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Cord Cutting Will Continue its Plodding Pace in 2015

Nov 20 2014 Media & Print, Services

Research Question: Will 2015 be the year cord cutting reaches critical mass?

Companies: AAPL, AMCX, AMZN, CBS, CMCSA, CVC, DIS, DISH, DTV, GOOG, BSYBY, BT, MSFT, NFLX, OUTR, T, TWC, TWTR, TWX, TYO:6758, VIA, VZ


By: Seth Agulnick

Click here to download the report (.pdf)

 

Summary of Findings

  • There will be no surge of pay-TV customers canceling subscriptions next year, according to all 16 of Blueshift’s sources.
  • Sports and other live programming keep viewers tethered to pay-TV, according to 12 sources, while over-the-top services remain difficult for most consumers to cobble together, according to six.
  • New streaming-only TV services from Sony Corp. (TYO:6758), CBS Corp. (CBS), Time Warner Inc.’s (TWX) subsidiary Home Box Office Inc., and others will not go far in accelerating cord cutting, four sources said, largely due to limited content.
  • Pay-TV operators that also offer broadband services are content to have consumers engage in “cord trading”—cutting back on pay-TV subscriptions, but buying higher speed Internet packages.
  • Pay-TV operators are experimenting with one-click purchases of shows and movies that can be stored on a set-top box or in the cloud, a la Apple Inc.’s (AAPL) iTunes, two sources said.
  • Netflix Inc. (NFLX) has had solid, if unspectacular, launches in France and Germany, according to two high-ranking studio executives. Two sources think Netflix will be required to share revenue with U.S. pay-TV operators to get its app on set-top boxes.
  • A survey of 206 TV watchers reveals that use of YouTube, LLC and Netflix streaming services continues to grow, but most consider OTT a supplement to pay-TV. There was little interest in paying more than $5/month for a standalone version of HBO.

 

Silo Summaries

1) Pay-TV operators

None of our four sources thinks the cord cutting trend will gain significant momentum next year, with three citing sports and other live TV as key factors keeping subscribers from abandoning pay-TV. OTT services are hampered by a narrow selection of content and remain difficult for many consumers to piece together. New streaming-only TV packages set to launch next year likely will have limited content. Internet services likely will move to a bandwidth-based pricing model, according to one source.

2) Content owners

All four sources agree that cord cutting will continue to grow very gradually in 2015. Trying to piece together different streaming services in place of pay-TV can be difficult and expensive. Pay-TV providers are experimenting with one-click movie and TV show purchase. Three said the cost for pay-TV operators to license premium content is rising. One said studios and pay-TV operators are going to be fighting over whether operators need to pay additional rights fees to allow subscribers to stream recent TV episodes on demand.

3) OTT service providers

The slow pace of cord cutting will not change in any meaningful way in 2015, according to all four sources, with three citing the importance of premium content, such as live sports, to pay-TV subscribers. OTT services need better content and need to become easier to use. One said a more comprehensive platform of on-demand TV shows would help pay-TV providers keep subscribers, while another expects operators to add services like online gaming as a way to attract new customers. Another source thinks mobile phone carriers could eventually compete in the home broadband service market.

4) Industry specialists

There will be no surge in pay-TV customers canceling their subscriptions next year, all four sources said. Younger viewers are leading the shift to OTT, two sources said, but both think such consumers could be brought into the pay-TV fold as they get older. HBO’s new streaming-only service is more likely to hurt Netflix than to encourage cord cutting, one source said. Pay-TV operators are in great shape, one source said, because they will be able to charge OTT providers for faster content delivery and consumers will want higher speed Internet service.

 

Background

More and more consumers are changing their TV viewing habits, increasing their use of streaming services like Netflix, Amazon.com Inc.’s (AMZN) Amazon Prime, and Hulu Plus, the premium streaming service offered by Hulu LLC. Some are finding such over-the-top (OTT) options attractive enough to cancel pay-TV subscriptions, with almost all major cable and satellite operators reporting subscriber losses during the third quarter, including Time Warner, which reported losing 184,000 TV subscribers.

This shift was observed in Blueshift’s and SurveyMonkey’s collaborative October Trends Tracker report, which found 1% of consumers canceling their cable subscriptions each month for four months. The number of respondents without a cable subscription rose from 33% to 36% in the survey, a figure that includes 15% that never have had a pay-TV subscription.

Pay-TV operators may face more challenges in preventing cord cutting once HBO’s streaming service HBO Go becomes a standalone option in 2015. A recently proposed rule by the FCC could push the trend toward OTT viewing even further by allowing Internet TV providers to license content from broadcasters the same way cable and satellite providers do. The change in viewing habits is prompting broadcasters and cable companies to utilize different strategies to remain relevant in the digital age: CBS is launching a standalone service for $5.99, while Fox Sports allowed pay-TV subscribers to stream the World Series live on computers and mobile devices.

Cable companies also are relying on their control of Internet services as a way to offset lost revenue from TV cord cutters. Favorable rulings around net neutrality, for example, have forced Netflix to pay Comcast Corp. (CMCSA) to stream its videos faster to avoid losing customers.

Sources in Blueshift’s Dec. 2013 OTT report did not expect the pace of cord cutting to pick up significantly in 2014. Younger consumers, referred to as “cord nevers,” were a bigger long-term concern than those who might cancel their service. Pay-TV providers showed signs of embracing OTT, partly because OTT spurs demand for high-speed Internet, which offers better margins than TV service. Sources expected pay-TV providers to introduce streaming-only TV packages in 2014, though the exact look and scope of such packages remained up in the air due to content rights issues. The rapid growth of OTT indicates that pricing models for Internet service could evolve into a bandwidth-based system. The number of Internet-only homes will continue to grow, but only gradually because of the way pay-TV providers aggressively price their “triple play” bundles.

 

Current Research

In this next study, Blueshift Research assessed whether the pace of cord cutting was likely to accelerate in 2015. We employed our pattern mining approach to establish six independent silos, comprising 16 primary sources (including six repeat sources), a survey of 206 TV watchers and nine relevant secondary sources focused on OTT services and net neutrality:

  • Pay-TV operators (4)
  • Content owners (4)
  • OTT service providers (4)
  • Industry specialists (4)
  • Survey of 206 TV watchers
  • Secondary sources (9)

 

Next Steps

Blueshift Research will continue to monitor the pace of defections from pay-TV, especially as new OTT options such as Sony’s PlayStation Vue and HBO’s standalone service are launched. We will look at how the battle is likely to play out between studios and pay-TV operators over rights fees for “catch-up” viewing of TV series. Lastly, we will check on Netflix’s progress in getting its app on pay-TV set-top boxes and whether revenue sharing agreements are part of such deals.

 

Silos

 

1) Pay-TV Operators

None of our four sources thinks the cord cutting trend will gain significant momentum next year, with three citing sports and other live TV as key factors keeping subscribers from abandoning pay-TV. OTT services are hampered by a narrow selection of content and remain difficult for many consumers to piece together, two sources said. While younger viewers are delaying subscribing to pay-TV packages, one source believes these viewers eventually will subscribe as they get older. New streaming-only TV packages set to launch next year likely will have limited content, which will reduce their popularity, according to three sources. All four sources noted that content costs have continued to rise significantly. One cable operator source said he is not worried about HBO’s new standalone service, but is concerned long-term about content owners trying to shift Internet service to a pay-TV model with expensive content bundles. Internet services likely will move to a bandwidth-based pricing model, according to one source.

 

Key Silo Findings

Cord Cutting

  • 4 of 4 think cord cutting will not accelerate significantly in 2015.
  • 2 think OTT needs a broader selection of content and an easier to use, unified interface in order to be a true alternative to pay-TV.
  • 1 said younger viewers are delaying pay-TV subscriptions, but most will eventually buy.
  • 3 expect limited success for streaming-only TV packages because of a lack of premium content.
  • 1 said cable operators are not at all concerned that HBO’s upcoming OTT service will encourage cord cutting.

Pay-TV Strategy

  • 3 see sports and other live programming as key to keeping pay-TV subscribers.
  • 1 said cable operators are worried that content owners will try to turn Internet delivery into a pay-TV bundle model.
  • 1 wants to add a Netflix app to customer set-top boxes.
  • 4 said content costs continue to rise.

Internet Usage

  • 1 thinks the Internet pricing model will have to change because the shift to online video is forcing major capital expenditures.

 

1) Technology executive for a major pay-TV provider; repeat source

Wholesale cord cutting won’t happen for at least the next decade because there are no true alternatives for most people who want premium entertainment content, including live sports. This source said that new OTT services will appeal to a small demographic, but will not steal the core pay-TV viewership. The cost of sports programming cannot keep rising at the current pace, with operators expecting all customers to pay, whether they want sports or not. While young viewers are delaying their subscription to pay-TV services, most ultimately will come on board. The Time Warner/Comcast merger could play a key role in the future of Internet pricing, control and access, as it sets the stage for increased government regulation.

Cord Cutting

  • “Personally I don’t believe there will be a sea change [in cord cutting] until there’s a truly competitive product. Most consumers like what they get [from pay-TV subscriptions]. They don’t like what they pay for it, of course, but they like what they get. While there’s always a group that decides they don’t need all those channels, for the most part your typical family with three or four TVs in the house really uses whatever subscription they pay for—sports, kids’ programming and all of that.”
  • “Getting out of that [traditional pay-TV model] without having a clear alternative, I don’t think is going to happen for at least the next decade—unless there’s some kind of drastic macro-economic change and people just can’t pay the bill.”
  • “There has to be a true selection of programming [for cord cutting to take off]. Amazon or Netflix is not a true selection of programming. Even a Netflix subscription and a CBS subscription isn’t a true selection of programming. There might be some number of people who decide that’s perfect for them, but I can’t imagine that fulfills the needs of most U.S. TV consumers.”
  • “I just don’t see people changing that until there are alternatives that really offer people at least most of what they think they need, which is a wide range of sports, significant news programs when they want it—MSNBC or whatever, which you may only watch two hours a month, but for that two hours you really want it. Then also the major entertainment programs, the ability to access whether it’s Walking Dead or whatever else is out there that everybody’s talking about, being able to watch The Voice. Those things are what most consumers like to have access to. Whether or not they watch it on a regular basis is a different story.”
  • “Until somebody can provide a wide range of programming, I don’t believe your average suburban consumer is going to think about bailing [on pay-TV].”
  • “The general sense is that people are waiting longer to pay for a full subscription program. I don’t know that they’re waiting forever—but I think they’re waiting longer, which has skewed the numbers. If you’re young, single, just out of college, you probably don’t watch all that much TV anyway. There are certain things you want, you may want Walking Dead and the sporting events. But other than that, there’s not a whole lot you care desperately about, so you put it off.”
  • “Everybody knows the story of one kid using their parents’ HBO GO login, and it’s shared by all the kid’s friends regardless of if they even know where the password came from in the first place. So there’s a fair amount of that, and sharing of Netflix and so on. That delays [a pay-TV subscription] a little bit and I think it’s a lifestyle thing. Those [young] people can go to the bar a couple times a week [to watch a sporting event] and if that saves them a cable subscription of $100 a month, that’s worth it.”
  • “But there still comes a time when a person’s time and convenience supersede the cost—especially once you get married and have a kid. So there’s a rational economic decision that says you can put a subscription off for a while, but at some point [from a lifestyle point of view] it’s worth the $100 a month.”
  • “I don’t know that I’ve seen a whole lot of [social media motivating live viewing]. Everybody’s trying to make social media the consistent poll to make people watch The Voice live. I don’t know that it’s the case; it’s still the water cooler in the morning. If you don’t know who got stolen on The Voice, then you’re not part of the conversation. Social media might push that a little bit, but I think social media is still trying to find its home.”
  • “The counter is that the programming younger audiences feel they must see is programs like Walking Dead, and nobody really watches that at the same time—they’re watching on demand or DVR—and that seems to work just fine. So I’m not sure that social media is going to drive people to have to watch that live. It just means they have to watch it.”
  • “Sports, on the other hand, will always drive live viewing, and one of the things that will keep linear programming a must-have at some level.”
  • “If you read the press, there’s a whole range of people going after OTT. I personally believe that it has to have a reasonable range of programming. There’s probably a sweet spot. There’s Netflix, which isn’t a reasonable range in my opinion. It’s got a lot of movies and old TV shows, but it doesn’t give you the sports, it doesn’t give you the live, it doesn’t give you a lot of stuff that most consumers want.”
  • “On the other side, you don’t want to exactly replicate your entire time Warner or Comcast cable package, because then it’s going to cost almost the same amount, and you’re going to be running in that $150, $200 a month amount, which is not an advantage—especially when you’re providing your own hardware and you’re responsible for your own Internet connection.”
  • “There’s a sweet spot somewhere in the middle that will have to be figured out. And nobody’s really announced anything yet—they’ve announced intentions but not specifics.”
  • “There are growing constituencies that may be more attracted to the new OTTs once they come out. They all sound like they’re going to be TV Everywhere in the beginning—so you’re going to have it on your tablet as well as on your TV; that will probably work for a group. Probably not my [demographic] but for a [smaller one].”
  • “Everybody’s going to try [offering streaming TV packages]. I think you’re going to see more [programmers] announce streaming-only options, like CBS, HBO and now Showtime. I honestly don’t believe most of them will be successful.”
  • “Even if the program quality is there, even if you could subscribe to ESPN separately, the fact that I would have to go into one user interface, one way on one device to watch ESPN, and then shut that down and go into something completely different to watch Showtime, and shut that down to watch something completely different to watch The Voice on a broadcast network, consumers don’t want that. They’ve shown time and time again that they don’t.”
  • “The convenience of a unified interface and a selection of programming on one bill is worth a fair amount of money to people.”

Pay-TV Strategy

  • “Obviously the prices [for sports programming] keep going up and the costs keep going up, and you have to wonder if somehow this will cause it to be separated out from your basic cable package. That’s likely the conversation that goes on [among operators]. We could separate it out and raise [the sports package] price, but is that better or worse for the programmer in the long run? Do they have fewer people paying more and did that compensate?”
  • “Everybody realizes [sports package pricing] is getting to the point of being unsustainable. It’s probably not there just yet, but something’s going to change. We just don’t know exactly how. The costs can’t keep going up the way they’ve been going up—[with operators] making everybody pay it, or else it will drive people to alternate choices.”
  • “There’sa constant effort to try to find value, to find what makes the service sticky. Obviously the TV Everywhere services, much like VOD was over the last decade, are becoming one of those things that it’s difficult to walk away from. I think that is working to a certain extent, but I don’t know if that’s the answer. It’s a Band-Aid holding it together for a while.”
  • “Every pay-TV provider is caught in the middle. They can fight particular programmers [on pricing], but if they lose the channels, are they going to lose subscribers? Or do they actually win by saving enough money by not paying the programmer and losing those few subscribers that want that content? I think all of the negotiations you see and all of the [blackouts], it’s all fighting that battle.”
  • “For the programmers, there’s almost no loss in them trying for a price increase. It’s just all upside. For the distributors, it is a loss, and they’re trying to figure out how to walk that fine line. Everybody has their own little way of doing it, with the exception of Comcast, which does it just by saying, ‘We’re Comcast, and if we turn you off you lose half the country, so make a deal.’”
  • “I don’t know [if we will we see Netflix on cable set-top boxes]. I think that what likely happens is platforms become more open. Cable boxes have always been very closed platforms, and so even if they wanted to they couldn’t do things like that. But as Comcast rolls out its [next generation set-top boxes] X2 and X3—which is really a computer that happens to be connected to their network that can run apps—those kinds of things [Netflix on the set-top box] become technologically possible, and then it’s purely a financial decision.”
  • “What’s the advantage to Comcast letting people watch Netflix on their set-top box? Does it keep more people subscribing to Comcast? I don’t know. Does it hurt Comcast’s pay-per-view viewership? Maybe. But on the other side, are people doing it anyway? So why not facilitate it and make it an easier opportunity for the customer.”
  • “If I were on the cable side right now, I would be looking at how I integrate Netflix into my guide so that I can make Netflix available but still promote my own product first. Because today, when you watch Netflix in your living room, you’re completely turning off your cable and going to a completely different interface that’s stand-alone, and doesn’t remind you what’s on live tonight—that you’re missing the game if you’re a sports fan. And by the way, that movie [you’re looking for on Netflix] is also available on Comcast on Demand.”
  • “There’s a way to walk that line, to give a customer a feature without it costing [the operator] a whole lot of money in terms of lost revenue on the other side. HBO makes Comcast $8 a month per subscriber. Allowing Netflix to be shown on my cable box, I don’t think Netflix is going to be giving them $8 per sub a month.”

Internet Usage

  • “A lot [of the future of Internet pricing] depends on Congress. Are there going to be laws restricting what can or can’t be done? Honestly I think that is the whole linchpin for [the] Time Warner/Comcast [merger]. I think the cable programming is almost a side issue. It’s about the Internet and access and pricing and control.”
  • “I have a feeling that there will be an attempt at least to put some pretty good limits on [the merger] that say, ‘You guys can merge, but only if—and here are the rules around Internet access, and here are the rules around pricing.’ And I think it’s going to put a lot of economic pressure on that deal, to whether it still makes sense.”
  • “It feels like that is the concern in that merger. That one business deal may shift the entire market in the U.S.—about how pricing for Internet goes, and are there bandwidth caps. Is it unlimited or limited? Economically, anything unlimited is really a challenge. It just doesn’t make sense when you go to economic theory that there’s any resource that people want that is unlimited.”
  • “If you look at the FCC comments that they received [on the merger], everything seems to be around that open Internet access and how much [operators can] charge, and can they shut down other programmers, with Netflix being the poster child. I think that is the key part of that deal, and that depending on how it’s resolved, that deal could set the tone for the next decade of how Internet access works in the United States.”
  • “My guess is that it is substantially resolved by mid-next year. Otherwise it starts to become less and less likely that the deal happens. Time Warner Cable [Inc./TWC] is too big a business to sit there—stagnant, losing customers, not taking action and not making investments—for too much longer.”
  • “[The net neutrality debate] will play out around this issue. It’s the excuse to impose net neutrality, even for some folks who thought it may not have been necessary. I happen to be in that camp. I would have argued against any kind of net neutrality limits, until I saw the Time Warner/Comcast deal.”
  • “I thought the open market was [regulating access] just fine, and that the idea of paid fast lanes was probably an OK thing. It’s OK if the biggest ISP is only 25% of the market, or close to 30%. But once it becomes 50%, that’s too much control to give one party. [The merged entity] could extract not just a few dollars, but real penalties for people who want to buy a fast lane or get through.”
  • “The [net neutrality debate] will force changes. People are going to compete differently. You might have a Comcast that can really manage Internet access and does slow people down, and make Netflix pay for faster access. And then there’ll be other [ISPs] which will compete on, ‘We’re wide open and free. We may not be the super-premium, but everything flows through us and we take pains to make sure that happens.’ And it may become a point of discussion if it’s not a point of law.”

