Thursday, December 11, 2014

Is Linear Video Business Finally at a "Crossroads?"

Is the U.S. multi-channel subscription video business finally “at a crossroads?” A new survey of video consumers might suggest the rate of change might be accelerating.

On the other hand, the survey might also suggest the big immediate danger exists across the board, in every age category between 18 and 59.

In fact, respondents 18 to 34 appear to buy linear subscription video at higher rates than consumers 35 to 59, a finding that might suggest demand has weakened across the entire age range between 18 and 59.

Some might argue the greatest danger can be found among younger viewers 18 to 34, as the one-year drop in buying was highest for those respondents, while buying was consistent for age groups 39 to 59: either flat or slightly higher.  

Cable TV (or telco TV or satellite TV) subscriptions among viewers 18 to 24, and those 25 to 34,  dropped six percent from 2013 to 2014, according to PwC.

But consider that subscription rates for consumers in older demographics was even lower than among those 18 to 34.

At 71 percent adoption, respondents 18 to 24 had the highest rates of purchasing, at 71 percent of respondents in that age cohort. Among those 25 to 34, the take rate was just 67 percent.

Among respondents 35 to 49, an even lower 64 percent of respondents say they buy linear video subscription services. Among users 50 to 59, the take rate was 67 percent.

The cable subscription figures are steadier for older demographics, though.

Looking ahead, 91 percent of viewers said they see themselves subscribing to cable in one year.  
Some 61 percent of respondents said they would likely subscribe in five years, and only 42 percent thought they would be buying in a decade.

So far, the survey found, use of on-demand, over the top streaming services remains largely ancillary to purchasing of linear video services.

Some 65 percent of linear video subscribers 18 to 24 used Netflix in 2014. About 71 percent of linear TV subscribers 25 to 34 had Netflix in 2014, up from 51 percent in 2013.

Of respondents 35 to 49, 66 percent of linear video buyers also bought Netflix. Of those 50 to 59, 58 percent bought Netflix, the PwC study reports.

The PwC survey, if it accurately reflects the actual population of consumers as a whole, might be interpreted as suggesting demand for linear video is actually a bit stronger among consumers 18 to 34 than among consumers 35 and older.

What is not so clear is “what” is at risk. The common perception is that it is the “linear” format or “bundling” that is endangered. That might not be the case for all programming formats.

Sports is the best example of linear delivery that is most valuable, and least susceptible to disruption by non-real-time alternatives. Movies and TV series clearly are the most at risk to on-demand delivery.

But bundling might not actually be endangered quite so much. Some light users will prefer full a la carte access. But most multi-user households and sports fans likely will find that the cost of a full a la carte approach actually costs more than what they currently pay for their video subscriptions.

As always is the case, price and value will matter. Much depends on how content owners decide to allow retail sales of their content, and what steps distributors might take in response.

Should content owners conclude they prefer to fully unbundle access, without requiring prior purchase of a linear video subscription, major instability could erupt in the video ecosystem.

On the other hand, if content owners stick with the current system, where a consumer generally must first buy a linear subscription to get on-demand access to some or all of the content available from any single programming channel, there would be less channel conflict, but likely also less development of a new distribution system and consumer choice.

Nor is it clear retail prices might be lower, in all cases, or profit margins higher, in all cases, for content owners. Today, programming networks other than the TV broadcast channels rely on a  wholesale role.

Few channels sell directly to end users, with the exception of local broadcast stations, as a class of suppliers.

A shift to a retail role would entail lots of new cost, especially for marketing and promotion. The new business models would be highly dependent on how those new retail selling costs changed gross revenue, profit margins and operating cost for the content owners.

Nor is it completely possible to predict the reaction of their current distributors (cable, satellite and telco TV providers). Faced with a major move to over the top access on the part of the programmers, the distributors would react.  

The point is that, even with the whole industry in a process of incremental movement, one might argue the crossroads actually remains in the future.

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