The Over-the-top Concern About Cord Cutters And Shavers
Written by Vincent Spinelli
Given the nature of our business and company mission, our views on the service provider world tend to be hyper-focused on infrastructure matters. To be sure, there’s a lot to discuss when it comes to SP infrastructure, given that we’re in the midst of a technology revolution from hardware to software, from closed and proprietary to open and open-sourced.
But even for us, it’s important for us to understand the sea change taking place that will impact SPs (and cable MSOs) most notably in content/entertainment delivery services. For these providers, this is actually a matter of life-and-death. More than $200 billion a year are at stake annually with a lion’s share of that revenue currently divided up by cable and satellite providers. But there is a strong push from a group of well-funded over-the-top (aka Internet) content providers such as Netflix, Hulu, and Amazon who are threatening to carve off significant chunks of SP subscribers and disrupt the traditional business models forever.
Up till now, that model relied on the cozy relationship between programming networks (content creators) and cable and satellite providers. The latter paid the former a negotiated fee per subscriber based on the perceived value of the content. And, until recently, the number of subscribers had been growing steadily, meaning networks could charge more and service providers could pass on those costs to consumers. Everyone, it seemed, was happy except perhaps the consumers themselves who consistently cited high costs and fees as the top reasons for their dissatisfaction with their providers.
Still, all was relatively quiet on this front until Aug. 5, 2015 when Disney in its quarterly earnings call reported its growing concerns of its flagship sports network ESPN shedding subscribers, an estimated 3.2 million subscribers in a little more than 12 months by some industry estimates. Disney’s stock along with those of major SPs tanked on the news. We also learned a new phrase to add to our lexicon: “cord cutting”
Cord cutting refers to the process of cutting expensive cable connections in order to change to a low-cost TV channel subscription through over-the-air (OT) free broadcast through antenna, or over-the-top (OTT) broadcast over the Internet. Cord cutting is a growing trend that is adversely affecting the cable industry.
The trend was no fad. While the number of consumers who cut the cord for good is still relatively low, the general trend was for consumers to at least decrease their reliance (“cord shaving”) on providers according to industry research:
… a recent study indicates that the number of cord cutters in North America is, in fact growing — in 2014, 8.2 percent of former pay TV subscribers surveyed by TiVo subsidiary Digitalsmiths said they ditched their service — an increase of 1.3 percent over the prior year. Meanwhile, a much larger 45.2 percent said they reduced their cable or satellite TV service during the same time frame.
Of course, the SPs and MSOs have not stood still in response to these menacing megatrends. And as big companies are wont to do, their first instinct was to get even bigger. We saw this unfold with AT&T’s takeover of DirecTV, which even the companies involved admitted was partly driven in response to cord cutting. The same for the $67 billion acquisition of Time Warner Cable and Bright House Networks by Charter Networks, which hangs on the balance as of today.
Another strategy was to offer more differentiated, customized services through the emergence of “skinny bundles”, a direct attack against the 500 Channels and Nothing to Watch criticism of pay TV providers. This has even pitted provider vs. programming networks in certain instances, most notably in the ongoing dispute between Comcast and YES Network that will determine how much consumers have to shell out to watch the New York Yankees at home or on their mobile devices.
Even the programming networks themselves are taking direct action. Consider the existence of HBO Now, an OTT streaming option that consumers can sign up for directly or through their current provider. Another recent example was ESPN going direct-to-consumer to offer highly specialized content, the Cricket World Cup that took place last week, which has already attracted 100,000 subscribers who forked over $100 for access.
If nothing else, this flurry of activities is fascinating to watch as it unfolds though nothing is set in stone. For one, everyone including OTT and traditional SPs acknowledge that cord cutting is easier said than done. Wired Magazine went as far as to say that cord cutting anytime soon is “going to suck” right now. There is even dispute as to just how much impact cord cutting is actually having on the SP and MSO businesses. For example, Comcast reported that its rate of subscriber loss in 2015 was 80% less than it was in 2014, primarily because it was able to offer a broader range of high-quality services including OTT content. And even Nielsen, the company who started all this hullaballoo with its ESPN red flag, recently revised its numbers downward as to how many subscribers actually abandoned that network.
We will continue to monitor this situation closely of course. However, we expect, as with generally all things in life, one size (or one bundle) will not fit all. While we expect OTT providers will continue to thrive, so will SPs, MSOs, and programming networks. The only certainty we know is that we will continue to work with partners to make the delivery of content easier for providers and more enjoyable for consumers. Our ongoing collaboration with Vantrix, Artesyn Embedded Technologies, and Intel, which we demoed at Mobile World Congress and will highlight again at the upcoming Layer123 NFV World Congress and INTX 2016, attests to our commitment.
The SP revolution is likely to be televised, or at least be about television. The question remains as to which screen and through which provider you’re going to be watching.
Originally posted at riftio.com.