 

2) President of a Midwest cable, Internet and phone provider; repeat source

Pay-TV operators are losing some market penetration but cord cutting will not grow significantly until programming access rules change and the OTT user experience improves. This source said that cable operators are not especially worried about HBO or CBS offering OTT subscriptions, but they are worried about content providers trying to turn Internet delivery into a cable model, where programmers are able to force distributors to take bundles of content and pay on a per-subscriber basis. The Internet pricing model likely will need to change, because the shift from linear to online TV requires significant capital expenses for broadband providers.

Cord Cutting

  • “If you go back a few years and look at the total number of TV households vs. [pay-TV] subscriptions, it’s not so much that we’re losing customers but we’re losing market share.”
  • “As the recession has wound down, all those younger folks who moved back in with Mom and Dad have now gone out on their own, and they have not picked up a [pay-TV] subscription.”
  • “I don’t think the velocity of [cord cutting] is going to suddenly becomes this massive, rapid torrent of disconnects to go to another delivery mechanism like over-the-top.”
  • “It’s going to take a while for the FCC and maybe even Congress as part of the [rewrite of the Telecommunications Act] to create an environment in which online video distributors can flourish [by giving them equal] access to program content. The program access rules have been under consideration for years and nothing has changed. So the speed with which that takes place seems like it will be pretty slow.”
  • DISH [Network Corp./DISH] has said they’re going to have some [streaming-only TV] product and Sony says they’re going to have something, but from everything I’ve heard, those products are going to look a lot like a [traditional pay-TV bundle]. Until the bundle of bundles is broken apart, nobody will have any competitive difference to create the critical mass or increase the velocity [of cord cutting].”
  • “If DISH or Sony or some new entrant could offer the Discovery bundle without the Viacom [Inc./VIA] bundle, for example, now you have a reason for people to start looking at their options. But if all you’re going to get from Sony is an $80 bundle of 100 channels, what’s the difference?”
  • “Access to content is one [barrier to OTT uptake]. Integration of the various platforms is another. One of the reasons OTT has not been more popular is that it’s a lot of work. If you want to jump back and forth between Amazon and Netflix and Hulu, it’s not easy to navigate and switch from watching House of Cards to your old Seinfeld episode.”
  • “[OTT needs] a user interface that integrates all the options with search functionality, some recommendation engine, maybe a cloud DVR. There’s a lot that has to be done to take it from a hobby where you really have to work at it to something that appeals to the masses who just want to sit back, push a button and watch the news.”
  • “It also has to integrate with cable or satellite because the vast majority of people are still going to want live, linear television. That’s a significant challenge.”
  • “In order for [OTT] to be really successful, it has to have some competitive differentiation, so the bundle of bundles has to break apart.”
  • “[HBO’s availability without a pay-TV subscription] is an incremental change, about the same as CBS and their [OTT offering]. Nobody really seems to know the details yet and the extent to which HBO will work with existing affiliates. HBO is a great service, but all they’re really looking for is a share of the cable-modem-only households, which is pretty small.”
  • “What are the costs [for HBO] of disintermediation? They have to sell the rate increase, collect the money, deal with bad debt. When they’re the direct-to-consumer provider, they have to deal with all the stuff that cable and satellite operators deal with now. There’s an awful lot of stuff that goes into being a consumer-facing service provider.”
  • “If you asked most operators, they would say they don’t care [about HBO going over-the-top]. There’s no margin in the premium networks anyway. We do that primarily as a service to the customers who want it. By the time you take the marketing expense and you churn and burn through the customers after the two or three months of free service, there’s nothing there when you sell another subscription. If one person spends $15 for HBO and another person spends $15 to increase their Internet speed, the cable operator is going to choose that Internet customer every single time.”

Pay-TV Strategy

  • “Everybody [among the pay-TV operators] is looking in all the same corners [to fight cord cutting]. There’s a great deal of interest in working with TiVo [Inc./TIVO] on their platform. Everybody is trying to get Netflix or HTML5 capabilities on their gateways. Everybody’s pushing towards IP [delivery] and full addressability. Everybody is working toward the same goals.”
  • “There are some companies that take a more enlightened approach or have set a specific goal rather than looking at everything—Wave [Broadband], Suddenlink [Communications], Cable ONE Inc. have put down their mark in the TV world as saying they are willing to get rid of some [programming bundles] to try to change the terms [of negotiations with content providers].”
  • “The issue with network neutrality is [avoiding] the slow ‘cable-ization’ of the Internet. If there is this systemic decline [in ad-supported TV watching], where are the content providers going to make up for that lost revenue? Probably not through disintermediation [from pay-TV operators] and selling TV subscriptions one at a time.”
  • “They’re going to look around and see a model that looks very familiar to them with the ISP guys. They’re going to say what they’re already saying to Suddenlink and Cable ONE—if you want online access to our content, you pay me so much per customer per month.”
  • “What would happen if [Internet providers] suddenly had to put $20 or $30 worth of TV content, or any content, onto a basic Internet subscription? It would freeze the development of the Internet. You won’t get infrastructure improvements. It will halt the quest for rural broadband because there’s too much content costs and it disrupts the expectation of a return on [infrastructure] investment.”
  • “That’s the drumbeat that most ISPs have been trying to get people to hear. It’s true that consumers want to see Comedy Central and whatever else they’re missing [if a pay-TV operator won’t pay] Viacom. But the content providers have shown an absolute disregard for consumers. They look at consumers as an annuity. Viacom or Fox says, ‘I need $6 per customer per month and I’m going to get it. I don’t care if they watch. I don’t care if I have to cram another network down their throats.’”
  • “Do we have to worry about that [approach] with the Internet? Linear TV is too far gone to be saved. The contracts are in place that are going to take us out until 2020 and beyond with 15% per year cost increases [for programming]. We’re not going to be able to fix it. It’s too complicated. So far, we’ve managed to shield the Internet from that [model] and that’s a mission of our industry—to protect the Internet from content companies forcing content on everybody.”  

Internet Usage

  • “We’re trying real hard to make that work [a Netflix app on customer set-top boxes]. I’d like to have that, absolutely. Netflix and Crackle and YouTube, all of them. We would like to enable consumers to find their online video from as many sources as they want. Load up on applications on the set-top box, on the gateway for the whole house. That would be terrific.”
  • “One of the jobs of the ISPs now is to educate consumers that, as they add more devices and want to watch more high-bandwidth assets like video, they’re going to have to upgrade their Internet speed. People don’t recognize that as they have six or eight devices in their home now, they’re all uploading and downloading various things. They need to have a faster Internet speed.”
  • “There are a couple of different [Internet pricing] models out there, such as ones where if you exceed a certain [monthly bandwidth] limit you have to buy more, and I’ve seen others where if you exceed a limit a certain number of times, you have to upgrade to the next package, which stops you from exceeding the limit. I don’t know which one I prefer.”
  • “As people begin to shift from the multicast linear stream of television to the more unicast stream of online video, the ISPs incur significant increases in capital expense to create smaller and smaller nodes, to add more and more streams. Very expensive capital investment there. There’s a real cost as people shift away from linear television. The ISPs are going to have to do something to recover that capital investment.”

 

3) Business sales representative with a regional pay-TV provider

Cord cutting will not accelerate rapidly in 2015 but within five years, consumers will no longer need or want traditional pay-TV service, as all content delivery will transition to broadband. Pay-TV operators will turn their focus to Internet services, with a mix of TV delivery, high-speed connectivity and phone service. The FCC likely will promote tiered levels of Internet service, clearing the way for higher broadband fees. Still, this source said it is unlikely that such fees would climb so high that pay-TV would be seen as preferable to OTT.

Cord Cutting

  • “Not in the next year [will cord cutting grow significantly], but in no more than five years cable will not be a necessity, and people won’t want it anymore.”
  • “We’re looking at providing better, higher-speed Internet. That will be the focus more than anything. VOIP [voice over IP] service, too.”
  • “Content providers like HBO will have to switch over to some sort of Internet provider [as their main distributor]. I’m positive that’s what they will do.”
  • “Faster, reliable Internet is the key to OTT. You’ve got to have that bandwidth to prevent constant buffering, which ruins the experience. It’s still a problem in a lot of rural parts of the country.”
  • “The younger generation has gone totally smartphone. They’ll stick with what they’re used to.”
  • “With smart TVs, it’s easy to use social media. You can split the screen and blog about what you’re watching at the same time. I think that is definitely starting to catch on, people using social media to share their experiences.”
  • “Netflix and Amazon will still be the big players in OTT. They have the financial resources to produce their own content and grow their subscribers.”
  • “HBO selling individual shows is really interesting. It’s nothing new, but it’s interesting for HBO to be getting into this. You can already buy whole seasons of your favorite show from a lot of channels and store them in the cloud. I think HBO is responding to this trend.”
  • “It’s serving a smaller segment of the market that maybe doesn’t want to watch everything on HBO but just one or two shows. You can buy a whole season for under $30, which is a lot less than subscribing to HBO for a year.”
  • “There’s really not a lot cable companies can do about it unless they have an exclusive deal locked in, like with pro sports.”

Pay-TV Strategy

  • “There’s a mix of things the pay-TV companies are doing to keep subscribers. Service bundles are really popular. A lot of them are priced in a way that it makes sense to get all your services—Internet, TV and phone—for one price.”
  • “Sports and special events are probably the strongest draw for pay-TV right now. So long as the game you want to watch is only on pay-TV, cable and satellite companies can depend on those subscribers.”
  • “The cable companies that work with OTT and not fight against it are probably going to do better. The nice thing about a set-top box with Netflix on it is the customer pays for Netflix but also for the built-in DVR. So cable companies get a piece of that.”
  • “The cost of content is a huge part of pay-TV pricing. The [cost of] license agreements for sports keeps going up, and a lot of customers who don’t watch sports are subsidizing the cost for those who do. I expect we’re going to see more cafeteria-style pricing in the future, where you pick the channels you want and just pay for them instead of one price for 400 channels. That will probably have to happen in the next couple of years to keep customers happy.”

Internet Usage

  • “ISPs can’t afford to raise prices so long as there is competition. One of the big concerns about Comcast merging with Time Warner is it could give one company too much control over access to the Internet. It will come down to Congress. It will be interesting to see how the new Congress handles this one. A merger of that size would be a real game-changer in how people access the Internet in this country.”
  • “The ISPs would be very foolish to start playing with bandwidth pricing before the FCC rules on net neutrality. If they vote to classify broadband as a telecommunications medium, then net neutrality is preserved. More likely, we’ll see a two-tier approach, with higher costs for broadband.”
  • “Broadband would have to become ridiculously more expensive for cord cutters to come back to cable. Would it stop more subscribers from canceling cable? Doubtful. If it comes down to an either/or choice, I think most consumers are going to choose high-speed Internet. Everything is headed in that direction. Everything is eventually going to be online.”
  • “If higher charges for broadband come into play, then ISPs obviously win. Companies like Verizon [Inc./VZ] and Comcast, AT&T [Corp./T] and Time Warner come out the big winners.”
  • “Consumers probably benefit the most from net neutrality. Companies like Verizon that support tiered pricing argue that net neutrality stifles innovation and reduces investment in broadband networks. I don’t think there’s any evidence to support that. It’s leverage over the FCC to support tiered pricing.”
  • “If the FCC pushes to regulate broadband like a utility, the first response will be lawsuits from all the major ISPs. That could take a few years to sort out.”

 

4) National sales executive for a satellite equipment distributor and DirecTV (DTV) partner

Cord cutting will not increase at a substantially greater rate in 2015. New OTT services that are launched during the year will likely have limited content, as good relationships between the content creators and pay-TV operators need to be maintained. For DirecTV, NFL Sunday Ticket keeps a third of the satellite operator’s 22 million customers from leaving the platform. DirecTV’s increased presence in colleges is also a key part of its customer growth and retention strategy, as is its security product LifeShield. Netflix may be added to some cable set-top boxes, but the main game among operators right now is partnerships that deliver both a huge customer base and a suite of products such as Internet, telephone, video and security.

Cord Cutting

  • “With the growing programming that’s available on the Internet, you are seeing numbers on the cord cutting side go up, but I don’t think it’s going to increase more than the rate that it’s at.”
  • “[Programmers] know where their bread is buttered. They’ll bring some content out [over-the-top] to increase the audience and viewers, but it’s going to be so limited. Whether it’s DirecTV or DISH, for on-the-go stuff, it’s very few channels that you have at your fingertips.”
  • “It’s not going to be expensive for those [content] companies to roll out a $6 online service, [but] I can’t see them offering everything that’s being offered by pay-TV providers right now, not for $6—otherwise the relationships just disappear with the providers. [Streaming TV packages] will be extremely limited.”

Pay-TV Strategy

  • “If you’re looking at key retention tools, DirecTV has the biggest retention tool out there with the NFL Sunday Ticket. If you look at DirecTV’s 22 million customers, I’ve heard different numbers thrown around, but somewhere between 7 and 7.5 million wouldn’t leave the platform just because of the NFL Sunday ticket. I don’t think any other provider that’s out there could say that they have one single retention tool that would keep a third of their customer base. No matter if they upped the bill $20 a month, they would stay.”
  • “DirecTV is partnering with more and more colleges around the country, getting DirecTV into those colleges so [younger consumers] are hooked then. It’s in their dorm room, it’s on campus and that’s what they get to know and love. This started a few years ago with colleges like Stanford, but has been increasing over the last year or two.”
  • “[Although other providers] are getting in on the space, it’s not just the service [that gives DirecTV an advantage on college campuses over competitors], it’s also the installation process. As far as being cost friendly, efficient and a clean process of going into institutions like college campuses, DirecTV has advantages.”
  • “Applications are also a big part of the key retention strategy— Facebook [Inc./FB], YouTube, Pandora Media Inc. …. The list goes on, where it’s hitting the ‘IY’ or ‘Internet Youth’ generation, that grew up with such Internet.”
  • “As [pay-TV] companies continue to merge, they should be able to get better rates from the [content creators] because of their larger subscriber bases.”
  • “For DirecTV, they’re a pure-play video content provider, and the best at it. No one is close to them. DISH Network is a number two—and trailing quite far behind.”
  • “DirecTV’s theme now is branching out across their dealer base—the deal they signed with LifeShield for security, for example. So the company is looking at extra revenue streams not just with the triple play, but also now the quadruple play with security.”
  • “[Branching out into different services] is not just a revenue source, but also a retention tool. When you have someone sucked into so many different products, if they’re frustrated with one, you can still keep [the customer].”
  • “When you look at the cable companies like Comcast, they’re making their money in Internet. DirecTV is making their money off of video. To have these additional revenue streams [from its LifeShield offering], especially at higher profit margins—I think will allow the company to be much more flexible across all platforms.”
  • “DISH is looking at a partnership with Verizon. I think everyone’s focus right now is in partnerships. It’s just like the airlines. Can Cox [Communications Inc.] go out and cut deals with Netflix or any of the others out there? Is it worthwhile, or do they need to be looking for other partnerships? I think the focus right now for [pay-TV] companies is the need for a huge customer base and to be aligned with three or four products—your video, your telephone, your Internet and security.”
  • “I don’t know how much I see [pay-TV packages] going down [in price], unless some of the networks become realistic on what they’re charging [for programming]. When you see a dispute [between operators and networks], if you really dig into it and look at the financial side of it, it’s just crazy numbers for content that are being thrown at the video providers that are out there.”
  • “I don’t see the cost of these packages going down. I think with the mergers on the horizon [the price increases of a package] may slow down a little bit. But I only think they’re going to continue to go up—everything is.”

Internet Usage

  • “I don’t know if the ISPs can raise their fees. They will have to be more strategic about the packages they offer. Outside a WildBlue or a HughesNet, and on your cell phone, you’re not going to have a data cap usually. So is 20 MB good enough for you? Do you need 50? Do you start getting creative and start offering packages that will add $2 a month to get the subscriber to go from 20 MB to 25 MB, even if they won’t really notice the difference? The margins are so huge on the Internet side that I think that’s where people start to play and leverage customers.”

 

 

2) Content Owners

All four sources agree that cord cutting will continue to grow very gradually in 2015, as live sports that are available only with pay-TV subscriptions remain immensely popular. Trying to piece together different streaming services in place of pay-TV can be difficult and expensive, two sources said. Netflix and Amazon likely are the big winners among OTT services in 2015, according to two sources. Pay-TV providers are experimenting with one-click movie and TV show purchases similar to iTunes, two sources said. Three said the cost for pay-TV operators to license premium content is rising. Two high-ranking studio executives reported that Netflix’s recent launches in France and Germany have been good, but not extraordinary. One said studios and pay-TV operators are going to be fighting over whether operators need to pay additional rights fees to allow subscribers to stream recent TV episodes on demand. Internet service providers likely will prevail in the net neutrality debate, and will be able to charge OTT services such as Netflix for faster delivery, according to one source.

