Single Play to Replace Triple Play?
Disintermediation, the removal of intermediaries from any value chain, has been a greater issue in virtually every industry segment since the emergence of the Internet and the World Wide Web. That obviously will apply to the multichannel video entertainment business to some extent as well.
The only issues now are how extensive the changes will be, and how soon they will come, as some users start to increase consumption of Internet video. In the interim, while content owners and packagers throw their full weight behind Internet delivery, Internet viewing will remain supplemental to the primary mode of packaged, multichannel video services. But it still is useful to ask the question of whether Internet video is compelling enough to cause significant desertion of customers from cable, telco and satellite video services. And the question is not so important because there is any serious danger of immediate disruptions of the business.
Rather, the questions are to understand what value drivers would have to change to make Internet-delivered services a more-functional substitute for existing services.
At the moment, there is a “measurable” amount of substitution of Internet video for multichannel services, argues Yankee Group analyst Carl Howe. What is less clear is the magnitude of true “substitution,” where a customer stops buying packaged video and relies instead on Internet substitutes.
At the moment, Howe suggests, the number of video “cord cutters” who actually report having canceled a cable, telco or satellite video subscription, is about 1.2
percent.
And though a few short years ago industry pundits, media companies and service providers thought that user-generated video would drive Internet programming, that hasn’t happened. Instead, it is long-form and episodic professionally-produced video content that have propelled prime-time television properties to the top of Internet video traffic rankings, says Howe.
During the 2008 U.S. presidential election, for example, clips from NBC’s “Saturday Night Live” generated unprecedented volumes of traffic for NBC.com, Hulu and clip sites such as YouTube and MySpace.
There are some other possible forms of substitution, though. It is conceivable that what Internet video actually cannibalizes is not linear video of the “live” sort, such as news and sports, but more movie or prerecorded video.
That suggests the immediate damage might not come to linear video subscription services that include “live” programming, and more video on demand or time-shifted, pre-recorded content such as TV episodes and movies that are consumed not in real time.
Indeed, “missing an episode of a television show” is the primary driver for Internet programming, Howe suggests. When the Yankee Group polled more than 1,500 broadband subscribers, it found that 82.3 percent of regular Internet video viewers cite missed episodes as the reason why they watch television online.
So Internet video displaces a digital video recorder, not multichannel video specifically.
NBC Universal, for example, uses a “Total Audience Measurement Index” to measure any item’s entire audience across distribution platforms. A single episode of NBC’s “Heroes,” for example, was 17 million viewers, with 12.8 million in the traditional linear broadcast mode, including three days worth of viewing of that episode on a DVR.
The Internet audience is driven primarily by NBC.com and Hulu, NBC’s joint venture with News Corp, and this audience comprises approximately four million viewers.
What immediately is obvious is that linear broadcast programming and Internet audiences eclipse those of paid downloads, such as Apple’s iTunes purchases, cable company VOD services, and mobile viewers of services such as Verizon Wireless’ V-Cast.
Some 54.8 percent of Internet viewers watch more than once a week, whereas VOD subscribers tend to use the service far less frequently, claims Howe. About 45.5 percent of Internet viewers watch either once a month or less than once a month.
And there is some evidence that DVR usage creates a new habit for time-shifted Internet video. DVR owners are 20 percent more likely to go online to watch missed episodes, according to the Yankee Group. When DVR owners do pre-record programming, it’s to avoid advertising. Some 78.9 percent of DVR owners report fast-forwarding through advertising either most or all of the time.
That’s another interesting facet: Content owners might do better offering Internet versions of their content with embedded commercials that cannot be fast forwarded, thus preserving their advertising opportunities, than watching passively while ad revenue is pressured by DVRs.
Another observation: Internet video viewing is being adopted faster than video on demand services or mobile video, which have had a head start. Despite more than a decade of investment in VOD, for example, Internet video has surpassed other on-demand platforms in a few short years.
But the hard and logical next question for Internet video audiences is whether or not they’re ready to cut their cable, telco or satellite services.
Call this the ultimate reaction to “triple play” services: single-play, high quality broadband where voice, video consumption and Internet all are provided initially by purchasing a high-quality broadband access service, and then cobbling together a range of applications and services.
Some of those applications might require no additional cost, some might cost a little, others might cost a reasonable amount. But it would be a dramatic reversal of recent trends if enough value can be gained from a high-quality, higher-bandwidth Internet connection to displace much video, voice and text communications needs.
So far, there is not even much consideration of the “single play” on the part of most consumers. Less than seven percent of respondents to a recent Yankee Group poll had even considered the option, 49 percent hadn’t thought of it, and another 31.5 percent said they will never cancel their linear video service.
For the moment, single-play disintermediation of subscription video is a theory, not much of a fact. But that could change.
And the prime suspects are younger users. Just as many younger users have grown up with mobile voice and text, and might not have the same desires for fixed-line voice services, so we now might be looking at a generational cohort that is growing up with YouTube and might have different appetites for linear video that will not be expressed for some years to come.
The other issue is improvements in consumption of Internet-delivered video watched on a normal TV screen. Perhaps the greatest barrier to dramatically-greater Internet video watching is the range of content available for viewing. In the popular way of describing this, “people want the good stuff.”
But some contributing resistance comes from the requirement to watch downloaded or streamed video on a PC. Younger users seem not to mind. Older demographics do not have the same degree of comfort, at least not yet. Easy and seamless ways to port that video directly to TV screens will eliminate a significant barrier to use.
Once users do not have to worry about that, the primary issues will be access to the content they want, replicating shows they now watch mostly on subscription video services, as well as the price of doing so.
In a world where virtually all linear content also is available online, the out of pocket cost to use either option will be quite decisive. Where there is no obvious cost advantage, when the cost of watching linear or Internet video is comparable, Internet mechanisms might replicate DVR usage, and might have most value as an on-demand, time-shifted or place-shifted way of
watching.
Also, Internet video substitution, at least from the standpoint of professional content producers, is looking like a financial opportunity for mainstream, blockbuster and highly-viewed “linear” content, not the end-user-produced long tail fare many rightly note is available now.
That is not to denigrate end-user-produced video. It is to say viewership of such video will be precisely what the Pareto theory (“long tail”) predicts: very-high viewing of a relatively small number of items and low viewership of a huge amount of other material.
Whether others in the ecosystem like it or not, content providers now can fill a role in the entertainment value chain quite similar in many ways to independent software providers in the “computing” business. End users will supply their own terminals, operating systems and bandwidth. Content providers will monetize their software as ISVs do, selling to users on platforms others supply.
Not all applications can be supported primarily by advertising, but not all applications can be supported by “for fee” business models, either. So far, Internet video seems to work best on an ad-supported model, though there are small markets for “purchased” content.
Some service providers might consider doing what Comcast already is doing with “Fancast,” making sure lots of on-demand Internet content is available from affiliated sites, and cross promoting linear video offerings.
Also, bandwidth consumption will be big issues for content ISVs. As owners of access infrastructure, some service providers would seem positioned to “offload” bandwidth onto their packaged offerings, offering users a “no hit to your usage bucket” carrot.
Perhaps there also are ways to package place-shifting and time-shifting devices with linear viewing and services, says Howe.
There seems little immediate danger of a massive shift from triple play to single play behavior. On the other hand, the level of danger grows every day from this point forward. IP
