There is no question that the video space and its players are undergoing major changes. It’s not clear where those are leading us, at least not yet. For decades, channelized TV has been the mainstay of wireline service profit, and yet it’s more threatened today than ever before. Where video goes, does wireline go? What then happens to broadband? These are all questions that we can explore, but perhaps not quite answer.
With VoIP largely killing traditional voice service profit growth and Internet revenue per bit plummeting, operators have come to depend on video in the form of live TV to carry their profits forward. At the same time, the increased reliance on mobile devices for entertainment has radically increased interest in streaming non-live video from sources like Amazon, Hulu, and Netflix. The combination has also generated new live-TV competition from various sources, including Hulu and AT&T, and more ISPs are planning to offer some streaming options in the future.
At the same time, the fact that streaming means “over the Internet” and the Internet is agnostic to the specific provider identity means that many content sources can now think about bypassing the traditional TV providers. The same sources are looking to increase profits, and so increase the licensing fees charged to the TV providers. Those providers, also looking for a profit boost, add their own tidbit to the pricing to users, which makes users unhappy with their channelized services and interested in streaming alternatives.
I’ve been trying to model this for about five years, and I think I’ve finally managed to get some semi-useful numbers. Right now, in the US market, my research and modeling says that about a third of all TV viewers regularly use some streaming service, and about 12% have a “live” or “now” option. It appears that 8% or so exclusively stream, meaning they have truly cut the cord. This data has to be viewed with some qualifiers, because many young people living at home have only streaming service but still get live TV from the household source. It’s this that accounts for what Neilson has consistently reported as fairly constant household TV viewing and at the same time accounts for a rise in streaming-only users. Households and users aren’t the same thing.
Wireline services serve households and mobile services serve users. The fact that users are adopting streaming because of increased mobile dependence isn’t news. What is news is that this year it became clear that traditional channelized viewing was truly under pressure at the household level. People seem to be increasingly unhappy with the quantity and quality of original programming on traditional networks, and that translates to being less willing to pay more every year for the service.
In my own limited survey of attitudes, what I found was that about two-thirds of viewers don’t think their TV service offers good value. That number has been fairly steady for about four years. Of this group, the number who are actively looking to reduce their cost has grown over that four years from about a fifth to nearly half. Where TV providers have offered “light” or “a la carte” bundles, users tend to adopt them at a much higher rate than expected. All of this is a symptom that TV viewing is under growing pressure, and that the “growing” is accelerating.
The most obvious consequence of this is the obvious desire of cable/telco giants and even streaming video players to get their own video content. Comcast buys NBC Universal, AT&T wants Time Warner, and Amazon and Netflix are spending a boatload on original content. I don’t think anyone would doubt that this signals the belief of the TV delivery players that content licensing is going to be ever more expensive, so they need to be at least somewhat immune to the cost increases. Ownership of a TV network is a great way to limit your licensing exposure, and also to hedge cost increases because you’ll get a higher rate from other players.
Another obvious impact of a shift toward streaming is that you don’t need to own the wireline infrastructure that touches your prospects. You don’t need to own any infrastructure at all, and that means that means that every operator who streams can feed on the customers of all its competitors. Those who don’t will become increasingly prey rather than predator. And the more people start to think in terms of finding what they want when they need it, rather than viewing what’s on at a given time, the less value live TV has as a franchise.
I think it’s equally obvious that the TV industry has brought this on themselves, in a way. For wireline TV players, their quest for mobile service success has promoted a whole new kind of viewing that’s seducing users away from traditional TV, even where it leaves household connections intact. A family of four would likely select a fairly fat bundle to satisfy everyone, but if half the family is out with friends viewing mobile content, will they need the same package? Competition for higher access speeds as a differentiator also creates more bits for OTTs to leverage, and encourages home consumption of streaming.
The quality of material is also an issue. If you want “old” material you clearly can get most of it from somebody like Amazon, Hulu, or Netflix. If you want new material, you’re facing much shorter production seasons, a reported drop in the quality of episodes, and higher prices. Every time someone finds that their favorite shows have already ended their fall season (which apparently ran about 2 months this year) and goes to Amazon to find something to view, they are more likely to jump to streaming even when something is new, because they expect more.
To me, the revolutionary truth we’re finally seeing is that “viewers” are increasingly separating from “households”. We’ve all seen families sitting in a restaurant, with every one of them on their phones, ignoring the others. Would they behave differently at home? Perhaps many think they should, but markets move on reality and not on hopes, and it seems that personal mobile video is breaking down the notion of collective viewing, which means it’s breaking down channelized TV bundles, which means it’s eroding the whole model of channelized TV.
If you need to stream to reach mobile users, if mobile users are the ones with the highest ARPU and the greatest potential in producing future profits, and if streaming is going to reshape viewer behavior more to favor stored rather than live shows, then when steaming hits a critical mass it will end up reshaping the industry. That probably won’t happen in 2018, but it could well happen in 2019, accelerated by 5G/FTTN deployments.
I’ve been mentioning 5G and fiber-to-the-node hybrids in my recent blogs, and I think it’s warranted. This is the part of 5G that’s going to be real, and quickly, and it has many ramifications, the shift toward streaming being only one of them. 5G/FTTN, if it truly lowers the cost of 100 Mbps and faster “wireline” Internet radically, could even boost competition in the access space. New York City did an RFI on public/private partnership strategies for improving broadband speed and penetration, and other communities have been interested in municipal broadband. The 5G/FTTN combination could make it possible in many areas.
Ah, again the qualifying “could”. We don’t know how much 5G/FTTN could lower broadband cost, in part because we do know that opex is the largest cost of all. Current players like Verizon have the advantage of an understanding of the total cost picture, and a disadvantage in that they have so many inefficient legacy practices to undo. New players would have to navigate the opex side in a new way, to be a pioneer in next-gen closed-loop practices that nobody really has proved out yet. We’ll surely see big changes in video, but the critical transition of “wireline” from channelized to streaming will take some time.