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If We’re Over-the-Top, Is It All Downhill?

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By John K. Hane

In October of 1996 my boss, the chairman of a $3 billion television production and distribution empire (and one of the smartest television dealmakers I ever met) scoffed when I said that television could be delivered over the Internet. I told him to wait ten years. Well, in 2006 we had YouTube, but I doubt Bill Bevins would count that as television.

In the first ten days of October 2010:

  • I spoke on the “Hot Topics” panel at the annual TPRC conference, where leading academics and policy makers discuss legal, economic, social, and technical issues on national and international information and communications policy. The hot topic this year: over-the-top (OTT) television.
  • A friend called asking for advice – he’d been offered a senior executive post with a very large broadcasting company paying a great salary, and a senior position with a scrappy OTT startup, paying lots of stock and the chance to hit big. In 2010, he sees this as a tough call.
  • I watched Forrest Gump in “high definition” on a 50″ plasma monitor, streamed by Netflix to my son’s Xbox. The quality was stunning.
  • I installed my new AppleTV and watched a high definition podcast, also streamed, and several “high definition” videos on YouTube and Netflix. In several cases, the quality was very good. And the Apple TV interface is much more elegant and easier to use than our FiOS set top box.

I should have told Bill 14 years.

OTT is here. There’s a lot of long tail and niche content online. It’s getting easier to find and use, and if you have a fast broadband connection, the quality can be outstanding. So just what is cord cutting and how do you define OTT? And what do they mean for traditional video providers?

Cord cutting at its extreme means a household drops MVPD service and relies on other sources of television – primarily free OTA television supplemented by long-tail OTT internet services like Netflix and Hulu. OTT means traditional television content delivered through non-traditional (generally Internet) television distribution channels. It doesn’t refer to non-traditional video content (YouTube and other user generated content) regardless of distribution channel. We make this distinction because, rightly or wrongly, we consider YouTube and Vimeo to be something entirely different (and less threatening to incumbent providers) than the delivery of high resolution, full-format, traditional programming over the Internet.

Many fear OTT will lead to tens of millions of households to cut the cord. This is naturally a concern for cable and satellite providers, but many broadcasters worry too, because MVPDs won’t pay broadcasters for cord cutting households. Personally, I think we are likely to see a fair amount of cord cutting in the next few years, and an even larger amount of what I call cord trimming – dropping premium services or higher tier services. In new households, broadband is essential, while pay television service is often optional. And the combination of gorgeous, over-the-air, live high definition broadcast service and increasingly compelling long tail OTT options is likely to be a better option for many households than traditional MVPD service.

But there’s a silver lining for cable systems and broadcasters, and even for DBS providers.

  • Cable systems may lose video subs, but demand for OTT television will drive broadband adoption into more of the 40 million households that haven’t adopted it so far, and it will lead others to upgrade their connections, at higher prices. Since broadband service is generally more profitable than video services, cable profit margins could actually rise even if gross revenue shrinks.
  • Broadcasters could lose retransmission consent fees from cord cutting households, but cord shrinking will affect broadcast competitors – cable networks – before broadcasters, because it’s the expensive higher tiers and premium services that cord-shrinking customers drop. The broadcast and sports channels are the last to go before cord is cut altogether.
  • If total MVPD penetration falls from the high eighties to the mid sixties in the next seven to ten years, as I suspect it will, tens of millions in advertising will migrate back from cable and satellite to broadcast, because reach is still important. Twelve or so years ago, with MVPD penetration in the mid 60s, broadcasters were far more profitable, even without retransmission revenue.
  • Much higher broadband penetration could breathe new life into the DBS business model, which is an incredibly cost efficient way to distribute high quality linear television. With more broadband homes to sell into, DBS providers can create a hybrid satellite-OTT service that meets and in many ways exceeds what the cable operators can do with their own video services.

OTT service will have many effects beyond cord shrinking and cord cutting. But incumbent providers should embrace OTT, because the opportunities it enables – the best of which we can’t imagine yet – far outweigh the risks that it poses to all incumbent business models. It creates opportunities for greater efficiencies and more varied service offerings for all incumbents, if they have the vision to see the opportunities and the perseverance to follow through. Best of all, OTT can make television more satisfying for consumers, more measurable, and easier to use – leading, inevitably, to more usage. In the television business, we all like more usage, as long as we get our share. Getting that share is the challenge and the opportunity.