 

Key Silo Findings

Cord Cutting

  • 4 of 4 think the pace of cord cutting will continue to be slow in 2015.
  • 2 said OTT services are difficult to cobble together and the cost can add up.
  • 2 named Netflix and Amazon as the big OTT winners in 2015, with 1 also naming Hulu and the other mentioning The Walt Disney Co.’s (DIS) Disney as potential players.

Pay-TV Strategy

  • 3 said live sports remain a key draw for pay-TV operators.
  • 3 noted that the cost for premium content is rising.
  • 2 said pay-TV providers are getting into the electronic sell-through business a la iTunes.
  • 2 think Netflix will get its app on more set-top boxes, but 1 of those 2 believes revenue sharing will be a requirement.
  • 2 said Netflix is doing well, if not spectacularly, with its recent launches in France and Germany.
  • 1 said a battle is brewing between studios and pay-TV operators over paying for “catch-up” viewing of TV series.

Internet Usage

  • 1 thinks broadband providers are likely to get their way in the net neutrality debate and be able to charge for faster content delivery.
  • 2 were split on whether Internet prices will rise for consumers.

 

1) Vice president for a “Big Six” Hollywood studio; repeat source

Viewers will not abandon pay-TV subscriptions en masse in 2015. As OTT offerings proliferate, there will be even greater need for an aggregator of streaming content, an opportunity that pay-TV operators will seize by building their own OTT universe. This source believes Netflix will be forced to pay more in the coming year for access to better Internet delivery, and likely will be forced to cut more revenue-sharing deals with cable operators to get its app on set-top boxes, similar to Netflix’s freshly inked agreement in the U.K. with BT Group plc [BT]. Technology advances, like cloud-based DVRs and backward scrolling programming guides, have studios worried that more comprehensive “catch-up” viewing models will cut into their revenue, a development that could lead studios to withhold content to force pay-TV operators to pay more for streaming content delivery.

Cord Cutting

  • “I don’t think there’s going to be a mass abandoning [of the pay-TV bundle]. With all the announcements of various content groups now looking at standalone [streaming] services, you still need an aggregator. It’s still got to come through to the end subscriber from one source primarily. They still need a tube. And to get that tube it means having some form of integrated relationship with the tube provider.”
  • “I don’t see a mass movement [away from pay-TV]. I do think it’s broken down by demographic—the younger demographic, the more [cord cutting] you’ll see. But it tends to be cyclical because there are always new options to break away from what’s been the traditional model. You go through two or three years of people breaking against the traditional model, and then you usually see it settle back into a stable environment.”
  • “The industry is always trying new things. If I look back to when interactive TV was introduced, there was this whole concept that people were going to abandon watching TV channels then. People talk about it happening but then human laziness takes over, because the more choices you’re given, the more time consuming that is, and ultimately people want a lot of the choices made for them.”
  • “[Pay-TV operators] will end up being the aggregators [of streaming content] because they have the pipe. If you think about the OTT services that are being counted at the moment—Netflix or Amazon Prime, and now CBS, HBO and then Disney on demand—suddenly you’ve got seven or eight places to go and buy standalone services. Suddenly your cost base goes up.”
  • “Will people be happy to pay Netflix $7.99 a month, then do that seven times over? Ultimately no. [Viewers] will still want to enjoy as much range of content, but they won’t want the price to go up exponentially. So they will still ultimately look for a stability over the amount of money they’re prepared to spend.”
  • “[The success of HBO’s streaming service] is very much down to the strength of the offering. It works if you still have extremely compelling content that brings the audience there. But you only need a number of near misses, or content no longer being compelling, for you to get a churn rate.”
  • “It happened with Disney/ABC. They launched their standalone on-demand service when they had Lost, Desperate Housewives, Grey’s Anatomy—and people couldn’t get enough. And then as soon as those shows got to the end of their [series] run, there wasn’t anything replacing it. And you got churn with that standalone offering because the content wasn’t compelling enough.”
  • “We’re seeing that with Netflix, and we’re seeing it to an even greater extent in international markets. It’s happening in the U.K. and even more so in the Netherlands, where the pay-TV operators got extremely uncomfortable and nervous about Netflix being in that market. But what [European pay-TV providers] are now understanding, is that there’s high churn [of Netflix subscribers]. If a pay-TV operator comes out with even a paler version of Netflix, that’s enough for a lot of subscribers to be happy to stay with them.”
  • “Unless Netflix is going to bring something extremely strong like House of Cards, then it’s not enough for people to want to stay there, and they’ll revert back to their pay-TV operator—if the pay-TV operator offers enough standalone content.”
  • “[The strategy for HBO and other OTT services] might be through maintaining original programming or it might be that they remain the exclusive provider of specific must-watch appointment shows.”

Pay-TV Strategy

  • “I do think [we’ll see more OTT services in the coming year]. You’ll see a lot of them being launched, and then it will fragment the market a bit, and then ultimately the strongest players will win out. It reminds me of the Internet boom, where everybody was launching [a platform/offering], and then gradually the strongest ones won out. The cable operators will all do their own, and it will all settle down.”
  • “Comcast will do a similar thing to [what British Sky Broadcasting Group plc (BSYBY) has done in Europe], and that is, rather than aggregate [the various OTT services], they would rather spend the money directly with the studios and build their own service.”
  • “[The pay-TV operators] have realized that studios aren’t going to play nicely unless they’re paid, but then at least [the operators] are in control of that relationship. If the control sits with a Netflix or a third party, then they’re twice removed.”
  • “We’ll start to see Netflix and other [OTT services] play more closely with the cable operators in the coming year. I think it will become a more symbiotic relationship for which [the OTT services] are going to have to pay.”
  • “The other consideration is MDVRs [mobile digital video recorders], this concept of recording and storing content in the cloud. Being able to store content in the cloud rather than on the [set-top] box will be the absolute hot topic in the next year. It’s right at the heart of what most content owners and cable operators are obsessed by right now because it will change the revenue dynamic.”
  • “If you have a DVR in the cloud, that’s arguably almost limitless. And at that point, you can build up a massive comprehensive library yourself as a subscriber, and that starts to cut through windows of [content] revenue.”
  • “The studios stand to lose money in this [digital cloud storage] scenario. For example, if I recorded all of Dexter that I’ve ever wanted to see [in the original ‘first pay’ window], that means that when it comes back a year later—and another channel is trying to launch [off Dexter], I’ve got all of Dexter already, so why would I watch that channel or even pay for it? And that’s where [MDVR models] start to cut into the long tail of revenue.”
  • “It will be a pendulum swing. In the beginning the [network] affiliates are going to just go out [and put content in the cloud without paying the studios extra rights fees for it]. And they will start to grow subscribers—or grow ARPU [average revenue per user]—as a result.”
  • “But then the studios will start to cut off the blood line, telling TV operators that if they won’t pay [extra for their OTT content], then it won’t be made available. So ironically [revenue flow] will settle back into a similar place to where it is now. [That entire pendulum swing] will happen over two to three years.”
  • “The pay-TV operators are using [OTT offerings] as a negotiation tool in a lot of conversations [with the studios]. They’re saying, ‘We keep you relevant and we give you new subscribers, and as a result you’re going to get the revenue growth that way,’rather than by paying additional [rights fees to the studios] to make the new offerings available. It’s quite a squeeze.”
  • “So I don’t know that [these new OTT services] will be a new revenue driver for the studios, because it starts to fragment quite quickly, and then it’s a volume game; unless you can get large volumes to engage with the service, it’s quite hard to have power or leverage in that environment.”
  • “Traditionally, content pricing has been about adding in additional rights. So that right might be you can now watch it over multiple devices, or you can watch it and download it. Those are the ways that content has built a value. What a lot of platforms are now arguing is that the kind of [OTT services] that they’re introducing are not a ‘right’ but a ‘functionality.’ And that’s what’s making studios very nervous, because if it’s purely a functionality, then [the pay-TV operators] are not going and asking for the rights, and if they’re not asking for the rights, you can’t build in additional revenue.”
  • “Another example is this concept of having a backwards EPG [electronic programming guide], so that you can scroll back through the last seven days of programming and watch anything that was on in the last seven days. That makes studios very nervous, because [currently] if somebody’s missed it, they might find it in catch-up, but if they don’t, the only way to go back and watch that content is when it’s available on iTunes or to buy online. That window gets cut off if this functionality of looking backwards is starting to be developed by platforms.”
  • “The reason that [these new technology advances] are putting studio revenues in danger is that the operators are not even asking for the right to do it. They just see it as extra functionality on the set-top box.”
  • “So the battleground is between the operators and the content creators, which are viewing these new technologies as a right that the [pay-TV providers] need to come and ask for—and pay for. It’s a big battleground.”

Internet Usage

  • “I would expect the [Netflix] app to appear more on set-top boxes and smart TVs offered as a box-less solution. It literally just happened with BT in the U.K. In the U.S. market particularly, I think that’s where the battleground is.”
  • “I would expect any cable operators who have their own [movie streaming] service to make both their own and Netflix available simultaneously until such time as they can secure direct relationships with the studios and buy content themselves for their own SVOD [subscription video on demand] This is preferable as they would then not need to manage Netflix or share revenue.”
  • “Netflix is going to have to start paying [more cable operators]. I think if [Netflix] were able to maintain the level of marquee TV—like House of Cards—then that would be different. But I don’t believe that’s sustainable, partly because of the cost base.”
  • “Ideally cable operators want Netflix to pay them. If you’re a cable operator, you’d probably much rather take Netflix on—partly because of the brand equity—but also because it’s a strong offering to put out to your subscribers to say, ‘We’ve got everything you want, why go elsewhere?’ It’s an integrated offer; you don’t have to do anything, we’ll do it all for you.”
  • “But [the operators] want Netflix to pay them for that, or have a share of revenue. And for a long time Netflix has been somewhat resistant to that, partly because that means they would have a reduction in their own revenue, but also they have stood by this philosophy that they shouldn’t have to pay for carriage.”
  • “I suspect that tide is turning for two reasons. The cable operators will make no move to improve the way that the Netflix service is managed over their systems [unless there is some kind of payment or revenue-sharing deal in place], which creates quality issues. And secondly, if Netflix is beginning to see a churn or a wane, then they need to get into bed [with the cable operators] and shore up those subscribers. I think there’s a bit of a sea change.”
  • “In Europe, the only [cable operator] that has managed to secure any form of revenue share or payment [from Netflix] is BT. But it’s under enormous caveat. It can only be new subscribers that haven’t got Netflix already. It’s only new [BT] subscribers having new services. It’s very diluted and watered down, so Netflix still maintains the upper hand in that. Yes, they do pay [BT], but only for a very small subset of new subscribers. Right now [the BT-Netflix deal] is more of a share of revenue.”
  • “[Netflix]] is not [yet] paying for [better service over the pipe] but that will come over the next six months, and that’s certainly the way the market will go.”
  • “[In the other European deals where cable operators have a Netflix app], there isn’t payment by Netflix [to the operators]. It’s not a managed service but a marketing relationship. By managed service, I mean [the cable operator] ensures fast pipe and better service.”
  • “France has done better than expected for Netflix but not stellar. In France, [Netflix executives] feel like it’s done better than expectations, and I think that’s mainly because the Franco mentality of being pretty resistant to U.S. content, being pretty resistant to non-French content, has always been an issue in the French market. But I suspect what’s happened is [Netflix] has tapped into the guilty pleasure aspect of it, so actually there’s an audience, and a strong enough audience, and Netflix has managed to tap into it.”
  • “In Germany, Netflix is happy enough [with the launch]—but again, not amazing. [Netflix executives have] been relatively neutral on Germany—I don’t think they’re unhappy with it. But you’ve got Maxdome in Germany, which is already a direct competitor. It’s not as good as Netflix, but it’s a pre-existing standalone service. Then there’s another one that’s doing extremely well in Germany called Magine, which is also a direct competitor.”
  • “[Also competing against Netflix in Germany and other European markets], BSkyB has gone out and aggressively offered lots of box-set services [an entire season of a show for viewing at the same time], so they’ve got a very, very comprehensive catch-up library that then feeds into new box sets of new shows airing at a given time.”
  • “When the next Game of Thrones comes out, they’ve got an SVOD service which allows you to catch up on every single episode of Game of Thrones, up until the launch of the new series—like DirecTV’s Genie, but it’s very comprehensive. [The company] has gone out and bought those rights from pretty much every studio, and it’s a really deep service with plenty of choice and most of the key titles. Sky has the best right now.”
  • “Netflix [got a head start in] the market in the U.S. and in the U.K., and to an extent in The Netherlands. But Netflix is now going into markets where there are strong competitors already, and [these also are] markets with a very strong tradition of local content, which is the challenge that they face.”
  • “Netflix is supposedly due to launch in Poland at the end of next year, which, outside of the U.S., is the highest pirated content market in the world. So you can imagine the challenge. If I go to Warsaw tomorrow, I can pick up and watch something that was aired in the U.S. on Netflix yesterday. But I think that might be why they’ve done it, because if you go ‘day and date’ in territory in Poland [i.e. simultaneously releasing a show/movie in all territories], then you have a much better chance of your content not being pirated.”
  • “To a degree the studios have limited control in terms of being part of the debate. Having said that, they know that it directly impacts their revenue streams. So, depending on where that lands, they’ve either got to get closer to the cable operators or closer to Netflix.”
  • “If net neutrality is maintained, the studios will be getting closer to Netflix, and if not they [will be more closely aligning with the operators].”

 

2) Senior executive for a major Hollywood studio; repeat source

Viewers will not cancel pay-TV subscriptions in substantial numbers until major live sports are available OTT, which will not happen in 2015. Pay-TV operators are getting into the electronic sell-through business, enabling subscribers to buy and own movies and TV shows directly on their set-top box. This is expected to become a huge new revenue driver for TV and movie studios, while also becoming a retention tool for the operators. Cable operators likely will cut more deals to have the Netflix app on set-top boxes.

Cord Cutting

  • “OTT won’t be the death of pay-TV, as long as pay-TV operators keep up in terms of really high quality content, TV Everywhere and on-demand offerings.”
  • “We’re hearing from our pay-TV clients internationally that their subscribers aren’t dropping their pay-TV subscriptions for Netflix. They just add Netflix on top of their subscription.”
  • “I don’t think all the new OTT entrants will change this. I think as soon as there’s a real sports offering available OTT, then we may see people cutting the cord in bigger numbers.”
  • “You can get day passes for sports, but until there’s a meaningful, monthly standalone subscription, I just don’t see people going off in droves from pay-TV. Most households have at least one person who loves sports, and the pay-TV providers have locked up the big sports offerings.”
  • “Sports aside, I’m not sure a la carte is going to be as big a deal as everyone thinks it is, because it’s a pain to have to cobble together HBO, Hulu, Netflix, Amazon and so on. And it’s not that much of a savings by the time you buy each offering.”
  • “[The studios] are doing more and more exclusive content deals, so a TV show or movie might only be available on Amazon or Hulu. To get the complete offering of what you want from OTT services, you’re going to have to buy more of them, or keep switching between them [if you don’t have a pay-TV subscription].”
  • “Even if you can add a sports package on top of that, you’re looking at saving maybe $20 a month. It’s not that much [considering the inconvenience].”

Pay-TV Strategy

  • “The big new thing is pay-TV operators getting into the iTunes-type business. Electronic sell-through [EST] is a whole new business model for us. BSkyB launched their own electronic sell-through service in the U.K., which is like iTunes, but it’s all on the set-top box. Comcast has done the same thing. We’re making a lot of money from that deal. It’s a revenue stream that we’re super excited about, and one that’s growing fast. I think it will take revenue from iTunes.”
  • “These EST business models are taking off—and people love that, so it’s another strategy operators are using to keep people tied to their pay-TV subscription. If you can just click on your remote and buy Ice Age or Frozen, and it’s on your set-top box forever to play on your big-screen TV, instead of having to find the DVD—it’s a perfect copy that you never have to buy again.”
  • “We’ll start to see U.S. pay-TV providers follow models that we’re already seeing in the U.K. and Europe. BSkyB, for example, already offers digital ‘box sets’ of a series, which is very popular. Twelve months after a show starts airing, they put the whole show up on demand and call it a box set. You can pull it down from the cloud or set-top box and you’ve got every episode. That’s hugely popular.”
  • “BSkyB has been the front runner in this, and I believe Time Warner has it to some extent, but I imagine everyone is going that way.”
  • “Fees for content creators are growing overall. [Content prices] always depend on the business model. It depends on whether you’re talking about free or basic [pay-TV], or whether you’re talking about movies or TV series. [The content price question] is nuanced, but I don’t see prices dropping overall. If anything, I think it’s going up.”
  • “The main driver of revenue for all the studios in this new OTT environment is great content that people want exclusively. In the TV series world, that’s hit shows. In the movie space it’s an overall strong movie portfolio.”
  • “Netflix and Amazon in the SVOD space will pay big dollars for shows like Gotham and Blacklist. They’ll compete for those shows and they want worldwide deals. That’s a whole new business model that we’ve never dealt with before, worldwide rights.”
  • “Money’s coming in that we haven’t seen before—but they want a lot of rights for it [across multiple territories].”
  • “Apps will also be new revenue drivers. FX recently launched a Simpsons app, offering every episode of the Simpsons ever made, and it’s been a huge success.”
  • “The cable operators will cut deals to have Netflix on their set-top boxes. I don’t know for sure, but my guess is yes. Ironically, that may help people stop cutting the cord, because it will make [pay-TV] more of a one-stop shop.”
  • “I’ve heard [Netflix] is doing quite well [in France and Germany]. Germany’s a tough market because there’s already a lot of competition from existing standalone OTT services. Maxdome has their own SVOD service, Amazon is there and a company called Watchever, which is owned by Vivendi.”
  • “Netflix’s success in France and Germany will all depend on how much local content they’re able to get in those markets. People [in France, Germany and other European markets] do love Hollywood content, but the big numbers are generated on the local content, unfortunately for [the Hollywood studios].”

