Cutting the Cord

Article ImageAs far as trends go, this one is easy to call: Over time, more consumers will break away from traditional broadcast channels of television and radio in favor of alternative video viewing platforms such as internet-connect televisions, set-top boxes, and video on demand. At the January Consumer Electronics Show (CES) in Las Vegas, manufacturers of web-connected television technologies such as Google, Sony, and Cisco Systems, Inc. touted the message of "redefining television," showing off new devices that will enable consumers to stream content directly from the web to their television screens and cut the cord from traditional programming providers.

It's little surprise then that content owners and cable, satellite, and telco distributors are taking a less gung-ho stance on that message of redefinition. Yes, the new devices put the user in control of the viewing experience and commingle web and television content, which, theoretically, leads to even deeper consumer engagement. But the issues at stake-revenue models and control for content owners, disruptive new competitors for the multichannel video programming distributors (MVPDs)-are enormous, and getting them right is critical.

And, as was evident in the plethora of devices showcased at CES, the issues are no longer just theoretical. Maryann Baldwin, vice president of consulting firm Frank N. Magid Associates, says, "As more consumers partake in [using] these [devices], it's just going to propel alternative video viewing platforms forward."

There are a number of reasons consumers are driven to consider alternatives to traditional television subscriptions, starting with cost. The sluggish economy is impelling many people to trim household budgets; the barrier to switching providers may not seem quite so high when unemployment is affecting nearly one in 10 American workers. A November report from Gartner, Inc. found that by mid-2010, a decline in net new subscribers was being reported for the pay-TV market of cable multisystem operators, the first such decline in decades.

The cost argument in favor of alternatives is strong, with over-the-top (OTT) devices such as Boxee, Roku, and Apple TV for streaming internet and TV content to your home television priced at about $100. Paired with one of the low-cost content subscription services such as Netflix, iTunes, or Hulu Plus, someone who was formerly paying $75-$100 per month to an MVPD might pay his monthly fees with a $20 bill and get back change. With sales of HDTVs continuing to grow, allowing consumers to receive network television providers' HD broadcasts, the gap between the quantity and quality of content on an internet-connected television and what is offered by MVPDs continues to shrink.

Demographics play a role as well. In its "Generations 2010" report, the Pew Internet & American Life Project found that members of the Millennial generation were 80% more likely to engage in watching videos online than older generations. These young consumers are also among the hardest hit by the economic slowdown. "The 25-34 age group is so good at finding deals," says Baldwin. "They excel at finding the least expensive way to get exactly what they want online, when they want it."

In the coming year, there are a number of legislative issues that should impact the speed of adoption for connected televisions. Harold Feld, legal director of Public Knowledge, a public interest group working to defend consumer rights in the emerging digital culture, says, "Whenever there's a new technology, Congress and the [Federal Communications Commission] have to force incumbents to make content available." Feld points to the electronic programming guide as one such issue to be addressed; since it's a linchpin for guiding consumers to the shows they want, the entity controlling it has a built-in advantage. "The cable companies don't want to share that information," says Feld. "But who owns it? Do they have to make it available? And who controls the presentation?"

All eyes will be on the Comcast/NBC merger as a test of precedent, as it undergoes scrutiny from the FCC and the Justice Department. At stake is whether Comcast's ownership of NBC's content could lead it to block content from other providers, such as Netflix, or withhold its own content from other MVPDs.

Of course, cable providers can't afford to wait around for the legal matters to settle out before they move ahead. Jim Barthold, editor of FierceCable, admits to being pleasantly surprised that Time Warner Cable announced partnerships at CES with Samsung and Sony to enable consumers to stream content onto web-connected TVs. "The cable guys have to realize that they are the pipes [bringing programming into the home]," Barthold says. "What I find even more interesting is that Apple has $50 billion in cash on hand. Why wouldn't they turn around and buy a cable operator?"

Meanwhile, content owners are exploring new partnership models that will enable them to work successfully with the OTT devices, with varying degrees of flexibility. Google TV's web browser, for instance, is currently blocked from streaming episodes from ABC, NBC, CBS, and FOX. Feldsays, "Small independent programmers in particular are experimenting more with regard to revenue models. But in some cases they are contractually prevented by their relationships with cable providers from putting even more content online."

Stuart J. Levy is the founder, CEO, and chief creative officer of the manga media company Tokyopop. He says the lessons learned distributing content on the web should inform content companies' stance on redistribution for connected television. "Syndicating content everywhere didn't pay off for people with valuable content. We're focusing on channels that can provide a fabulous user experience and respectable revenue streams," Levy says. "It's a case of ‘prove to me you have a viable revenue stream' before I'll let you carry my content."

Levy cites, Netflix, and Apple as three providers who meet the requisite viability benchmarks, but he says he'll be watching the industry closely as new players emerge and evolve.

For now, cable and satellite providers may take solace in studies showing that, for the consumer, traditional television still rules. A November 2010 Magid study of consumer video consumption habits and platforms found that only 3% of consumers report that they are even considering canceling their traditional subscriptions without replacing it with a competing subscription, suggesting a relatively stable subscriber base for traditional providers. An August 2010 Nielsen study was slightly more optimistic, finding that about 1 in 5 global consumers owns or has a definite interest in purchasing an internet-connected TV within the next 12 months.

Sooner or later, the stand-alone television set as the sole means of video consumption is going to go the way of the rabbit-ear antenna. Savvy content owners are planning for that day right now.