The last several years have seen huge innovation in the TV and video space, with a plethora of startups and larger companies transforming the television watching experience in a number of ways. Many are forecasting a future of cord cutting and online, over-the-top delivery, and yet that reality doesn’t seem to be panning out just yet. I wanted to examine why and in part to follow up on Ben’s Insiders post from a couple of weeks ago about why the TV industry and the associated business models seem so resistant to change. This is also something of a follow up on my earlier posts about the TV industry and Apple TV specifically.
TV on a detour
I like to say TV has been on a detour for the last several years. What I mean is that many of the trends we’ve seen can appear on the surface to be leading us off in a whole new direction but, in reality, I suspect we’ll find many of the behaviors we’ve witnessed will come to seem like more of a detour, as we eventually find ourselves rejoining the main road. What is the nature of this detour? Well, it’s best summarized as the phenomenon of significant viewing happening off platforms owned by the major pay TV providers. Let me be clear: some of this viewing will absolutely continue. But much of it has been driven by temporary limitations of the traditional pay TV model in meeting our basic needs, in contrast to newer models which have met those needs much more effectively. Think about the reasons why many of us first tried using YouTube, Netflix, Hulu, iTunes or even BitTorrent to watch content. They can probably be summarized as follows:
- Content availability – the content I want to watch isn’t on TV
- Content windows – the content I want to watch isn’t showing on TV right now
- Consumption – the content I want to watch isn’t available on the device I want to use
- Discovery – it’s too hard to find the content I want to watch in the programming guide.
Many of these needs were met by the superior content libraries, on demand offerings, mobile apps, and search and discovery mechanisms available on newer platforms, away from the traditional set top box. If we wanted to find and watch that specific content at that specific moment on that specific device of our choice, we had to go away from the cable or satellite provider.
However, since these services first sprang up, the pay TV industry has slowly awoken to a sense of the crisis it was facing and has plugged many of these gaps. The pay TV providers themselves and the system vendors who support them (such as Cisco, Ericsson and Arris) have developed set top box hardware and software which offers better discoverability, video-on-demand, DVR functionality, and mobile apps (e.g. through the TV Everywhere initiative in the US) for watching on non-TV devices. Today, almost all of the needs which were once only served by alternative providers are now fairly well met by the pay TV providers, especially the largest ones.
Cord cutters not in evidence just yet
As such, many of the reasons for people to explore alternatives to traditional pay TV have been eliminated. Although much viewing will continue to take place away from the TV in the home, much of this viewing will now take place in apps tied back to a cable or satellite subscription. If you look at the numbers reported by the major pay TV providers in the US, it becomes clear subscriptions haven’t dropped at all, despite all the talk about cord cutters:
However, people aren’t overwhelmingly happy with their pay TV providers. Whereas the earlier objections to the model revolved around content libraries and flexible access by time and place, today’s objections mostly center on price, business models and customer service. Customer service remains a perennial bugbear for this industry and the cable companies in particular, but as long as people have to deal with these companies for broadband anyway, it’s unlikely to drive any cord cutting on the TV side. That leaves price and business models, which are obviously closely connected.
An analogy: fixed/mobile voice substitution
In order to examine possible scenarios for where TV could go from here, it’s worth looking at a somewhat analogous situation: the phenomenon of fixed/mobile substitution in the voice telephony market, which began about 10-15 years ago and continues today. I was a telecoms analyst when this phenomenon was first observed, so I watched and analyzed developments closely. Two key phenomena eventually emerged from that analysis:
- First, there’s a difference between usage substitution and subscription substitution – that is, people start shifting usage from one model (fixed or wireline voice) to another (mobile voice), even as they continue to subscribe to both services. Thus, substitution doesn’t have to mean abandonment, at least at first
- Eventually, usage substitution reaches the point where it no longer makes sense to maintain both subscriptions, and the subscriber cuts the cord entirely and moves all usage to the new subscription.
The end result of all this is, if you focus on subscriptions, it appears as if nothing is happening at all for a very long time and then you suddenly get a very rapid decline as many subscribers begin to hit the usage tipping point all at once.
Two possible scenarios for TV’s future
There are two ways the TV market could go from here:
- Either the analogy of fixed/mobile substitution applies and we’ll see very little movement in TV subscriber numbers for some time, even as significant usage shifts from pay TV platforms to newer platforms. But eventually there will be a rapid shift away from pay TV platforms once the tipping point is reached
- Or the model stops applying because it’s simply not possible to go all in on newer platforms and still get the content people want to watch.
I suspect the reality is our future resembles the second scenario much more than the first. As Ben outlined in his piece, content rights are one of the thorniest issues when it comes to disrupting the TV space and the new platforms are having a tough time getting key rights to create what might be termed cable replacement packages. However, content rights aren’t the only issue. Advertising plays a massive role too, and while that’s something the Hulus of the world are very comfortable with, it’s alien to Netflix, Apple and others who might potentially build disruptive video services. In addition, even if a provider could combine the content rights and advertising in the right ways, they’d end up recreating the cable bundle, with few of the advantages earlier online TV providers enjoyed, thanks to the strides made by the pay TV industry in recent years.
That’s in some ways a grim future to look forward to. I think we’d all love for someone to come in and reinvent TV to make it cheaper, more flexible, and more appealing. Apple in particular seems ripe for disrupting the TV industry as it has others. But the reality is the pay TV industry has likely evolved just enough to maintain significant share of this space and much of the growth in online video services will be complementary rather than substitutional, with little impact on the total number of cable subscriptions. It may not be as exciting a future as what some of us have dreamed of, but it’s likely more realistic.