Internet Usage

  • N/A

 

3) CEO of an entertainment company specializing in IPTV media networks and studio entertainment

Premium content, primarily sporting events, will keep pay-TV subscribers tethered to their cable companies. While OTT content is less expensive, it is not an option for people in areas of the United States without reliable high-speed Internet access. OTT winners will continue to include Amazon, Hulu and Netflix. Pay-TV operators are experimenting with different features such as one-click purchases of digital movies that reside on customer set-top boxes or in the cloud. Bundled services may prove to be a better value than buying individual channels or individual shows. The net neutrality debate is leaning in favor of the telecom companies.

Cord Cutting

  • “Cable and [satellite] TV aren’t going away while they have premium content locked in. It’s all about the content people want. Higher cable bills may drive some people away, but it’s the content that keeps subscribers happy.”
  • “OTT is also about content, but right now the big advantage is it costs less than pay-TV. A lot of areas don’t have high-speed Internet service, so that’s an obstacle to OTT.”
  • “The younger crowd is happy to watch content on a smartphone or a tablet. The [high] cost of cable TV may be part of it, but I really think it’s a lifestyle choice. People in that age bracket don’t want to sit at home watching TV.”
  • “Social media like Facebookand Twitter [Inc./TWTR] get a lot of play during live events. The thing is, people are watching an event on a TV—maybe at home or in a bar, wherever—but they’re posting to their Facebook page on another device—a phone, a tablet.”
  • “Amazon and Netflix will do well. Hulu has a lot of really great content, both free and on the subscription side.”
  • “I don’t know what HBO is offering a la carte. Again, it’s the content. It gets complicated when you try to distribute content on another platform. If you own the content, that’s one thing. But a lot of companies like AMC [Networks Inc./AMCX] and [CBS’] Showtime—they don’t own the content that transmits over their channel. They lease a lot of content from production companies. So they have to go back to the table and work out a new deal.”
  • “The other thing about a la carte deals is the pricing. If you pay $10 for limited HBO content, then decide you want a few other channels, you could quickly be looking at a bigger bill than your cable bill.”

Pay-TV Strategy

  • “There’s the quality of the content and promoting exclusive access to that content. A lot of companies are tinkering with different ideas like one-click movie buying. It’s similar to Time Warner’s Flixster Inc. and VUDU Inc. where you buy a digital copy of a movie and it exists on the cloud. There’s a lot of appeal to that, the convenience. You don’t need media storage for all those Blu-rays and DVDs.”
  • “All of the pay-TV companies are looking at ways to add value for the customer, whether it’s throwing in a free DVR for new subscribers or creating new promotional offers.”
  • “[Phone, Internet and TV] bundles are a good deal for a lot of consumers. Most parts of the country have at least two pay-TV companies offering service, so the packages are priced competitively.”
  • “ESPN and pro sports packages are absolutely holding subscribers. The pay-TV companies are pouring billions into professional sports to get that content.”
  • “Pay-TV bills will increase as the cost of content goes up. One way around it is to offer individual packages to the customer, like NFL, so only the people who want sports are paying for it.”
  • “I don’t know the level of interest cable companies have in adding a Netflix app [to set-top boxes]. On the one hand, they’ve had plenty of time to do it, and on the other, it makes sense because a Netflix subscriber would then be a cable subscriber.”
  • “There will be more streaming content in the next year, probably special events like the World Series this year. You have heightened interest in an event, so streaming is a way to grab more eyeballs and meet demand for people who either don’t have pay-TV or want to watch an event where they don’t have access to a TV.”

Internet Usage

  • “I don’t think we’ll see hefty increases in Internet service [pricing] until the net neutrality debate gets sorted out.”
  • “If pricing goes up based on bandwidth, I think it will only spur more pay-TV companies to move forward with streaming options for customers. Internet is already an integral part of the business for most of these companies. It’s not going to spark new sign-ups for pay-TV subscriptions. If anything, we’ll see more IPTV, more streaming services.”
  • “The FCC has indicated it does not want to regulate the Internet like a utility, which is essentially what [President] Obama proposed. [FCC Chairman] Tom Wheeler was a lobbyist for a long time, working for the big telecom companies. If I had to bet, I’m thinking the telecom companies win this one.”

 

4) Award-winning producer/director of a video content provider specializing in web series

This source said cord cutting will continue next year at a slow pace, as live sports keep pay-TV companies in business. Internet infrastructure is critical to the success of OTT services, but broadband providers fighting net neutrality regulations say they have no incentive to invest in infrastructure unless they can charge OTT providers for bandwidth. The FCC will likely give telecoms what they want. Netflix, Amazon and Disney will be the big OTT winners in the next year, although there likely will be new content companies entering the market. Higher Internet pricing for consumers will not drive them back to pay-TV and may, in fact, spur more cord cutting to offset the additional broadband expense.

Cord Cutting

  • “I don’t know about massive cord cutting—more like slow and steady. The consumption model is changing rapidly. A lot of people are annoyed with the price of their cable bills and they like choice. They can go to the Internet and get what they want when they want without a schedule.”
  • “Infrastructure is critical to OTT and that’s one of the arguments about net neutrality, that if it’s put in place there will be no investment for infrastructure. But it’s a disaster if we allow ISPs to throttle content that requires a high-speed connection. You can’t have varying speeds for different businesses. You’ll kill small video companies, small businesses.”
  • “Younger people watch YouTube and streaming content. TV is dead to them. And they find content producers they like and stick with them. I don’t think anyone under 25 pays one shred of attention to the new fall TV season.”
  • “People are definitely using social media while watching live events. It’s participatory. It’s a way to be closer to that fan-based way of media consumption.”
  • “The [OTT] players continually shift, and you would think it’s going to be Netflix and Amazon Prime [as the big winners]; they’re doing a lot of the right things, attracting big audiences with good content. But there are others waiting in the wings, and you never know who is going to make the catnip that draws everybody. Disney will be there, too.”
  • “HBO’s a la carte is going to take off. It’s what consumers want—content when they want it. People are busy and they don’t want to be told when they can watch something. The cable companies will adapt or die.”

Pay-TV Strategy

  • “[Pay-TV operators] know without a shadow of a doubt if they can control content on the Internet, then the entire landscape of the Internet will shift. They know that’s where people want to live, so it’s difficult to maintain the current business model. They either have to maintain excellent content on cable or at least content that draws an audience.”
  • “Sports keep the cable companies alive. Without it, they would be dead by now. It’s at the top of the list why people purchase cable.”
  • “For me personally, bundling [of phone, Internet and TV services] isn’t an incentive. It’s content.”
  • “The [pay-TV companies] reluctantly adapt and try to game the system behind the scenes with lobbying. Even if we get net neutrality, I don’t think they’ll stop their lobbying shenanigans.”
  • “All the big companies will try to maintain the status quo. They are not in a mode to be service-oriented to their customers. Prices won’t go down, only up.”
  • “Adding Netflix to a cable box is a roll of the dice [for pay-TV operators]. As a consumer I would love that. It depends on the pay-TV company and whether they see Netflix as a potential partner or a competitive threat.”
  • “There will be more streaming. The pay-TV companies are merely battling what consumers want. If you try to re-train consumers to want something else, you’ll fail.”

Internet Usage

  • “Yes, they’ll increase [Internet] prices. By how much I think depends on each market and how much competition there is.”
  • “ISPs will charge for bandwidth if they can. It’s really an unpleasant future where there’s a few people who have the power to sell you access to content. If only the elite have access to content, to information, then it throws us back to the Middle Ages.”
  • “If you’re poor, you only have access to crappy bandwidth speeds. You’re cutting into people’s ability to learn, to know the world.”
  • “It’s not just entertainment. People are taking online classes, doing distance learning and taking online courses. You can’t do that with poor Internet service.”
  • “Higher Internet prices aren’t going to push people back to pay-TV. They already live online.”
  • “I’m nervous about the future of net neutrality. It’s a real problem that a former lobbyist for big cable is now head of the FCC. The big goal for our leaders across both parties is not how to best serve consumers, but how to get campaign contributions. What’s best for Americans is net neutrality, but that’s not what’s best for telecom companies.”

 

 

3) OTT Service Providers

The slow pace of cord cutting will not change in any meaningful way in 2015, according to all four sources, with three citing the importance of premium content, such as live sports, to pay-TV subscribers. OTT services need better content and need to become easier to use, two sources said. All four expect new streaming-only TV packages to launch next year from content owners, new entrants to the market or pay-TV providers themselves. Sources were split on whether pay-TV operators will add a Netflix app to customer set-top boxes. One said a more comprehensive platform of on-demand TV shows would help pay-TV providers keep subscribers, while another expects operators to add services like online gaming as a way to attract new customers. Internet pricing will move to a bandwidth-based pricing model at some point, one source said. Another source thinks mobile phone carriers could eventually compete in the home broadband service market.

 

Key Silo Findings

Cord Cutting

  • 4 of 4 expect no surge in cord cutting in 2015.
  • 3 said premium content, such as live sports and broadcast networks, keep pay-TV subscribers from leaving.
  • 4 expect multiple new streaming-only TV options in 2015, whether from content owners, pay-TV operators or new entrants.
  • 2 said OTT services need more and better content or need to become easier to navigate in order to be a viable alternative to pay-TV for more consumers.

Pay-TV Strategy

  • 1 thinks pay-TV providers can attract and retain subscribers with a more comprehensive catalogue of on-demand shows.
  • 2 said pay-TV operators will cut deals to add Netflix apps to customer set-top boxes but 2 others think such deals are unlikely.
  • 1 believes pay-TV operators will start adding new services such as online gaming to their suite of offerings.
  • 2 see programming costs going up.

Internet Usage

  • 1 thinks Internet pricing will eventually move to a bandwidth-based model.
  • 1 believes mobile carriers could provide competition for home broadband service.

 

1) VP for a developer of Netflix and other IPTV apps; repeat source

Cord cutting will do no more than continue to plod along in 2015 because there are too many factors keeping people tethered to pay-TV subscriptions, including live sports, broadcast networks and first-run windows. Cord cutting will not reach critical mass until streaming services become more compelling than the upcoming offerings from CBS, HBO, Showtime and others are likely to be. There may be some pressure on pay-TV operators to offer more choices and lower priced bundles—an unthinkable option only a few years ago. Internet pricing eventually will move towards a bandwidth usage-based model, as broadband providers try to make up revenue from the shift towards OTT. At least one and possibly several major multiple-system operators (MSOs) will add a Netflix app to their set-top boxes next year, in an effort to keep viewers within their ecosystem.

Cord Cutting

  • “Cord cutting will only reach critical mass if the direct-to-consumer [streaming] offerings are compelling and really encourage unbundling. But at this point, I can’t see anything that’s going to change [the pace of cord cutting] from its current trend.”
  • “If [pay-TV subscription declines are] a fraction of 1% [of total subscribers], I’d be comfortable [saying that level of cord cutting will continue] unless something revolutionary happens with HBO and CBS and Showtime going to direct-to-consumer and it’s really compelling.”
  • “There’s a lot of things [keeping people tethered to pay-TV]. Number one, even if you want to watch free-to-air channels right now, you need a cable subscription. You could potentially have rabbit ears on your TV, but for the most part, if you want to watch free-to-air at home—the broadcast networks—you need a set-top box.”
  • “Number two is the sports are still there [with pay-TV subscriptions] and it’s not going away. Most of the good sports are still behind the [pay-TV] paywall and you can’t do much about that.”
  • “Three, while I can still get certain episodes of shows on iTunes or Amazon or Netflix, that first-run windowing is still really controlled by the pay-TV world. If I want to watch an episode of “Game of Thrones” or something on F/X, I can watch it on the TV Everywhere app from that provider but I still need a pay-TV subscription.”
  • “I’ve personally tried it—canceling my Comcast. But if you want to watch TV, you just can’t. People want a linear TV experience and you need a box to do that.”
  • “If HBO is important to you and nothing else [like broadcast networks, sports or first-run episodes], then [having HBO without a pay-TV subscription] might be compelling. Ultimately, if I want to watch those HBO programs and don’t have a subscription, I can probably buy the episodes on iTunes.”
  • “I don’t know the exact details of how much HBO is going to cost or what’s going to be available. I don’t think that’s been released yet. It might be amazing, but it might not be that compelling. It might just be a watered down offering that keeps their [pay-TV] partners happy, like having all the Game of Thrones episodes except the current season or some weird windowing.”
  • “If [HBO without a pay-TV subscription] is $20 a month, is the value going to be there? If they’d come out and said it’s going to [have everything that’s available on] HBO Go for $20, then that would be amazing, but I suspect it’s not going to be.”
  • “Who is HBO targeting, really? HBO says it’s for the consumers who never want to get pay-TV. But really they’re going after people stealing the content for free. They’re not competing for people who don’t want to spend $100 per month for a cable subscription. They’re competing for people who are already watching [their content] but have never seen the need for a cable subscription. If those consumers can continue getting it from their torrent site, they will.”
  • “Are [HBO, Showtime, CBS and others offering streaming packages] doing that to create relative value for the pay-TV bundle? That’s one of the theories I’ve heard put forth about why CBS is doing it. I don’t really see a lot of people taking that up. It’s going to make the bundled service look really good. If I wanted all of those services individually, I’d probably be better off to take a cable subscription.”
  • “I have Netflix and I also use Amazon Prime a lot, because the interface is so superior to [Comcast’s] Xfinity. I also have the linear channels on Xfinity. There’s no getting around it. Sometimes you just want to watch CNN on TV. There’s really compelling content there still.”
  • “I’m working on a number of [streaming TV services] at the moment. Everyone’s having a go at this sort of service, either because they think they’re protecting their bundle or they’re attracting new consumers or they just want to explore new distribution channels and understand the technology.”
  • “A lot of the reason they’re doing it, and I’ve heard this first-hand, is it’s essentially a sandbox for them to understand how the distribution works, how consumers pay—99.9% of their revenue still comes from the traditional bundled television model but they understand that things could rapidly change so they want to become experts and understand how they attract and retain subscribers, how to distribute content, how the apps all work.”
  • “My business [of developing apps for streaming content] is seeing a huge uptick, because even if [the content owners] don’t believe in it or don’t believe it will have a huge financial impact in the next 24 months, they’re investing it in anyway as a way to future-proof their business.”
  • “In terms of differentiation [of OTT providers], the original content side of things is going to mature. They will become more like TV networks. Original content, especially on Amazon, is really good. Their last six pilots, all of them were really worthy of network TV or cable. If anyone’s going to attract true fans and become more like a network, it will be through original programming.”
  • “Absolutely [there will be more Netflix apps on pay-TV set-top boxes]. We just launched Netflix on Deutsche Telekom [AG/ETR:DTE] in Germany. We created a Netflix app that goes on their set-top boxes. The little insight I have into Netflix’s strategy is they want to be on everyone’s set-top box. From what I’ve heard from the [pay-TV operators], they’re fine with it, because it means viewers are staying within their environment. They’d rather them stay on the X1 box than go to their Roku [Inc. set-top box] to watch Netflix.”
  • “I see it as inevitable [that Netflix will be on the set-top boxes of major pay-TV providers]. I see them open to having these discussions. They just have to get the deals in place. I’ll be very surprised if at this time next year there’s not one to three major MSOs in the U.S. with Netflix on their set-top box.”
  • “You can have a unified search function [on a set-top box]. That’s how it works with [Microsoft Corp.’s/MSFT] Xbox or Roku right now. If I want to type in ‘Sons of Anarchy’ on the top level search box on an Xbox or [Sony’s] PlayStation, you have deep linking, so it’ll give me the four different places I can watch that show—in the F/X app, on Netflix, on VUDU, on Amazon. It will give you all those options. That type of unified search can definitely exist. It’s just a matter of turning it on and doing the integration. Deep linking is pretty much mandatory for all the platforms we build on now.”

Pay-TV Strategy

  • “What you’ll probably see is some pressure on the size of the bundles and the peering. It was unthinkable even five years ago to move in the direction of a la carte for pay-TV. I’m not sure you’ll ever see one that means you don’t have to subsidize ESPN even if you don’t watch it, but I think you’ll get more reasonably priced bundles.”
  • “We see this in other markets. In Australia, for example, where only 30%-40% of households have pay-TV, the operators have been a little more creative and put out value bundles for consumers because they know that’s the maximum penetration they’re ever going to get. Here, where [pay-TV penetration] is much higher, they’re more interested in defending what they’ve got rather than acquiring those last households without pay-TV. They’re more interested in defending their existing subscribers than going after the ones who are not ever going to get pay-TV at this point.”
  • “You have Comcast buying Time Warner Cable and then you have AT&T acquiring DirecTV. Between them, that’s a pretty substantial chunk of the market.”
  • “Comcast is the cable industry leader. Everyone pretty much either copies or licenses whatever they do. I know there’s some talk about them licensing X1 and rolling them out in markets where they don’t have competition. They’re doing as much as they need to, given the competition they have.”
  • “The satellite guys are perhaps a little more aggressive. I think AT&T buying DirecTV is an excellent move, very good for both. It lessens competition in the market for consumers but both have more incentive to go and create an ultimate over-the-top offering on AT&T’s network because they don’t have any legacy [infrastructure] from the satellite side of the business. The satellite business will be with us for a long time—you have all this hardware circling the Earth. It will remain current for a long time and [DirecTV] has a huge subscriber base that AT&T will have access to and can sell them over-the-top services.”

Internet Usage

  • “I think [Internet pricing will move to a model based on bandwidth use]. If you look at the typical household, you can easily have three streaming services going on at once. In our house, my daughter might be watching one Netflix stream and my son’s watching another and I might be streaming music, so there’s huge bandwidth being consumed and we’re going nowhere near the set-top box.”
  • “[Internet pricing] will eventually have to go that way [towards paying for the amount of bandwidth used], especially if Comcast sees real revenue erosion from people dropping cable. They still control Internet access into a lot of people’s homes, so they’ll make up for it that way. No matter what you want to watch you still need something connecting your home to the Internet.”
  • “[Even cord cutters] could easily be back at $120 per month. You have Hulu Plus and Netflix and a series that you’re buying on Amazon for $30 and then $60 for your Internet and you’re back over $100. There’s no getting around it.”

