June 19, 2013: The War on TV Part II – Streaming is Coming
War on TV Part II: Streaming is Coming
As we wrote last week, new devices are challenging for control of TV “Input 1”, aiming to put streaming on even footing vs. cable. However, even at a disadvantage, streamers are stealing viewers from TV networks, a trend that will be amplified as new devices succeed. The cable era has peaked – total TV households and overall viewership are falling, with prime time ratings off precipitously – and the streaming era is gaining traction. On-line media players are using “big data” techniques to direct multi-billion dollar investments in exclusive and original programming, accelerating the audience diaspora. The rise of streaming video is an echo of the rise of cable – 25 years after HBO won its first major Emmy, cable nets now dominate viewership and critical acclaim. The channelized powers-that-be are stepping up their defenses – improved TV Everywhere, new user interfaces, premiums for web-hostile networks, broadband fast-lanes for the operators own streaming content, etc.. Thus far, these initiatives have failed to stem the advance of the streamers, and ultimately, we believe that they will be insufficient to do more than delay the inevitable demise of the channelized TV model.
Channelized TV has peaked. The percentage of US households subscribing to a multichannel TV service plateaued in 2010 and began to decline in 2012. Nielsen’s estimates of the number of hours that Americans spend watching TV each day is also declining, and the reality may be worse, as the study methodology fails to acknowledge falling viewer engagement in an increasingly multi-screen world. All four major broadcast networks have reported drops in viewership in the most recent periods, and in aggregate primetime TV audiences are down in the high single digits YoY. Moreover, a large and increasing percentage of primetime programming is viewed from DVR recordings, a major red flag for advertisers fearful that viewers will fast-forward past their spots.
On-line video is coming fast. Nielsen estimated a 47% YoY increase in on-line video for 1Q13, not including NFLX, which streamed more than 1.3B hours of content per month to its subscribers during 1Q13, up more than a third in less than 9 months. NFLX’s monthly audience, which, unlike Nielsen, does not account for multiple viewers in a household, is larger than any cable network. YouTube is streaming 50% more hours this year than last. The continued rise of tablets and the emergence of alternative video boxes that break cable’s hold on TV input one could even accelerate this trajectory.
Big data tools helping streamers compete on content. Content ages and must constantly refreshed. Networks do enjoy resources and relationships that have given them advantage in securing promising programming. However, on-line rivals are beginning to compete successfully for content, typically using sophisticated analytics on subscriber search data to identify promising programs, a significant edge vs. programming executive “tastemakers” and focus groups used by the networks.
The rise of on-line video is reminiscent of the early days of cable. HBO won its first major Emmy in 1988, but by 2000, cable nets won more than a third of these awards, and by 2010, more than half. Viewership has followed – in 1988, the “big 4” networks owned nearly 95% of primetime viewership, but today cable-only nets command more than 70% of the audience. On-line original content is on a similar trajectory, with “House of Cards” critically touted as worthy of multiple nominations, helping to drive NFLX into 29M households averaging nearly 1.5 hours of viewing a day each.
Revenue will follow audience shifts. More viewers means more money – subs, ads or both – paying for more new programs that will attract even more viewers. For US TV networks, $66B in ad sales and $4xB in fee revenues are at risk, with shifting viewership a likely leading indicator for future revenue movements. Again, this harks back to the rise of cable nets, which today command a growing 60% of total industry revenues vs. the once dominant broadcast nets. It is also important to consider the inherent conservatism of the advertising market. Newspaper advertising recovered out of the 2001 recession, rising to more than $55B in 2005 before plummeting to less than $25B in 2009 and heading south from there. Arguably, this drop was predictable, given the shift of readership to on-line information sources. We will look at the revenue picture more closely in the next piece in this series.
MSOs are taking aggressive steps to forestall market change. In keeping with the theory of “disruptive innovation”, the channelized TV industry is hard at work setting roadblocks. Comcast announced its X2 cable-box platform, which purports to replace the widely reviled cable interface with a modern approach integrating access to non-video internet content. TWC is offering higher fees to networks that eschew on-line. Collectively, MSOs and networks are pushing “TV Everywhere”, which requires viewers to have a traditional service subscription in order to have access to streaming content. VZ bought NFLX wannabe Redbox, DTV is circling Hulu, and Comcast is offering its own NBC-Universal streaming service, all to further the TV Everywhere umbrella. However, also in keeping with “disruptive innovation”, we do not expect these tactics to slow on-line media very much.
The growth of on-line will seriously pressure the status quo. The best content – e.g. live events like sports – gains enormous leverage. Thus far, competition amongst cable and broadcast nets has been driving up rights fees at an extraordinary pace, while content owners have been retaining some digital rights and experimenting with supplemental or premium streaming services. Media companies have been signing pricey deals with on-line outlets for early windows on theatrical releases, broadcast reruns, and catalog content, and for exclusives on new content tied to established franchises. Meanwhile, demand elasticity for cable fees may be steepening, constraining MSOs ability to push rising content costs onto consumers and raising contention in negotiations with media partners. This context could make on-line a considerably more important future factor in the profitability of media companies.
Content owners and on-line aggregators to win, multichannel operators to lose, and networks are a mixed bag. The self-reinforcing cycle of growing on line viewership attracting ad and subscription revenue, which brings more compelling programming, which builds a bigger audience, is already accelerating. The creators/owners of the best content will find their way on-line, as aggregators flourish and the market for streaming programming gets more lucrative. MSOs could be left holding the bag, squeezed between network demands and increasingly price sensitive viewers. As ad spending moves on line, the most savvy networks will follow aggressively, weaning themselves from the channelized model, but others will hesitate and fail.
For our full research notes, please visit our published research site.