Parks Associates Blog

Wednesday, December 31, 2008

Hot Topic for 2009: Will Web Video Replace Your Cable Company?

Today's Wall Street Journal has a couple of articles about cable's power struggles with cable TV programmers. First, is the battle that is playing out between Viacom and Time Warner Cable. We posted this news item earlier today, noting that this is a classic example of the problem that cable providers have with their rather uneasy alliance with the programmers. The power lies with the programmers, who have enormous flexbility to charge not only carriage fees, but get the lion's share of the ad revenues. And, they can also put their video online and raise ad revenues that way. I heard one Time Warner exec quoted earlier today as indicating that Viacom "wants their cake and to eat it, too."

Then, there's the contention between the FCC and Comcast about carrying channels like the NFL Network. The FCC accuses Comcast of discriminatory policies regarding these channels (offering them only as a special tier at an extra cost); Comcast argues that not all of their subscribers want the NFL Network, saying it's not fair to pass on a high fee for everyone who doesn't want it. For the cable channel that allowed Bryant Gumbel to ruin football broadcasts for two years, you have to give the NFL Networks for its moxie in providing an inferior product at a high price.

Then, of course, there is the issue of Web video and whether it will cannibilize cable subscribers. I had written an earlier blog about this, but wanted to follow up with some additional information on the phenomenon.

The past two years have witnessed tremendous growth in online video viewing, particularly for premium content such as television shows. In a study conducted in mid-2008, we found that more than 26 million U.S. adults with home broadband access report watching TV shows on the Internet, using services such as Hulu, Joost, Veoh Networks, or the portals established by major broadcast networks. A key question that we are being asked today is whether consumers will begin to view their pay TV services as expendable, since so much television content is available free of charge (and with many fewer advertisements) via online sites. Today, the number of “cable cutters” is negligible, according to our TV 2.0: The Consumer Perspective study. This study found that found 0.6% of the respondents don't pay for TV service but are watching or downloading TV shows over the Internet. Translated into households, that would be around 400,000.

Despite the popularity of Internet video, cable VoD services still retain a tremendous advantage in terms of quality-of-service and the quantity of high-definition offerings. As we size the potential market for both broadband video and pay TV VoD services for the next five years, we see significant revenues coming to the operators for these transactional services. These numbers do not take into account revenues from ad-supported free VoD content. How effectively cable operators can fine tune their content management systems and advertising relationships in the free VoD space will be an important measure of how well they can capitalize on non-linear advertising revenues, such as free VoD. We also anticipate that cable operators will follow a model similar to the Comcast Fancast development, in providing a broadband video-on-demand service that not only has the potential to spur advertising sales, but ties back to the existing digital cable service by providing applications for remote DVR programming through the portal and allowing users to set up folders for online content to then be viewed on the TV. Cable operators that can develop seamless user experiences between the broadband and cable TV world for their subscribers will have an edge on their competition.

Finally, it’s important to note that our data indicates that even among active Internet video users, their likelihood of cancelling pay TV services is no higher than for all respondents. We would guess that access to live news, sports, and other exclusive programming, as well as more content in on-demand and high-definition formats, will continue to be draws for consumers to pay TV services. Obviously, we’ll be tracking this data for trending analysis to see how these figures might change over time.

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