 

2) CEO of a digital media company serving content owners and consumer-facing video services

Cord cutting will not reach critical mass in 2015. Pay-TV operators can keep subscribers by enhancing the live TV experience and by making available a complete catalogue of premium TV content to watch on demand. There will not be any meaningful shift toward more live sports programming outside the pay-TV platform next year. It is unlikely cable operators will cut deals to include Netflix on their set-top boxes, as the early evidence from Europe is that such availability steals viewers. We are likely to see four or five big, well-funded national OTT players emerge this year, but they will supplement the core business of pay-TV operators rather than disrupting the bundle. Internet pricing should get more competitive with faster speeds and better levels of service. Smaller networks and content creators are vulnerable in this landscape, where the best capitalized programmers will be able to pay more for access to the distribution pipe.

Cord Cutting

  • “We’re monitoring the landscape, as everyone is, and we’re not seeing wholesale cord cutting. There’s some at the margin, and some of that is likely generational and some may be seasonal.”
  • “There is certainly going to be more and more programming options for consumers outside of the traditional bundle, but we think that [because of] the quality of the programming and the value of the bundle for most consumers, [the pay-TV subscription model] is still going to be the predominant way that premium TV programming is consumed for the foreseeable future.”
  • “The strength of the triple play is real. Having a strong broadband service and telephony to go along with the video service is still a powerful combination. The companies that have built those kinds of services and made them attractive to consumers are well positioned.”

Pay-TV Strategy

  • “Over the next five years or so, for the pay-TV operators, it’s really about two things. [First] it’s about making the live TV experience as good as possible. Part of that is exclusive rights to the NFL or other licensee programming, and part of it is making that live TV experience really good—ensuring that you’ve got a great HD channel lineup and that the quality of the video service is really good.”
  • “The second [strategic opportunity in the video space] is really leveraging all of the investment in premium TV programming. I think the big opportunity that has not fully been built out and exploited yet is a real catch-up TV service that is able to make the commitment to consumers that everything on television is available live to watch, and it’s also available after the fact to watch in case you missed it or didn’t know about it.”
  • “I don’t think the free on-demand service of today comes anywhere close to what that service truly needs to be.”
  • “We see this a bit more internationally, where catch-up TV services have been introduced. I think Comcast is the closest, but if you can imagine all of my TV channels—if I tune in to them of course I can watch whatever’s on—but if I don’t, that programming is captured, indexed, stored and made available for play-out afterwards. That’s real value to consumers. That’s really emphasizing the breadth of the high-quality TV service that’s available. And the only way really to do that today is through your DVR, so you have to know what you want to record ahead of time.”
  • “If you miss something, the free on-demand offering of today is not complete. And short of that, it’s confusing to consumers what’s available and the value of that. I think the big opportunity for the pay-TV industry is to really embrace what that [catch-up] service could look like.”
  • “It would be great for programmers, because it would give them maximum ability to reach an audience. It would be great for pay-TV operators because it would really emphasize the breadth of the high-quality programming they have. And it is unique and different programming that is during a period of exclusivity only available on the pay-TV platform.”
  • “There needs to be—and this is the one gap—a wholesale reinvestment and reinvention of the free on-demand service to really deliver on the promise of making the TV experience as convenient, as accessible and as flexible as consumers want. I think that’s a powerful combination that is unlike the value proposition of iTunes, unlike that of Netflix, of Amazon, and I think it’s defensible.”
  • “I don’t think really premiere live sporting events are going to be available outside of the pay-TV platform in any meaningful way.”
  • “You’re seeing more and more disputes [between pay-TV operators and programmers] but at the end of the day, so far, the programmers always win. And they always win because the view of [pay-TV operators] is, if I can limit the cost increases, if I can create more flexibility, if I can get access to programming on other devices and expand the experience, those are all wins. But I can’t completely walk away and say to the programmer, ‘I’m just not going to be in business with you anymore.’”
  • “All these [content price] negotiations tend to be limiting the growth in programming costs, and getting other valuable things thrown in the mix along the way. I don’t see meaningful capping of programming costs until there’s enough resolve on the part of the distributors to start dropping programmers. I don’t think they’ll have that resolve until they see enough erosion of subscribers. I think you’re going to have to see a lot of pain before that’s really going to happen.”
  • “I don’t think [cable operators will cut deals to have the Netflix app on set-top boxes]. I will tell you that it has been done internationally, and it’s had a very negative effect on the pay-TV service. Perhaps that’s a more narrow view. Maybe if you look in aggregate across the full bundle of services—the broadband, telephony and video, the addition of Netflix may be viewed in that way, so integrating it into the set-top box is a net positive. But if you look at the more narrow view of the video service, it siphons viewers away from the pay-TV service. So I think that’s something to be mindful of.”
  • “Netflix has certainly had a big impact in Latin America, and certainly caused pay-TV operators to want to respond with the assets that they have. Our view is that the most effective approach is not to be better at what Netflix does than Netflix, but rather to emphasize all the attributes that a pay-TV operator has—live TV, catch-up TV, transactional on demand, subscription on demand, the bundle with data and telephony. Those are all unique and different [from Netflix].”
  • “We’re going to see four or five big [OTT] services—national in scope, funded by a national media company or video distributor. [These services] won’t take the place of [operators’ and networks’] core businesses, but acting as a complement and supplement to it. Certainly the content deals are getting done. Earlier this week it was CBS concluding its deal with Sony.”
  • “My sense is that the bundle is not going to be disrupted. The power of the bundle remains strong. I also think these [OTT] services will play by the rules, and will continue to license the full portfolio of channels, and they’ll pay full rate card for it.”
  • “That says to me that you have to be well-funded, well-capitalized. You have to be planning to go big, and there will be several of them in 2015 for consumers to choose from.”

Internet Usage

  • “We’re going to see continued increases in broadband speeds at more attractive pricing. That appears to be one area of competition, where the bar continues to be raised.”
  • “Tiered pricing is here to stay. I think there will always be low price, a medium price and a high price, but the level of service will continue to expand in each one. And as long as there is consumer benefit and justification for having high speed—whether that is streaming of higher quality video, faster performance of game play, whatever it is—as long as having twice as much speed is better, there’ll be an opportunity to price at a premium level.”
  • “There are certain price points independent of the quality of service that people stop having a budget for. I suspect what’s going to happen is we’re going to end up with a number of price points, and over time what you get for that price point is going to increase dramatically. You’re not going to see a collapsing of one size fits all.”
  • “The consensus seems to be that the Comcast/Time Warner merger will be approved, but that it will have significant conditions that come along with it. I just don’t think that the government will block it. Many of the conditions seem to be around the broadband service and how much that scale in Internet access affects competitive markets.”
  • “On net neutrality, all I see is that it was obviously a very important ruling in the last year, and that the prevailing viewpoint from the government seems to be that investment in infrastructure and in that last mile gives the operators the ability to have some degree of control to use market tools like pricing to justify that investment. I’m not sure that anything on the horizon suggests that’s going to change.”
  • “On the content [owner] side, there are a couple of fears. One is that there’s more of a toll that can be imposed for really high-quality access to consumers in the form of a fee, and that plays to the advantage of the best capitalized programmers. If you’re big and powerful and you have the resources then you can pay for that best quality of service, and if you don’t, you’re going to be harmed. It could be a [smaller] network or it could be an independent creator of content.”
  • “You’re not troubled by those tolls if you’re Netflix or ESPN because in the scheme of things, it’s an easily absorbable cost. But if you’re a smaller programmer, those might be real deterrents.”
  • “A second concern is the relationship between the programmer and distributor. If you’re Comcast and you have broadcast, cable networks, movie studios, there’s certainly the likelihood that you want your programming treated well in terms of programming and access to consumers, and is that done to the detriment of others? Meaning if Comcast is meting out bandwidth, and gives favorable treatment to the programmer that pays the most, [there’s likely to be friction with its other partners].”
  • “On the operator side, their concern is that others [OTT services] will get to ride over their platforms which they [sunk such a huge initial investment into].”

 

3) Founder of a software development company specializing in streaming media

Cord cutting is not expected to occur on a wide scale in the next year and traditional pay-TV will continue to be a force for the foreseeable future. However, consumers who have cut the cord are not going back, even if Internet access costs rise significantly. Viewers under age 30 are not interested in pay-TV, partly due to the cost but mainly because they expect access to content on mobile devices. To compete, pay-TV companies will begin offering more streaming options and premium cable channels will experiment with a la carte models to see what consumers will buy and how much they are willing to pay. Triple-play discount packages provide convenience beyond the usually temporary discounts. Mergers such as the pending Comcast/Time Warner deal are all about Internet access and charging for travel through the pipeline, with content delivery a secondary concern.

Cord Cutting

  • “Pay-TV will be around for the foreseeable future. I don’t think we’re going to see wide-scale cord cutting next year or the year after, for that matter.”
  • “Content delivery might take a different form—I think we’re going to see more cable and satellite companies offering streaming options of their own—but they will still have exclusive deals for content that people will pay for.”
  • “The Comcast/Time Warner deal is proof that these companies are determined to hold subscribers and take greater control of Internet access.”
  • “These [pay-TV] companies will continue to exist. Maybe in a slightly different form as they start offering a mix of services that cater to different customers. But traditional cable service isn’t going away any time soon. I think there are still a lot of people who prefer cable and a DVR over buying a single show and storing it on Google Play [Google Inc./GOOG] or VUDU or some other streaming service.”
  • “[Streaming] is already there. You see a lot of the Hollywood content already available via streaming with more and more people like Amazon coming into play. The focus going forward will be more for live-streaming of events like sports and concerts. That sort of streaming hasn’t happened in a big way just yet.”
  • “Pay-TV doesn’t interest younger viewers. Some of it is due to cost, but the main thing younger viewers want is content they can access on the go. If they can’t get it on a smartphone or a tablet, they’re not interested. I think the only way content providers can serve an audience is to provide the content they want, when they want it, on the hardware of choice.”
  • “Social media is absolutely having an impact [on live TV viewing]. It’s all about sharing. People want to be part of the conversation.”
  • “It’s become much easier for ordinary people to share complex content. Not everything has to be polished and sophisticated to have a market. Ordinary people sharing ordinary stories is going viral and seeing more of an audience than even polished content.”
  • “Netflix and Amazon are the biggest players [in OTT]. One thing Netflix has done differently is they have become content producers beyond just streaming content. The very nature of what was expected for streaming providers has changed.”
  • “It’s going to be harder for new players to come into the market and catch on with that kind of strength. There’s a steep learning curve. Small-scale streaming has been around for ages, but streaming to a large audience presents enormous costs and technical challenges, plus the deals you have to make with providers around the globe.”
  • “Amazon has a shot [to challenge Netflix]. Maybe Vimeo.”
  • “There is a sweet spot that HBO has to hit price-wise [for its streaming-only service]. If you think about iTunes, when they came out with buying a song for $1, people balked at it, but it’s now common knowledge that that was the sweet spot for buying a song.”
  • “The other thing to remember is people who pay for Netflix can get a lot of excellent content, more than they have time for. I think a smaller niche of people will be interested in a la carte from the premium cable channels, but by itself that would not sustain a company. That sort of an offering needs to be part of a larger offering.”

Pay-TV Strategy

  • “[Pay-TV operators] all understand the importance of the Internet and a lot are already offering streaming as part of their services. They have the infrastructure and the advantages that go with it to compete.”
  • “The recent call from President Obama to keep net neutrality obviously affects cable companies and legacy infrastructure companies, because that’s their strength. For Netflix, they still need to connect with the customer.”
  • “Comcast and Time Warner, if their merger goes through, it would give them enormous power. Cable is still going to have a role for the foreseeable future.”
  • “The [triple play] bundles represent more of a convenience for customers than the benefits of any discount, which is usually for less than 12 months. You get one bill for three services. Also, just the thought of setting up a new Internet connection with another company probably turns off a lot of people so they stick with what they have. It’s inertia.”
  • “Live sports will continue to be a huge advantage for the existing pay-TV companies. Whoever has the deal with those content providers can be assured of holding subscribers and gaining more.”
  • “We’re already seeing some live streaming experiments with major sports. The World Series was streamed for the first time this year.”
  • “Pay TV to some extent is at the mercy of their content providers. If pay-TV costs go up as a result of more expensive deals to carry NFL games, college basketball, whatever, then consumer costs go up. A lot of pay-TV customers are paying for exclusive content that they can’t get anywhere else. Price increases always roll downhill.”
  • “Netflix will be on more set-top boxes. They’re cutting deals with cable companies all the time, but they’re doing a gradual rollout. It’s really a win-win, because the customer not only has to sign up for Netflix to use the service, he has to rent the pay-TV company’s DVR or TiVo.”
  • “We’ll see a lot of delivery systems trying out different streaming options and reaching out to customers to find out the demand.”

Internet Usage

  • “Internet service pricing is the net neutrality question. Should ISPs be able to charge more for certain content? I think that’s something that will cause problems because it’s not just a question of economics. It’s a question of free speech. There will be more court cases if it goes in that direction. It would be more acceptable to raise prices across the board for everybody. They’re all going to talk about free speech.”
  • “There’s still enough competition among ISPs that they will either all move to a bandwidth pricing model or none of them will. But it won’t be one or two here and there.”
  • “I don’t think people who have cut the cord are going to go back to cable if their Internet cost goes up. If it gets a little more expensive, I think at most people would cut back on overall usage.”
  • “Depending on the market that you’re in, the competition you have, you may be shooting yourself in the foot if you increase your price too much. Comcast is a player, then there’s AT&T and satellite providers. There’s Verizon providing service over fiber optic at extremely high speeds. So there is competition.”
  • “The prices of the stocks of various cable companies started to drop on the President’s call for the FCC to maintain net neutrality. There will be some serious pushback from the cable companies. The Comcast/TimeWarner deal is all about Internet access and charging for it, not delivery of programming. That’s a secondary concern.”

 

4) Jeff Allen, vice president of business and corporate development, Clearleap Inc.

Pay-TV operators won’t see massive subscriber losses in the coming year. Cord cutting primarily is a disposable income issue, Allen said, evidenced by young viewers comprising such a large part of the untethered viewing population. Pay-TV providers will continue to develop more comprehensive service bundles, which will include features like online gaming. Operators will also likely develop their own streaming-only offerings to rival new OTT services. Netflix likely will not appear on set-top boxes as an integrated app, because it seems unwilling to strike any revenue sharing deals with U.S. cable operators. Pay-TV companies may face competition for Internet delivery from mobile carriers.

Cord Cutting

  • “Wholesale cord cutting won’t happen [at a greater rate than we’ve seen of late]. I believe it’s more of a disposable income issue when it comes to cord cutting, and we see [evidence of] this with younger viewers.”
  • “Content tends to migrate to bigger screens and higher quality viewing experiences, which obviously in today’s consumer electronics world means you’ve got to have more dollars to pay for those experiences. Younger viewers have less disposable income, and are not willing to put up with the [costs] of having bigger screens and higher quality.”
  • “You’re just going to see a diversification of how viewers watch the content that they want to watch, rather than any bifurcating [of] strictly pay-TV versus streaming only or over-the-top solutions. I think all of the viewing locations are equally as valid.”
  • “This [diversification] will push the pay-TV operators to evolve even more. They’ve done a reasonable job of allowing viewers to see content where and when they want, and this is perhaps why there hasn’t been more [wholesale cord cutting].”
  • “If you’re subscribing to several [OTT services], if you get beyond three or four different services or groups of content, it’s not even just the price [that becomes prohibitive] but it’s the user interface. How do you navigate all these different sources of content?”
  • “The tricky user interface issue is important, and how you interact with the specific device that you’re consuming it on. The cross-catalog recommendation portion of the user interface doesn’t necessarily exist when you’re subscribing to individual bundles. [Those issues] need to be solved.”
  • “I could see a few [new] OTT services jumping into the fray that have small subscriber bases, but because there’s a lot of efficiency and technology, you can have a lower cost base and be able to operate a service profitability.”
  • “[These] new entrants into the OTT market would be able to go across studios—especially when you get into the television content—and start to build a catalog of cross-studio content, and begin to build low-cost, exclusive and new productions that appeal to maybe a small number of people, but enough where the services can stand on their own.”
  • “You might generate an audience for those new entrants [with] one or two exclusive properties of content that’s already proven in the marketplace.”
  • “You’ll get other strong brands in the space that may have that potential. HBO has got a strong brand, and some of the sports stuff like ESPN has a strong brand. They could create cable footprint offers, either in territories or go direct to consumer and still monetize pretty well.”
  • “One of the key issues for consumers in selecting the source of their content comes down to the breadth of the catalog that’s offered. Netflix, Hulu, Amazon all have a pretty broad catalog. I think that’s a key factor for companies that will break out and become their own standalone, direct-to-consumer service.”
  • “Coupled with that is content that is exclusive. Exclusivity is key to the longevity of this platform. If any service has very popular content, and theirs is the only place you can get it, then [it will do well for the time they have that content]. Of course, it’s always hard to guarantee a hit.”
  • “You also have to have scale to be competitive in the OTT market. One of the advantages of achieving scale—and Netflix has the advantage of having a lot of subscribers—is that they can promote new content to those subscribers.”
  • “The other direction you can go is to have content that is niche, but you have a depth of that which appeals to a broad enough range of people that are interested in that type of content. You can add up several bundles of these niche plays—like programs from Discovery or The History Channel—in order to create a sub-catalogue that’s maybe not as broad as a pay-TV operator, but is still sufficient enough to stand as a service. Disney and the History channel are examples of programmers which are very good at selecting content with a good understanding of who their audience is, and the types of content that they want.”
  • “We’ve already seen a little of that with things like DISH and Disney teaming up to have an OTT personal experience. Probably we’ll see more of that sort of thing, where the operators themselves evolve into creating more bundles for defined sets of consumer characteristics that appeal to different groups/audiences.”

