How Will Networks Co-Exist With Over-The-Top?

I was busy poking fun at the Nielsen position on cord cutting the other day.   But it’s hard to deny that the trend seems relatively minor in the scheme of things.

A J.D Power and Associates study released yesterday shows that just 3% of residential TV customers have cancelled their multichannel subscriptions, 6% among Generation Y customers.   I’d argue that 6% among the younger audience is not insignificant; it’s a factor.   But those levels won’t be turning the TV world upside down.

This may sound odd, but I think the most important aspect of cord cutters not that they’re cutting the cord with their multichannel providers.   The most important thing is they’re likely to be driving online video over-the-top to their 10-foot screens.   The cord cutting aspect of the cord cutters…may be misdirection with regard to future trends.

To clarify terms, when I say “over-the-top” I mean streaming online video to a TV set rather than a computer or mobile screen and watching in lean-back mode, the way people traditionally watch TV.

Because over-the-top streaming is initially focused among the young, the tech-savvy, lower incomes, light TV viewers…it is more likely to replace traditional TV for these audiences.     But, as over-the-top becomes mainstream, only a minority of people will actually cut the cord.   Thus the key scenario, the one that will eventually play out for the majority of households, is that both traditional and over-the-top TV will compete for time in the 10-foot, traditional TV viewing experience.

I think some basic, human factors will drive to this scenario:

  • People will always prefer to watch long form programming on the 10-foot screen.   Watching full-length TV shows and movies on 4-foot and 2-foot screens will increase; the iPad will help drive its growth.    But the average length of an online video stream is still under 5 minutes.   I’d argue that the average length of online streams won’t really take off till the mainstream consumer is sending online video over-the-top to his TV.
  • Over-the-top will penetrate the home through the path of least resistance.   That path is the Internet-connected TV; the least number of extra boxes and wires entailed.   Blu-Ray players and Internet-connected game consoles will be secondary; boxes people already own for other purposes.   This path mitigates against cord-cutting; why buy a spanking new TV and then cut down your viewing options?    It also ties the rate of behavior change to TV replacement cyles and the briskness (or not) of new TV sales.
  • Network programming will continue to alleviate the burden of choice.    Lighter TV viewers may be able to subsist entirely on a diet of on-demand viewing.   But for heavier TV viewers it would be onerous to deliberately select everything they watch.  Channel surfing is a key part of their diet that can be supplemented but not entirely replaced with on-demand options.  And so…as over-the-top migrates to heavier TV viewers, a pattern of coexistence rather than replacement will be seen.

Here’s an interesting data point from the Leichtman Research Group.  30%  of all households report having at least one TV connected to the Internet via a video game system, a Blu-Ray player and/or the TV itself.   But only 10% of all adults watch video from the Internet via one of these devices at least weekly.    So a substantial number of households already have the capability; most don’t use it regularly.    Of course the numbers are much higher among Netflix subscribers…

When people have both forms of TV, traditional and over-the-top, available to them in lean-back mode, what do they do, what trade-offs do they make, what gets cannibalized?   If I were a network executive, this future scenario would concern me the most.

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