There is little question that change is roiling through the video market. The challenge is figuring out what might be changing, and what it’s changing to. The choices seem fairly clear—we have an OTT-driven video option or a more traditional channelized cable-and-telco-TV or satellite option. We’ve seen growing interest in streaming OTT video services as a “cut the cord” strategy, and Verizon has been (and is reportedly continuing to be) dabbling in the notion of OTT video. Is OTT going to win?
Channelized video services have been a mainstay of profits for wireline providers. The cablecos, of course, all offer that kind of service, and many telcos (Verizon and AT&T in the US) launched some form of telco TV. The fact that AT&T has pulled back from wireline telco TV to satellite shows that there are challenges to the wireline service—not all customers can be supported because of the limits of the loop plant and the cost of running new fiber. Even Verizon FiOS doesn’t cover everyone in Verizon’s territory.
Apart from the technical challenges of traditional video, we have the problem of increased OTT competition, first generated by the multi-screen user. As mobile devices become the mainstay of at least many younger users, the expectation of viewing TV on these devices has increased. This launched both a set of initiatives for traditional TV service providers to offer mobile/broadband addon services, and companies who are catering to the untethered masses. Add to that the Netflix and Amazon services that offer large libraries of both TV shows and movies, and you see the reason for OTT growth.
Even the OTT momentum so far raises the question of whether channelized TV delivery is in for trouble, and we’ve not even gotten to the questions about networks going it OTT alone, rising franchise fees, and so forth. The possibility that regulators might mandate unbundled channels seems to be falling, at least in the US, but that would add to the mix of issues. So where are we, and where are we headed?
If mobile devices increase their dominance of consumer entertainment, there’s little doubt that streaming OTT video will grow further. That in turn will accelerate the desire of the networks to deliver their own video, and that will move the whole industry toward an unbundled channel model. The question is how fast mobile dominance of entertainment could increase. Does it happen at the pace of generational aging, or would it advance faster for some reason?
One possible reason would be disenchantment with traditional TV, which is obviously growing. The popularity of Amazon Prime Video and Netflix demonstrate that people don’t ask “What’s on next?” as often, and though there is market data that shows only a minimal decline in the number of hours of traditional TV viewing, there is still a decline. There are more commercials on traditional TV than ever, and more incentive to record shows and then skip them. All of this weans users away from the rigid channelized model, making them more amenable to an OTT option.
The biggest variable in a faster advance is the question of at what point the TV providers decide that it would be cheaper to simply move to an IP streaming model. When that happens, “channelized TV” becomes only a kind of private version of OTT streaming video, which means that it would probably make sense for operators to offer it outside their own infrastructure. That’s the biggest advantage of a streaming IP model for video, for those operators who already do channelized TV. You can poach on a competitor’s turf, even ride on their infrastructure and disintermediate them.
OK, how about retarding forces? We have had streaming video for a long time, and even though it’s hardly likely it would totally displace traditional TV without further stimulus, surely these forces would have pushed users to switch from channelized TV to OTT streaming in greater numbers than the data shows. Sure, the data could be wrong/biased, but still….
One obvious factor is inertia, legal and otherwise. People are locked into multi-year contracts for cable/telco/satellite TV in many cases. Where they are not, they’re still fighting a trend of depending on traditional TV that goes back to their childhood. They would have to figure out what channels they actually watch (everyone in the household), and then figure out who offers those channels as OTT streaming. Probably nobody does, at least at this point.
Which is the second factor. We have some OTT TV services that are actually real-time streaming of multi-channel video, but not nearly as many as we have “library” services that let you pick from archival episodes. You have a risk of missing live broadcasts, and in the case of either news or sporting events, that’s a big deal.
I think this leaves us with a notion of the balance of forces in favor of OTT streaming, and I think that lets us assess how things might change over time. My view is that the demand-and-behavior issues are unlikely to sweep traditional TV from the markets. At the very least, satellites offer a very low per-user delivery cost potential for multi-channel viewing. Market data from Wall Street suggests that when new offerings come along, they sway people on the fence, but the fact remains that hours of traditional viewing have not declined significantly up to now. Something has to change that, beyond changes in consumer behavior.
We probably won’t see a regulatory mandate to offer single-channel a la carte viewing. We probably won’t see cable companies abandoning their naturally multi-channel CATV benefits. We certainly won’t see AT&T or Verizon or any global telco who has copper plant jumping onto a streaming offering, because the increased demand for available broadband capacity makes it difficult to achieve both multichannel IPTV viewing and broadband on a copper loop. Technically it can be done, but is it worth the investment given that the broadband part can be exploited by OTT video players?
I think we are heading toward a decline in the importance of channelized TV. I think that households with children will likely remain loyal to the model because it’s easier to support simultaneous multi-channel viewing with it. I think that adults will increasingly move to on-demand viewing based on IP, and I think that networks will increasingly try to offer their video more broadly to OTT streaming players, or deliver it online themselves.
The wild card in all of this is the settlement payments that could come along if regulatory relief were offered. In the US, the FCC is reversing its prior decision to classify broadband Internet as a telecommunications service and apply limits to paid prioritization and inter-provider settlement. If the classification is reversed, it wouldn’t be necessary for the FCC to bar these practices; there’d be no legal basis for the FCC to regulate them. Thus, OTTs might either have to pay for video delivery on a larger scale than today, pay for priority handling, or both. That increase in revenue to the telcos might induce them to spend more on broadband and less on OTT video themselves, and that might shift things more in the OTT direction.
Watch what happens in this critical area. If there’s going to be a radical change in the TV viewing market, this is the way it will likely develop.