Pay-TV Strategy

  • “I view operators as masters of bundling. Triple plays and quad plays—bundling Internet and phone, home security as well as TV. If we look back 20-some years, the general trend for pay-TV operators is to offer more and more combinations and more and more bundles. I think that’s something that they’re really good at. And ultimately what they’re also really good at is, they know how to bill people and collect money.”
  • “If we go purely outside of the video space, the gaming eyeball time is something that the operators are taking notice of. So I can see gaming—streaming games—being one of those things [added to the bundle].”
  • “The devices themselves are really blurring the lines of entertainment; game consoles are fantastic now. Five or six years ago, it was almost unheard of to believe that you’d be able to get a Comcast subscription on a game console, and you can clearly do that today.”
  • “I can see gaming going the way of [TV] operators themselves. There’s a rich set of consumers that are spending time in games, and we want to capture their attention. [Operators] want to be their entertainment hub even for games. I think there have been some light announcements around that, but I could see more.”
  • “I could [also] see operators offering streaming only, or an untethered service. I think there are still a lot of rights issues that need to be worked out, and that [may take] many, many years, but I can see that happening, where the [cable] operators create bundles of packages that appeal either within their Internet footprint or even beyond their Internet footprint.”
  • “When you start to talk about operators going outside their [traditional] footprint … internationally, rights around the content are in some respects a little easier, [compared with] rights in the U.S., which are very complex and long term. There are some great opportunities for studios and programmers or broadcasters in the U.S. that may want to extend content that they own or exclusively license outside U.S. borders, because it doesn’t step on pay-TV operator rights in the U.S.”
  • “From a technology provider standpoint, this whole issue of rights management [is a key part of the equation]—rights that are locked up that prevent consumers from getting certain types of content on the device that they want to view it on.”
  • “Some of those rights have been renegotiated [in this new OTT environment], and there are still more to go. But I think it’s creating a very complex equation for making decisions as a content owner [when they’re trying to] predict what the best pricing would be and where they can maximize their revenue. There are companies which have a great opportunity to help content owners understand all the different options of where they can sell their content to what distribution channel.”
  • “This world of consumers having lots of different devices where they can consume content has opened up opportunities for content owners to distribute through many, many locations. To analyze and to manage the transition of distribution of the content to all those devices, I think they just need better tools to understand how each of those distribution channels will be monetized, and how they can benefit by either spreading the content through many channels, or accepting a larger price to go on one channel more exclusively for a period of time.”
  • “I would say it’s not likely [for a Netflix app to be incorporated into cable set-top boxes this year].”
  • “We may see the TV operators include exclusive content [from Netflix] as a way to enhance their bundle and keep consumers on the pay-TV deck. We’ve already seen this happen on the lineup in certain channels on the cable deck for second run [such as the recent Comcast purchase of House of Cards].”
  • “Netflix could be on every cable platform if they were willing to accept the [revenue sharing] deals that the cable platforms offer. [But] Netflix has the infrastructure, subscriber management billing systems to rival many of the operators [in the U.S], and they probably feel that they don’t need to accept the distribution deals that the pay-TV operators have offered them.”
  • “A key factor that Netflix probably should consider is how well integrated their content would be into the guides, the recommendation engines, the discovery process for that content.”
  • “For example, in a cable operator environment, you have a whole bunch of channels, and if Netflix had a bank of channels that created linear programs based on the content they have in their catalog, that might be a really good way for Netflix programs to be discovered.”
  • “The question is, what does adding Netflix to the cable lineup do for the cable operator? There may not be that much of an advantage [for the operators] to do that, unless Netflix is giving a significant portion of their subscriber revenue to get on the deck. And I think that’s where the big challenge is. I think it would have to be a significant portion of what Netflix charges consumers, and I think that’s a big blocker.”

Internet Usage

  • “We may see the mobile carriers being competitive with the cable operators for Internet service. As the mobile operators get better at handling video traffic, which today is very expensive, that’s probably going to be [serious] competition.”
  • “In many countries around the world there’s the quad play, where you’ve got your cable and your Internet to your home, and your phone and also your mobile phone all part of the same subscription. I would think that [you’ll start to see more of these in] developed economies.”
  • “I’m interested in how the mobile market [plays out with Internet usage]. I’m increasingly using my mobile phone at the hotspot to get Internet access. I would think at some point, the mobile operators could be competitive when they get back to an unlimited plan.”
  • “There were unlimited [mobile data] plans for a while, and [the telcos] then throttled them back. Now I’m seeing how much you get per month starting to increase again. We’ll probably get back to unlimited plans.”
  • “I don’t see prices going down, [but] I would think that some kind of [government caps on price increases] are very likely given that the Internet is now viewed as a utility, and especially if it’s a monopoly or near monopoly in localized neighborhoods. This also relates to the net neutrality debate.”
  • “In the venture capital world, I’ve also seen lots of new technological ideas offering Internet service through microwave and types of technologies other than telco or cable, and that ultimately may be what provides competition to the existing lineup of providers—or at least to keeps their pricing in check. But I’ve seen many, many of those attempts not really take hold.”

 

 

 

4) Industry Specialists

There will be no surge in pay-TV customers canceling their subscriptions next year, all four sources said, with three sources stating that original shows and live sports available only on pay-TV are too important to viewers. Younger viewers are leading the shift to OTT, two sources said, but both think such consumers could be brought into the pay-TV fold as they get older. Another source, however, said consumers are coming to expect ad-free, on-demand access to content on any device, which will hurt the perceived value of pay-TV subscriptions. HBO’s new streaming-only service is more likely to hurt Netflix than to encourage cord cutting, one source said. Despite the shift to OTT resulting in some subscriber losses, pay-TV operators are in great shape, one source said, because they will be able to charge OTT providers for faster content delivery and consumers will want higher speed Internet service. One source said Internet services will not move to a pricing model based on bandwidth use in 2015, but could shift that way at some point.

 

Key Silo Findings

Cord Cutting

  • 4 of 4 expect cord cutting to continue at a gradual pace in 2015.
  • 3 said premium content like original shows and live sports keep subscribers from leaving pay-TV.
  • 2 said younger viewers are at the forefront of the shift to OTT, but such consumers could buy pay-TV subscriptions as they get older.
  • 1 thinks the value of pay-TV will continue to decline as­­ consumers come to expect on-demand access to content on any device.
  • 1 said HBO’s streaming-only service will be a bigger threat to Netflix than to pay-TV operators, but ESPN ever going OTT could accelerate cord cutting significantly.

Pay-TV Strategy

  • 1 said pay-TV operators will benefit from “cord trading” as OTT becomes more popular and will also gain from being able to charge OTT providers for faster online delivery.
  • 1 expects pay-TV operators to add Netflix apps to set-top boxes and 1 does not.
  • 2 think content pricing will continue to skyrocket.

Internet Usage

  • 1 said broadband providers will not move to a bandwidth-based pricing model in 2015.

 

1) Jason Anderson, pay-TV and OTT strategist, Lucky Rock Media

Pay-TV subscribers are unlikely to cut the cord in 2015 in significantly greater numbers. The phenomenon of “cord trading” is more meaningful to pay-TV revenues than is cord cutting, as those viewers abandoning or never subscribing to pay-TV will instead pay more for fast Internet service to access web-based TV. High-margin Internet revenues, together with fees charged to OTT operators in need of high-quality delivery pipes, will more than offset losses from pay-TV subscriptions, according to this source. Content revenue will keep rising, but will be shared by fewer networks as smaller and even mid-tier content creators are squeezed out. Content providers will bear the brunt of future price increases from broadband providers.

Cord Cutting

  • “The [pay-TV] companies—Comcast, Verizon, Time Warner and others—are going to make money hand over fist with web-based TV, despite the sunk costs of [losing customers to OTT services] and with content costs continuing to rise. They’re going to make money not just on broadband subscribers, but also on the Netflixes of the world [who will pay dearly] to have guaranteed quality of service.”
  • “If someone is a web-based operator, they’ll need quality service over somebody else’s pipe. Comcast is going to sell the end user high-margin broadband in bigger and better packages and then charge through the nose to those [OTT] operators. I think this will definitely offset whatever pay-TV revenue [Comcast and others] would lose as a result of the new entrants.”
  • “There’s no question that cord cutting is happening, but the better question is, which cord are you cutting? You’re still tied to [the cable and telco companies]. You may think you’re cutting one cord, but you’re actually attaching another cord at the exact same time.”
  • “It’s just trading cords. It’s not necessarily cord cutting. It’s cutting one cord to grab another—and by the way, the operators make more money on the cord you just picked up. The operators will trade pay-TV [subscribers] for faster broadband [customers] every time because the margins on Internet service are 60%, 70%, 80%. They’ll trade that cord out every day.”
  • “The math for HBO [as an OTT service] seems especially challenging considering, among other reasons, the significant revenue lost by the discount per-subscriber fees that pay-TV operators will inevitably demand if/when HBO is available through a standalone monthly subscription.”
  • “CBS seems better positioned [to offer a streaming service] because local broadcast channels are, at least for now, the building blocks of any U.S. pay-TV lineup. CBS continues to spend billions for premier sports rights and TV’s most popular shows with an incredible back catalog to boot.”

Pay-TV Strategy

  • “Comcast is by far the company doing the best job [among pay-TV providers]. They’ve blown it out of the water with their Internet offerings for consumers and businesses. And now Comcast sells so many different things. This whole home monitoring/home security automation industry is supposed to be a multi-billion-dollar industry within a few years, and they’re right there. Time Warner to a lesser extent.”
  • “Verizon is good. I think they have a good product. They have an OTT product coming, and it will be interesting to see how that goes after [Verizon and Outerwall Inc.’s/OUTR] Redbox Instant bombed. Verizon has so much pipe that if it’s able to get it right—attract more pay-TV subscribers and offer more services—then it has a pretty good shot, and I think Verizon will be fine.”
  • “Verizon has clout, but just doesn’t have the sheer numbers of a Comcast to be able to dictate terms to content providers. And Verizon hasn’t yet monetized its pipe to the extent that Comcast has.”
  • “DirecTV needs AT&T way more than Comcast needs Time Warner. I don’t know if [that merger] will go through, but if it doesn’t, [DirecTV’s] future is [much less bright].”
  • “I would say that Comcast and Time Warner, and AT&T and DirecTV, are going to play really nicely with the FCC on web-based operators [like Sony, Aereo and other potential newcomers]. It’s in their best interests to convince [the FCC and others] that there is competition in the market. I’d say it’s mission critical that they play ball with this whole web-based operator business. They want these mergers to go through, and one way to help that along is by letting new competition come in and being able to point to that as evidence that they won’t have a monopoly[or a] duopoly.”
  • “I have clients that are very seriously looking at what it would take [to operate a web-based TV service]. Once they feel like they have the ability to do it, you’ve still got to jump through all the regulatory hoops, but somebody’s going to take on the giants. They’re going to be facing the same math in terms of competing on content by making great stuff and spending lots of money on content, or they’re going to have to find ways to line up the triple plays.”
  • “Competitors are going to be there. I wouldn’t be shocked if Aereo 2.0 happens. I believe Aereo will make a go of that. It will try to come back and offer a TV service just like Sony is. Or if Aereo dies, many more will rise up in its place.”
  • “The right to negotiate for content, together with a delivery model, means you don’t have to own your own pipe [so] there’s going to be mass interest [from potential new pay-TV entrants].”
  • [Pay-TV operators like DISH and DirecTV] can’t survive without [merging with a] cable or fiber company. It’s why AT&T is so important to DirecTV, because it’s not just broadband they need but all the bundle of services—business services, security, the whole suite. Unless you’re able to sell the whole suite, you’re not going to survive. If you don’t own broadband or spectrum, you’re toast. The math [for TV-only providers] will not work as well long term because content is getting way too expensive.”
  • “The price of content is absolutely going to keep rising. SVOD rights and video stacking—the number of past episodes of a show that are available for on-demand viewing—are rising exponentially. Just look at Netflix buying The Blacklist for $2 million an episode. I think costs will rise at the same rate we’ve been seeing, but it’s going to be divided among fewer networks.”
  • “This whole world of a la carte or unbundling is going to lead to smaller channels disappearing. Currently [the smaller networks] are now under the umbrella of the bundle, but as content costs continue to rise, and the networks pay more for TV Everywhere, the NBCs of the world are going to make a decision about whether they want to keep floating those other networks. This is happening now, and it will accelerate over the next three years.”
  • “If you don’t have one of the top-rated shows—I would say one of the top 40% or 50% top-rated shows or live sports—then the money’s just not there [for a network to survive].”
  • “I believe that we will see more Netflix apps on pay-TV set-top boxes, especially as Netflix and pay-TV—including pay-TV VOD, are entirely different offerings. They may as well put that service on their boxes if folks are watching it anyway.”
  • “It will be interesting to see if the pay-TV providers show some sort of gateway ads when users switch from their TV lineup to Netflix on the box. These could be minimally invasive, 15-30 seconds, but a great venue for advertising packages and VOD options. Pay-TV VOD advertising is becoming a significant growth area for pay-TV operators and such in-between platforms spots might be another area of opportunity.”
  • “The data mining will also be very valuable to the pay-TV companies to the extent that they will be able to at least track how often a user switches to Netflix on the box or how long a user watches through the box.”

Internet Usage

  • “I don’t know that [ISPs] are going to charge more to the customer, but they are going to charge more to web-based operators and content services. That’s where [the ISPs] are going to make their money.”
  • “It’s like health insurance premiums: when you’re disconnected to a certain extent from the direct cost, then it changes the math. So while consumers may not see their broadband bill go up, they may see their Netflix bill go up, or their CBS All Access fee go up.”
  • “[The ISPs] are going to get their money. That’s all there is to it. Quality of service is going to be huge, and depending on what the FCC goes for in terms of these agreements between the Netflixes of the world and Comcast, the fees to content services are going to be there. Sony needs quality of service. DirecTV doesn’t own the pipe, and will need quality of service for web-based offerings.”
  • “That’s why I think it’s interesting that people are so focused on cord cutting in the pay-TV business– which is happening, but [the pay-TV providers] are going to turn around to all these OTT services and say, ‘Do you want to look good? Here’s how much that’s going to cost.’”
  • “All the web-based content providers—whether they’re subscription VOD or actual TV operators—have no choice but to pay more fees to the ISPs unless the FCC or Congress steps in and decides that’s not how the game is going to be played.”
  • “How long can the ISPs keep passing on costs directly to consumers? They can’t. Look at Europe, where your whole bundle is roughly $80-$90 with 100mbps broadband speeds. Sports is the same. How long can [the operators] really pass costs on to the consumers? They’re going to charge the content providers [instead]. It reminds me of re-transmission [fees] with the networks.”
  • “The smaller networks will likely be the ones most negatively affected, because they will likely struggle to pay for quality-of-service agreements with the ISPs.”

 

2) Senior research executive for a TV ratings measurement and analysis firm

Cord cutting will not accelerate substantially in 2015. The shift to OTT is more of an evolution than a revolution, and a la carte programming is not likely to happen in the next five years. While millennials are at the forefront of the shift to OTT, it remains to be seen to what extent they will shift to pay-TV subscriptions beyond their early twenties. For a true OTT lifestyle, there must be both ease of use and quality of programming. The biggest retention strategy for operators is having original, quality content. There has been double-digit growth of video-on-demand programming on the cable operator side, one advantage they have over satellite operators. NBC is planning several new live television shows, with high hopes that they become major TV rating hits like last year’s “The Sound of Music Live!”

Cord Cutting

  • “Cord cutting will stay at the edges [for the foreseeable future]. Two things have happened. First, of course, the recession, which has worked its way through the economy. You had some people that dropped out of the pay-TV sphere because they just couldn’t afford it—the long-term unemployed, and a segment of the population that just isn’t there anymore.”
  • “You also have millennials, who have a greater propensity for over-the-top. How much of that will they carry forward as they settle down, get families, buy houses, that remains to be seen. Will that behavior change once you have a nine-to-five job and you’re commuting and you have a kid and you want to just sit down in front of the TV set with a beer and watch the game? We’ll see. But I do think certainly a proportion of those millennials will carry that forward.”
  • “The cord cutting, the shifting to OTT, will continue. I just don’t think it’s going to be dramatic, [with] 50% of viewership going over-the-top in five years. That’s just not going to happen.”
  • “The bulk of TV viewing is still live and DVR playback and VOD. There’s about 114 million TV homes, of which 2 million are over-the-top [without a pay-TV subscription]. Pure OTT is a small proportion of viewing.”
  • “Of course, that 114 million [pay-TV subscribers] doesn’t mean that they don’t also have Netflix, YouTube, Hulu and Roku. But all the metrics still show a huge amount of linear television viewing. This isn’t to say things aren’t changing, but the world isn’t coming to an end. It’s more of an evolution rather than a revolution in my mind.”
  • “It’s ease of use combined with depth of content [for OTT to take off], and I don’t think anybody’s there quite yet. You have to aggregate it yourself.”
  • “First off, there has to be some standardization [among OTT services]. People don’t like having to make a whole bunch of different choices. You’ve got Amazon, you’ve got Roku, you’ve got Hulu Plus and Netflix and now CBS. That’s a lot of choices, but what people have proven is that consumers freeze up at a certain point with too many choices.”
  • “Somebody’s got to come out on top of this. There’s going to have to be some business that clearly makes it easy for OTT, and has a great deal of choice within it to succeed.”
  • “Obviously, the web seems the most obvious place for [a comprehensive OTT service] to happen. In terms of quality content, I don’t think anybody’s there quite yet.”
  • “It really is about the consumers being able to watch what they want to watch when they want to watch it. The DVR started the revolution and technology’s enabling it to happen more and more, but there’s still a huge value in being able at the end of the day to take your brain out and put it in a warm bowl of water—and that’s what television is like. And you get that on the big screen, not necessarily staring at your computer or a tablet.”
  • “If a la carte [programming] did happen, it definitely would hurt the small networks. But what we don’t know is if it’s going to happen. We’re a long way away from a la carte being the norm. I think it’s certainly not going to happen within the next five years. CBS obviously made their move [to offer a streaming service]. We’ll see how many people want to pay that.”

