Venture Bytes #6 - Time to Cross the Stream?

Time to Cross the Stream?

Have we reached the tipping point in over the top (OTT) content delivery? Pundits and news reports say yes with increasing volume and certainty. Recent announcements from Apple, Dish, Sony and others notwithstanding, we believe cord cutting is still a marginal phenomenon. Report of the death of cable and satellite companies is greatly exaggerated. We are seeing “cord shaving” rather than “cord cutting”, as cable and satellite companies respond with “TV – everywhere” offerings and rationalize their bundled offerings and subscription prices. Younger and more acutely budget conscious households are not spending on cable and are turning to alternative services, often of the streaming variety. We expect this to spread and intensify over the next 3-5 years.

Apple announced recently its plans to enter the Internet TV arena with a bundle of TV networks this fall. The service will have about 25 channels, anchored by broadcasters such as ABC, CBS and Fox and will work across all devices powered by Apple’s iOS operating system, including iPhones, iPads and Apple TV set-top boxes. Apple will be joining Dish, Sony, HBO, Showtime, Hulu, Netflix, Amazon and others who are already in the market. Dish has a $20-a-month alternative to cable, Sling TV, and is available on a range of connected televisions, mobile devices streaming boxes and sticks such as Roku. Sony has a $50-$70 a month offering, PlayStation Vu, and HBO and CBS announced they will begin selling standalone streaming subscriptions. Amazon Prime Instant Video is available to prime members, $99 per year.

Internet television has come a long way since its early days when all you got was assorted broadcast reruns, strange webisodes, low-fi dramas, aggregation-based newscasts, and the occasional polished mini-documentary series. The availability of high caliber Internet-based content, and the proliferation of mobile devices offering high-quality viewing have changed the profile of Internet TV. Cutting the cable cord doesn’t seem as limiting and content constraining as it did just a few years ago. HBO, Netflix and Hulu are poised to compliment rising consumption of video entertainment on phones and tablets. Streamers are more likely to watch primarily, or even exclusively, on mobile devices. More, and more recent programing is available on proliferating streaming services as traditional cable subscription costs are on the rise.

According to market research company NPD Group, traditional cable monthly rates have grown an average of 6% per year, as household income has remained essentially flat. If nothing changes, NPD expects the average pay-tv bill to reach $200 a month by 2020. Reflecting this trend, audience ratings are down, television subscriptions dropped for the first time in 2013, and the number of people paying for satellite or cable continues to shrink, albeit slowly for now. Those viewers are migrating to Internet television. We are seeing the next generation of cable subscribers cord shave. Clearly the economic stains on lower income and younger households are pushing folks to cord shave. We see this trend intensifying. It will still take a long while to mortally reduce traditional cable subscriber pools.

OTT content delivery still has a long way to go before it replaces the status quo – for a number of reasons: 1) You can get certain things from Hulu and Netflix but it is a very fragmented experience and you have to subscribe to multiple services to get all the content you want and even then you won't have access to everything; 2) Many experts have predicted Millennials would lead the cord-cutting charge, as one would expect of people who have tight budgets and the technological savvy to access tons of free online video, but a report from eMarketer concludes they have yet to cut those cords en masse; 3) Though some SVOD (subscription video on demand) subscribers may be cutting the cord, according to market data from NPD Group, the evidence is that the overwhelming majority are not only keeping the cord, they are lengthening it through aggressive use of TV Everywhere - more than one-in-five (21 percent) Pay-TV subscribers use the TV Everywhere services provided by their Pay-TV operator at least once per month.

Digital video, like many other consumer technologies, has been oft hyped and announced. Pundits and audiences have been awaiting alternatives to expensive, near or outright oligopoly cable providers. As is often the case with deeply entrenched and unpopular providers, some rumors of cable’s demise are likely driven by wishful thinking. We do think that cable is starting a long, slow gentle decline with regard to traditional bundled cable packages. We expect cable companies have a long while before they slide quietly into the night. Long after cable TV is an expensive separate service these providers will likely be delivering internet connectivity.

Also featured in this edition is our news section containing articles from Bloomberg, Business Insider, and The Wall Street Journal.