Pay-TV Strategy

  • “Fundamentally, it comes down to content. Do you have content that people are interested in watching? It’s really about content, and that’s how you keep an audience. Original content.”
  • “Television is really more adventurous than the movie business, because of the fact that the movies are so tied to that first weekend. There’s a lot more freedom for experimentation in TV, and so therefore you do have a lot of different content now. If you look at what ABC is doing with ‘How to Get Away with Murder,’ both with the violence and the sex scenes, that just wouldn’t have been on prime-time TV four or five years ago.”
  • “The distributors have been focusing on video-on-demand. There’s been huge growth there, particularly with free content from the networks. There’s been double-digit growth over the last five years in terms of TV networks and cable networks putting their programming up on demand, and having it watched.”
  • “[The growth in VOD programming] benefits both sides—the content providers because fast forwarding is disabled, and therefore the audience stays through the commercial, and therefore they can get more monetary value than when programs are being DVR’d and fast forwarding erases the commercial audience.”
  • “For the distributors, they’ve felt they can do a better job with VOD than satellite.”
  • “I was just at the LiveTV conference in LA last week, and there was a lot of conversation around social media, and people thought it was very important for live TV events.”
  • “Programmers are thinking of [social media being valuable] more from the promotional perspective—not so much during the show, but that to get people to watch shows, social media is important to get your show out there, and get people talking about it as a form of promotion.”
  • “A lot of this is rights issues [around streaming live sports]. I just don’t think the legal issues have been worked out on that.”
  • At the LiveTV:LA conference [in the first week of November], [the chairman of NBC Robert Greenblatt] announced NBC was going to do ‘Peter Pan’ with Christopher Walken as Captain hook, as well as several other shows [that will be televised live events]. He really feels that live programming pulls in a bigger audience, and creates a special kind of programming whether families and friends watch together. So NBC is looking seriously at a bunch of new live show options, including a variety show with Neil Patrick Harris.
  • “[Netflix apps on set-top boxes] becomes a rights issue. I can see it happening, but it’s one of those things that everybody’s got to feel that they’re getting treated fairly.”
  • “There is this continual tug of war between the content providers and the distributors, each trying to get the advantage of the other, and I think perhaps common sense will come into play in the sense that the content providers will realize they can’t squeeze the distributors too much, or they’ll be shut off.”
  • “The traditional targeting in TV, for advertisers, has been age and sex. What we’re able to do is look at advanced targets like what your political persuasion is, for example. We do this [targeting] in automotive, in packaged goods, in financial and a lot of categories. TV is becoming much more like a direct marketing tool in that you can use it to home in on the targets that you want as an advertiser to buy, rather than just these broad targets of age and sex. We’re using masses of data, and that’s what our focus is.”

Internet Usage

  • “If net neutrality doesn’t survive, of course it will hurt those that can’t afford to pay to have their content moved quickly. But I don’t know whether net neutrality is going to survive. It’s a fight amongst the giants, and there’s a possibility that it won’t. If it doesn’t, then smaller [networks and content creators] will suffer.”

 

3) Managing partner of an entertainment, sports and media consulting firm

Customer defections from pay-TV will not accelerate significantly in 2015, this source said, in large part due to the value of sports and other live programming. However, the value of pay-TV will continue to decline as consumers get used to accessing shows and movies on demand through numerous devices and without any advertising. HBO’s plan to sell its content outside of a pay-TV subscription is a bigger threat to Netflix than to pay-TV operators. But, ESPN doing something similar could be a game-changer in terms of convincing people to cut the cord. Pay-TV providers must adapt to the changing landscape by offering a combination of linear and on-demand programming with an easy way for consumers to navigate both.

Cord Cutting

  • “The [pay-TV] industry is losing sight of what its core service is, which is to deliver quality entertainment or credible information. People who haven’t subscribed to linear television before—younger generations, teens—they’re used to seeing their video not only on demand but also unimpeded and un-intruded upon [by advertising].”
  • “The other night, I was watching a TV show on ABC and first of all, you have all the commercials in it. You can fast forward through those, of course, but on top of that, the networks are becoming so intrusive with lower-thirds [ads on the bottom of the screen] and animations and other interruptions of the actual content to promote their schedule.”
  • “It’s hitting a tipping point in terms of the actual value of the entertainment. The more that people get used to the over-the-top experience and the non-intrusive aspect of it, the more they come to expect that from the traditional linear experience.”
  • “This is something that is going to emerge over the next three to five years, but definitely not in 2015. It’s all evolutionary and incremental.”
  • “That [younger] group is going to be very resistant to more traditional push marketing from the networks. I think that’s going to have a corrosive effect on the people who are subscribed to cable or satellite. As too much of the business is creeping into the entertainment, the risk of that is you will get an exponential jump in cord cutting.”
  • “[The lure of pay-TV] has to do with the immediacy of certain genres. The current OTT subscription-based services are essentially archived libraries. They’re very deep electronic libraries that you can navigate and plumb to whatever desire you have. They don’t have live content.”
  • “That’s not to say they couldn’t have live content.… There’s nothing to stop Netflix from doing a live version of ‘Peter Pan’ and driving people to it and then putting it in the library. That said, the live genres like sports and news, those will continue to have a significant place and value within the linear network landscape.”
  • “In a world of ubiquitous digital distribution, whoever has the best content, wins. Whoever owns that content—the NFL, Warner Bros. whatever—they ultimately hold the value.”
  • “The older you get and the less familiar you are with some of the technologies, the more resistant you might be. The younger you are and the more familiar you are, the easier you’ll embrace them. We’re clearly seeing those patterns with the adoption of OTT, with cord shavers and cord nevers. Ultimately when it comes to advertisers, they want 18-34 and 18-49, so those younger demographics are going to be more valuable and if they are shifting to OTT, the money will shift with it.”
  • “HBO has the ability to be a competitor to Netflix, delivering their 10 channels over the Internet rather than through cable lines. Netflix [should be more worried than cable operators about HBO going over-the-top]. HBO is a different animal because of their brand. You don’t really think of them anymore as just a linear television network.”
  • “The other network that has done a fantastic job of becoming a portal rather than just a linear service—and this could be a huge game-changer—is ESPN. What if ESPN did the same thing as HBO and delivered content over-the-top? It doesn’t really matter the pipes that it’s going through. ESPN could do something very similar. They might still exist within the pay-TV universe but they could also set themselves up as an OTT portal. Their new deal that they just set with the NBA allows for that.”
  • “[Disney CEO] Bob Iger has recognized that Disney’s greatest skill is in packaging and promotion. He’s got entities like Lucasfilm, Marvel that are the creative entities and then Disney packages and promotes that content.”
  • “Going back seven or eight years, broadcast affiliates were complaining about [Disney] content being made available online or through emerging technologies and he was one of the guys that said, ‘We’re going to take our content through all these technologies and you’ll just have to deal with it.’ So they’ve shown a willingness to treat their content as platform agnostic. I don’t see them doing this with ESPN overnight but I do see them putting their toe in the water as they are with this NBA deal, which is a hybrid.”
  • “I’m a big sports fan, so if could get a separated version of ESPN and marry that with a Netflix subscription, I’d be pretty happy. I may not get all the sports stuff but I’ll get the best of the best.”
  • “One of the things [CBS President] Les Moonves has been saying about the CBS [OTT offering] is that if nothing else, it’s a hedge against the traditional distributors. So when DISH is crossing swords with CBS over retransmission fees, it doesn’t hurt CBS to say, ‘We’ve got this over-the-top service and we’re going to get our content to your customers either on your platform or off it.’”

Pay-TV Strategy

  • “The AT&T merger with DirecTV and the Comcast deal with Time Warner are about scale and about holding their own with content providers in terms of licensing fees, but also about creating an integrated push and pull capacity within each brand.”
  • “If you’re a cable operator and all you’re doing is offering a push, linear product, you’re dead. There’s going to be an expectation of being able to go into a library and pull content, and viewers are going to still want to be provided live sports or news. Distributors are going to have to offer a combination of linear content as you always have plus non-linear content seamlessly within your brand.”
  • “There are many cable distributors who, to a large extent, do nothing. There’s no value add. They’re essentially taking a bunch of wholesale networks, throwing them into a bag and marking them up for retail.”
  • “There is real value in navigation and aggregation. That is going to be the differentiator for distributors in this combined linear and non-linear landscape.”
  • “Think back to the early days of the Internet. Google took this dense jungle of information and allowed people to navigate it very efficiently. So all this value accrued to Google. It’s no different in media and entertainment. If someone can help to sort it and to know individual consumer interests to say, ‘If you like this show then you’ll also like this one,’ those are huge values.”
  • “When CBS offers this over-the-top service or other networks or studios do it, it’s a la carte programming. If I can get somebody to package that for me and offer me discounts through the packaging and give a really clean, great interface that’s going to register my likes and dislikes and bring content to my attention, there’s big value in that.”
  • “One of the companies that slips through the radar in this is Amazon. They’re not as sexy as Netflix. Some of the original content doesn’t have the same buzz. But what they do extremely well is allow you to navigate really well to find what you want and fulfill that need in a very efficient and secure way.”
  • “Sony is trying to be an aggregator. They are not vertically integrated in the linear television space which gives them the freedom to play in the non-linear space. They don’t have to own broadcast networks or cable networks. They’ve got this platform in PlayStation that’s widely penetrated and appeals to the most difficult demographic to get, young men. They would be stupid not to try [offering a streaming TV package].”

Internet Usage

  • N/A

 

4) Dan Rayburn, executive vice president of StreamingMedia.com; repeat source

Less than 1% of pay-TV customers have cancelled subscriptions in any given quarter since 2012, and that slow pace will not change next year. Live sports continue to be a key reason people keep their subscriptions, and Rayburn believes live sports may draw younger viewers to pay-TV as they get older. Netflix and Amazon will continue to be the big winners within the OTT realm, but offerings from Hulu, Sony and DirecTV also have potential for success. Broadband providers can increase Internet pricing, but Rayburn does not foresee a switch to a bandwidth-based pricing model in the next year.

Cord Cutting

  • “[I expect] no meaningful cord cutting next year. The data shows that over the last couple of years, in any one quarter, not even 1% of people cut the cord when you look at all cable and satellite providers combined.”
  • “Live sports is the reason people have cable and that’s not going on the Internet any time soon without blackouts.”
  • “OTT can’t take off. Who owns the content? That’s who controls OTT. The NFL, MLB, all these sports leagues have no incentive to stick this stuff online. They want you to go to TV and get it. Cable companies continue to do well and the sports leagues continue to get billions of dollars from the pay-TV companies. They’re not going to upset that.”
  • “There’s a lot of debate about younger viewers, usually 15-25. They get their first place and they’re not going to get cable, or so goes the argument. Here’s the problem with that theory: they get married and get cable, or they’re into sports and want to watch those games on cable. So we really don’t know for sure about this younger crowd. I don’t think it’s a serious factor.”
  • “Social media stuff is happening on a second device, not on the same device. There’s no real good integration tied into smart TVs just yet. Second-screen viewing is huge because of live events and then people commenting on that using a smartphone or their tablets. All that does is drive more people to TV.”
  • “VUDU and services like it aren’t really OTT. Real OTT is subscription-based, so the winners who can continue are Netflix and Amazon and Hulu.”
  • “DirecTV and Sony are going to launch OTT services, so it’s really too early to say who the true winners will be, but no question it includes Netflix and Amazon.”
  • “HBO is offering an OTT flat-fee subscription service where you get a certain amount of content. We don’t know when it will launch, how much content will be available, how much it will cost or what devices it will support. Obviously, HBO’s partners don’t want them to undercut them in any way, so whatever HBO does, they’re going to have to be very careful.”

Pay-TV Strategy

  • “[Pay-TV operators] are doing a lot of things with DVRs, adding functionality. They also bundle a lot of stuff. They’re all trying to outdo each other with bells and whistles. Some customers could care less.”
  • “I don’t think any pay-TV companies are adapting any better than any others. Most offer similar services, maybe little differences like the interface, but there’s not a huge distinction.”
  • “Live sports is what keeps the cable companies in charge.”
  • “[Pay-TV operators’] costs are based on a bunch of factors, but the largest is the cost of content, and that price of content continues to go up. So their pricing will continue to go up as the cost of content goes up.”
  • “There are some companies that will allow you to cut sports out of your package and save money. Cablevision [Systems Corp./CVC] is one of them.”
  • “Cable companies aren’t going to cut a deal for a Netflix app on their boxes. If they wanted to do it, they would have already.”
  • “There will be more streaming plans. Whether they are popular really depends on the content being offered. That’s it.”

Internet Usage

  • “[Broadband providers] can increase their pricing. Nobody can answer whether people will still pay for it.”
  • “In the next year, ISPs will not charge based on bandwidth. Too early to know when or whether they will move to a bandwidth pricing model. It’s possible a couple of years down the line.”
  • “Right now, ISPs are encouraging you to consume more video. It would be a misstep for them to then turn around and charge for that.”
  • “It’s about 10 million homes that are Internet only.”
  • “It’s too early to know how net neutrality will shake out. It’s gotten very political. A lot of politicians are sounding off about this subject and they don’t know what they are talking about.”

 

 

5) Online Consumer Survey

In a survey of 206 pay-TV and OTT subscribers, the use of pay-TV services is rising slightly even as subscribers cut back on premium cable offerings. Viewers also are increasing their use of OTT services at a faster pace than last year. YouTube, Netflix, and cable TV were the top services used. Most respondents are willing to pay $5 or less per month when HBO becomes available as a standalone service, with only one in 10 pay-TV subscribers extremely likely to cancel their subscription when it launches. Although the number of respondents using Netflix is rising, Netflix is showing some weakness—one in 10 subscribers said they are extremely likely to cancel the service in the next three months because of better options available from services like YouTube, Amazon Prime and HBO. Internet speed is important to consumers, with one-third willing to pay a significant increase to their Internet bill to keep their viewing habits the same. Half of respondents would downgrade their Internet speed if the cost escalated by $15 a month.

 

 

Pay-TV subscribers are either keeping their viewing habits the same or increasing their use of pay-TV services, but are cutting back on premium cable offerings.

  • Pay-TV subscribers were the vast majority of our respondents.
    • 2% of our respondents subscribe to a pay-TV service. (Q2)
  • The majority of pay-TV subscribers are keeping their viewing habits the same, but those that are increasing their use are doing so at a faster rate than last year and outnumber those decreasing their viewing habits by 3 to 1.
    • The majority (69.7%) of pay-TV subscribers have not changed how much they use their pay-TV service in the last 3 months. (Q4)
      • 2% of pay-TV subscribers increased their use of pay-TV services over the last 3 months. A year ago, 20% of respondents reported growing use.
      • 7% of pay-TV subscribers have decreased their use of pay-TV services over the last 3 months, compared to 10% reporting declining use last year.
  • One-third of pay-TV subscribers have cut back on their pay-TV services, mostly affecting premium cable channels.
    • 2% of pay-TV subscribers have not cut back on their pay-TV services in the past year. (Q5)
      • 8% of pay-TV subscribers have cut back on some form of their pay-TV services in the past year.
      • 8% of pay-TV subscribers have cut back on premium cable channels in the past year, a figure that is up 5% compared to last year’s survey.
      • The number of pay-TV subscribers that cut back their subscription to basic cable dropped roughly 4 percentage points compared to the previous year.

 

OTT subscribers are increasing their use of OTT services, which are used by most as a supplement for pay-TV services. Those that are exclusively using OTT services were more likely to have canceled their pay-TV subscriptions within the last year compared to 2013.

  • OTT users are increasing their use of OTT services compared to last year.
    • 3% of OTT users are increasing the use of their services over the last 3 months. (Q7)
      • 1% of OTT users are using OTT services the same amount and 5.7% are decreasing the use of their services over the last 3 months.
      • The number of OTT users increasing the use of their streaming services grew roughly 22 percentage points compared to last year’s survey.
      • OTT users decreasing the use of their OTT services dropped 5 percentage points compared to the previous year.
  • OTT services are used as a supplement for pay-TV subscriptions for the majority of OTT users.
    • 7% of respondents use OTT services. (Q6)
      • 9% of respondents use OTT services as a supplement to pay-TV subscriptions.
      • 8% of respondents use OTT services exclusively for their TV watching.
      • Respondents that use OTT services as a supplement to pay-TV subscriptions rose 5 percentage points compared to last year.
  • TV watchers that only use OTT services are more likely to have cancelled their pay-TV subscriptions in the last year compared to 2013, although 40% have never had a pay-TV service, and 30% cancelled more than a year ago.
    • Of the respondents that are not pay-TV subscribers but use OTT services (Q2), 40% have never subscribed to a pay-TV service, while 30% cancelled their pay-TV service more than a year ago. (Q3)
      • Respondents that do not have pay-TV subscriptions are more likely to have cancelled their subscription within the last year compared to 2013.
      • 30% of respondents cancelled their subscriptions within the last year, compared to 5.1% of the same group in 2013.

 

YouTube, Netflix and cable remain the most used services, although YouTube and Netflix have changed seats compared to 2013, while cable use rose 10% compared to 2013. Respondents use an average of 3.7 entertainment services.

  • The most used services across pay-TV and OTT platforms are YouTube (51.2%), Netflix (47.3%), and cable (41.9%). (Q8)
    • 3% of respondents use HBO Go.
    • 9% of respondents use ESPN3/myESPN.
    • 9% of respondents use CBS All Access.
    • Respondents using cable (41.9%) rose 10% compared to the previous year.
    • Respondents using premium cable (18.2%) rose 3% compared to the previous year.
    • Respondents using Google Play (13.8%) rose 7.5% compared to the previous year.
    • Respondents using HBO (26.6%) rose roughly 5.5% compared to the previous year.
    • Respondents using Hulu Plus (17.7%) rose 9% compared to the previous year.
    • Respondents using Redbox DVD rental (15.8%) dropped roughly 10% compared to the previous year.
    • Respondents using Netflix (47.3%) dropped 9.5% compared to the previous year.
  • Consumers use an average of 3.7 entertainment services currently, compared to last year when the average number of services used was 3.4.

 

Roughly half of respondents are not willing to pay for HBO when it becomes available without a pay-TV subscription, with less than 25% being willing to pay $5 a month for the service. Half of pay-TV subscribers are not at all likely to cancel subscriptions when HBO becomes available as a standalone service, with 1 in 5 pay-TV subscribers moderately likely to cancel, and 1 in 10 being extremely likely to cancel.

  • 2% of respondents are not willing to pay anything for HBO as an OTT service. (Q12)
    • 15% of respondents would pay $5 a month for an HBO-only subscription.
    • 8% of respondents would pay $10 a month for HBO.
  • 3% of pay-TV subscribers would not be at all likely to cancel their subscription when HBO becomes available as a streaming-only service. (Q13)
    • 3% of pay-TV subscribers are moderately likely to cancel their pay-TV subscriptions when HBO becomes available without a pay-TV subscription.
    • 4% of pay-TV subscribers are extremely likely to cancel their pay-TV subscriptions when HBO launches as an OTT option.

 

Half of respondents are Netflix subscribers. They are increasing their use of the service compared with last year, and most are not at all likely to cancel in the next three months. However, one in 10 respondents are extremely likely to cancel Netflix in the next 3 months due to a rise in better alternatives from YouTube, Amazon Prime and HBO.

  • 3% of respondents are Netflix subscribers. (Q14)
  • 9% of Netflix subscribers are increasing their use of the service over the last three months, while 6.9% of Netflix users are decreasing their use over the same period. (Q15)
  • 4% of Netflix subscribers use the service significantly more than other services. (Q16)
    • 7% of Netflix users use the service more than other services, a 4% increase compared with the previous year.
    • 7% of Netflix users use the service less than other services, a 5.5% decrease compared with the previous year.
  • 6% of Netflix subscribers are not at all likely to leave the service in the next 3 months, a 4% decrease compared to last year. (Q17)
    • 8% of Netflix subscribers are extremely likely to leave the service in the next 3 months, a roughly 11% increase compared with last year.
  • Netflix subscribers that are likely to leave in the next 3 months will do so because there’s a better alternative option (40.6%) or because the service is too expensive (37.5%). (Q18)
    • The number of people likely to cancel Netflix because of a better alternative rose 30.5% compared to last year and is the number one reason Netflix subscribers are considering leaving.
  • YouTube (28.1%), Amazon Prime (25%), and HBO (21.9%) were the top replacements for those considering abandoning Netflix. (Q19)

 

One in 4 respondents upgraded their Internet speeds in the last year, and one in 3 would pay a significant increase in Internet costs to keep their current viewing habits. Those that would downgrade their packages are divided as to whether they would downgrade pay-TV or OTT services to reduce costs. Although some respondents would pay more to keep viewing habits the same, a $15 increase in Internet costs would cause the majority to downgrade their Internet speeds, with one in 10 respondents saying a $30 or more increase would force them to cut back.

  • 6% of respondents have upgraded their Internet speed packages in the last year, up 10% from last year’s survey. (Q9)
    • 3% of respondents already have the highest Internet speed packages, a 12% decrease compared to the previous year.
  • The largest grouping of respondents (34.5%) would pay a significant increase in Internet costs to keep their current viewing habits. (Q10)
    • Respondents that would change habits as a result of higher Internet costs were divided on what they would cut, with 31.5% keeping their OTT services and 34% keeping their pay-TV services.
    • Those that would pay a significant increase in Internet costs to keep their current viewing habits rose 6% compared to last year.
    • Those that would keep their OTT services and decrease or cancel their pay-TV services dropped 7% compared to last year.
  • A $15/month increase in Internet costs would cause 68% of respondents to downgrade their Internet speeds. (Q11)
    • 3% of respondents said that a $30 or higher increase would cause them to downgrade their Internet speeds.

 

Secondary Sources

The following nine sources discuss the growth of OTT services, the response of pay-TV operators to the OTT threat, and the debate around net neutrality rules.

 

 

OTT Services Growth

Polls show online TV and OTT device usage growing at an astounding rate. Sony launched its cloud-based TV service, PlayStation Vue, and has agreements in place with some large networks. Household bandwidth requirements will rise as OTT service consumption increases and will prompt Internet providers to upgrade their infrastructure to handle the increased demand.

Oct. 21 MediaPost article

Unique monthly TV Everywhere and online TV viewing grew 146% in the last year. The number of online TV users grew by 388%. For the first time ever, streaming movie content has exceeded sports content. Devices with smaller screens like smartphones edged out tablets for the first time as means of accessing online TV.

  • “According to [Adobe Systems Inc.’s] metrics of online TV viewing, the number of unique monthly TV Everywhere and online TV viewers was up 146% in the last year alone. The number of authenticated online TV users (TV Everywhere) was up a staggering 388%.”
  • “While devices are among the leading sources of this migration from standard distribution methods, over-the-top devices—including game consoles and streaming media set-top boxes like Apple TV and Roku—are leading the charge. In addition to the growth in raw viewership, the amount of TV content consumed online per viewer was up 55%. This is a habit now.”
  • “To wit, the largest share of growth in the online TV category went to streaming media boxes and game consoles, which saw a 195% market share increase. Apple’s iOS platform is still the leading destination for online TV content (51%), but Android apps were up 28% to account for 20% of the market. The flight from standard Web browser continues, with that platform’s share dropping 41% to 19% overall.”
  • “Adobe reports that for the first time movie content exceeded sports content. Movie networks enjoyed a 125% increase in usage. The average viewer is now watching 4.5 movies a month. Episodic content at the TV and cable networks was up 81%. Sports event viewing was up 31% to 4.2 watched per month among its fans.”
  • “In another sign that users are becoming more accustomed to lean-back experiences on smartphones, this was the first time that the smaller screens edged out tablets (14% share vs. 13% share). No doubt the growth in screen size and bandwidth is helping to accelerate the trend. Nevertheless, only 17% of the videos watched on smartphones progressed to the 75% mark, while desktop users were three times as likely to get to the three-quarters mark.”

 

Nov. 13 The Verge article

Sony disclosed details about its cloud-based TV service, PlayStation Vue, which will provide TV channels across a range of devices in an effort to replace traditional cable subscriptions. The service initially will be offered in New York and will include channels owned by networks such as CBS, Fox, and NBC Universal. Sony’s service appears smartly designed, but faces challenges such as channels not being available on its mobile service.

  • “Sony has detailed the cloud-based TV service it originally announced at CES 2014. Called PlayStation Vue, it aims to offer an array of TV channels without a monthly contract across a range of devices, and is Sony’s bid to offer a TV service that it hopes will replace traditional cable subscriptions. The company says the invite-only beta version of the streaming service will first be available on PS4 and PS3 in November, before rolling out to iPad, and later other Sony and non-Sony devices.”
  • “The beta version of the service will launch first in New York, with around 75 channels per market, including channels owned by CBS, Fox, and NBCUniversal. Price and packages will be revealed at launch, but Sony says that the service won’t require any monthly contracts, won’t need any extra hardware to use, and won’t demand any installation charges.”
  • “Other companies have tried to offer alternatives to old-style cable subscriptions, but without access to the range of channels, movies, and live sporting events as cable providers, they haven’t seen huge success. Sony, too, may find it tough to navigate the stipulations set out by TV content providers—Bloombergnotes that some channels aren’t available on the mobile service thanks to the peculiarities of the deals Sony could sign, and shows can’t be kept for longer than 28 days.”
  • “But Sony’s service appears smartly designed, aping cable TV but improving on it by letting people watch everything shown over the last three days at any time, without recording it beforehand. With experience in the sector and a profitable PlayStation division behind it, Sony might be able to give the new Vue the kind of kick start it needs to get people cutting their cords.”

 

Nov. 5 CED Magazine article

Household bandwidth requirements will increase 31% annually over the next five years due to increased use of OTT services such as Netflix, Amazon Prime, and HBO Go. The increased use is prompting Internet providers to reassess their existing infrastructure and take steps enhance their networks.

  • “With the plethora of OTT services from the likes of Netflix, Amazon Prime, and HBO Go, among others, the average household bandwidth requirements are poised to increase by 31 percent annually over the next five years, according to a recent report.”
  • “Peak hour average usage per household would increase from 2.9 Mbps this year to 7.3 Mbps in 2018. The abundance of streaming videos across various devices has put an unprecedented strain across metro residential backhaul networks, according to the report.”
  • “OTT unicast video (streaming video) traffic was predicted to be 4.6 times greater than traditional multicast traffic by 2018. The shift from viewing video over multichannel TV video subscription services to Internet video was a fundamental driver and accounted for the majority of the bandwidth requirement for all device types.”
  • “The explosion of OTT/unicast service as well as the surging demand for video content is pushing service providers to reassess their existing infrastructure and take steps to enhance their metro network,” said Michael Kennedy, principal analyst, ACG Research. “End-user expectation of a more ‘on-demand’ experience is a dramatic change for networks and requires the underlying infrastructure to evolve in order to give users the experience they expect.”
  • “Usage of Internet video was expected to grow from 12 percent of overall peak average bandwidth in 2014 to 25 percent in 2018. Use of 4K streaming video services will grow from 2 percent in 2014 to 12 percent in 2018. Factors driving increasing bandwidth requirements include the trend toward multiple Internet-enabled devices in a household consuming content simultaneously.”

 

Pay-TV Response to OTT Growth

DISH Network has jumped into the OTT fray by offering subscribers access to local TV networks through a streaming pay-TV service. AT&T and Verizon have signed deals with Netflix and Amazon, respectively, to further their OTT offerings. Some cable operators are raising rates on broadband customers to offset a shrinking customer base, while Cablevision shows no signs of embracing the OTT trend.

Oct. 3 Variety.com article

DISH Network is releasing its Internet-delivered pay-TV service which will offer local broadcast TV networks to its subscribers. DISH has deals in place with Disney, ABC, ESPN, A&E and Scripps.

  • “DISH Network, which is assembling one of the first Internet-delivered pay-TV services in the U.S., is planning to offer local broadcast TV networks to subscribers of the over-the-top service as a separate, premium-priced tier, according to industry sources. But it’s not certain whether the No. 2 satcaster will be able to secure agreements with many broadcasters to be able to bring such an offering to market, as they would expect to be included in any basic pay-TV bundle. ‘Good luck with that,’ said a senior broadcast exec.”
  • “So far, DISH has inked deals with Disney, covering linear and video-on-demand content from ABC-owned broadcast stations, ABC Family, Disney Channel, ESPN and ESPN2, along with cable nets from A+E Networks and Scripps Networks Interactive. DISH chairman Charlie Ergen has said he anticipates the company will launch the Internet TV service this year. The OTT bundle is expected to be $20-$30 monthly, although DISH has not outlined specific pricing or packages offerings.”
  • “Skeptics have questioned how appealing a “virtual pay-TV” service will be from DISH or others expecting to launch OTT pay-TV services like Sony and Verizon Wireless. Absent local broadcast channels, it’s even less likely consumers will bite.”
  • “Cable and satellite TV ops are facing “a death by a thousand cuts,” said Craig Moffett, senior analyst at MoffettNathanson. “No single virtual MSO will likely dramatically change the equation. But collectively, they could start to have a material effect on the subscriber numbers.”

 

Oct. 29 The Motley Fool article

Traditional pay-TV providers AT&T and Verizon are entering the OTT market and have inked deals with Amazon and Netflix, respectively. AT&T will also offer the HBO Go streaming service.”

  • “A recent Experian Marketing survey now finds that 6.5% of all households have abandoned pay-TV for streaming-based services such as Netflix and Amazon; that’s up from 4.5% in 2010. And since pay-TV providers appear unable to stop the trend, they’re now competing to offer these streaming services in addition to their subscriptions to mitigate the risk.”
  • “The latest company to offer a streaming-based add-on is Verizon, which just signed a deal with Netflix. Although the deal is limited in both time (expiring on Nov. 1) and geography (New York City area), the deal points toward a testing phase in which Verizon’s management weighs demand before deciding on a nationwide rollout. In addition to a year of Netflix, you get a free $150 Visa gift card, 75/75 Internet, and 195 HD channels for $79.99 per month.”
  • “AT&T offers its new $39-per-month U-verse bundle with Amazon Prime and HBO. And while AT&T’s service appears cheaper, it appears not to offer as many channels (roughly 90, versus the 195 HD that Verizon boasts of) and a data cap of 250 GB per month (additional data is $50 per 10GB) while Verizon’s appears to be without a cap. In addition, after the first year, AT&T’s service increases to $70-$80 per month.”
  • “AT&T’s service included Time Warner’s HBO and its online streaming service HBO Go with its deal. HBO recently acknowledged that it will open up a streaming service without a pay-TV package. And while the company has yet to acknowledge the form and price, rumors peg the service as costing an astonishing $15 per month. At that price point, it is hard to see HBO’s Internet-only service being a huge player in the streaming-only market.”

 

Nov 7 New York Post article

Cable companies are raising broadband rates to offset the slowing growth of subscribers. Cablevision shows no signs of joining the recent OTT push and believes it will continue to grow the company by monetizing its big data.

  • “Cable companies appear to have found the perfect antidote to cord-cutters—jack up the price of broadband. Cablevision on Thursday reported a 6 percent rise in broadband revenue—even as it lost customers. Comcast reported a 9.6 percent increase in revenue from broadband in the third quarter—outpacing the rate of customer increases.”
  • “Media giants like CBS and Time Warner’s HBO are getting ready to launch streaming versions of their programs—a move that could spark further cable-TV cord-cutting but will also make a high-speed broadband connection all the more valuable.”
  • “The third quarter saw the biggest percentage increase in broadband uptake in nearly two years, rising 3.8 percent, or by 798,000 subscribers. Comcast and Time Warner Cable combined accounted for half the total increase, adding 423,000 broadband subscribers in the period.”
  • “When asked how Cablevision intends to grow, Dolan told analysts, “We’re going to see a re-stratification of the cable business. One thing we see is significant uses of data, increasing exponentially. We think that’s where the growth is going to come from.”

 

Net Neutrality

The FCC has been working on rules that govern whether Internet providers can develop “fast lane” deals with content providers. AT&T antagonized the FCC by threatening to delay its fiber network buildup due to uncertainty surrounding net neutrality rules. The President issued a statement fully supporting net neutrality and issued a plan that would treat the Internet like a public utility.

Nov. 9 CNET article

The FCC may delay offering its guidelines to Internet providers about handling video traffic until 2015. The FCC showed signs of willingness to compromise by allowing fast lane deals between Internet service and content providers.

  • “The U.S. Federal Communications Commission, working on complicated rules about how Internet providers can handle video and other traffic that crosses their networks, may delay offering up its guidelines until 2015 so it can “ensure they are defensible in court and people understand them.”
  • “FCC Chairman Tom Wheeler, who wanted the proposed rules out by the end of this year, has been working to appease advocates of so-called ‘Net neutrality,’ as well as providers, who don’t want more regulation over their services. Wheeler needs to have his proposed rules completed by the end of the month to submit them in time for the FCC’s last open meeting of the year on December 11, but FCC lawyers are pushing for more time.”
  • “Wheeler may be a considering a new hybrid plan that would still allow for ‘fast lanes.’ Such lanes would let content and other website owners make special deals with network service providers to ensure sure their website or content is served up faster than other sites and content online. But the new plan would rely on a different legal justification than what’s been debated this year, and it would expand the FCC’s regulatory authority over broadband service providers.”
  • “Under the emerging plan, Internet providers’ retail operations—where consumers pay for Web access—would be regulated more lightly than the back end, in which broadband providers serve as the conduit for websites to distribute content. The FCC would classify the back-end service as a common carrier, like the old landline telephone network, giving the agency the ability to police any deals between content companies and broadband providers.”

 

Nov 14 Recode.net article

AT&T CEO Randall Stephenson has threatened to delay building its fiber network due to uncertainty about net neutrality rules. The FCC responded by questioning whether AT&T could profitably operate DirecTV if it approved the upcoming merger between the two companies.

  • “Two days after AT&T CEO Randall Stephenson said his company would delay building out its fiber network because of uncertainty about net neutrality rules, the Federal Communications Commission has some questions. FCC officials also want to know if AT&T’s financial model “demonstrates that fiber deployment is now unprofitable” and whether laying fiber to more than two million homes after the DirecTV acquisition “would be unprofitable.” AT&T has a week to respond.”
  • “The request may not be great news for AT&T, which still needs the FCC to sign off on its $48 billion deal to acquire DirecTV. Stephenson’s threat to stop the company’s fiber build-out may help bolster the case of Internet providers that net neutrality rules advocated by President Obama would hurt investment in networks. But it doesn’t help the case with regulators that allowing AT&T to buy DirecTV will expand high-speed broadband access to millions of Americans who currently can’t get it.”

 

Nov. 15 NPR article

President Barack Obama strongly supports net neutrality and might be at odds with the FCC regarding a compromise with Internet service providers. Net neutrality has an overwhelming amount of public support; 81% oppose paid prioritization or Internet fast lanes.

  • “Obama threw his full support behind a proposal to classify broadband Internet service as a Title II utility.”
  • “FCC Chairman Tom Wheeler has his own ideas, a more “hybrid” approach, for how to handle the issue. He runs an agency that is independent of the president.”
  • “U.S. senator Ted Cruz, a favorite of the far right came out with a tweet blasting Obama’s position, likening net neutrality to Obamacare. Cruz then backed it up with this op-ed in The Washington Post, arguing, ‘Government-regulated utilities invariably destroy innovation and freedom. If the federal government seizes the power to regulate Internet pricing and goods and services, the regulations will never end.’”
  • “The general principle of net neutrality is overwhelmingly popular, with surveys showing 81 percent of respondents oppose ‘paid prioritization’—letting cable companies charge content providers for ‘faster lanes’ to customers. Net neutrality regulations are intended to prevent that. The debate now, is over how those regulations should be enforced.”

 


Additional research by Emily Carr, Steve Evans and Mason Rudy.