Saturday, January 3, 2015

Future TV is Coming, But the Business Model Remains Unclear

Some research findings are bound to be obvious. Most people in the United States either drive a car, use public transportation, eat a meal outside the home or use a mobile phone. So a study showing that to be true would not surprise you.

Neither are you likely to be surprised if told three out of four U.S. households already use some form of “on demand” video entertainment, as a new survey has found.

And most of us would likely agree that some form of on-demand delivery is going to be the norm in the future.

About 76 percent of U.S. households have a digital video recorder, subscribe to Netflix or use video on demand services from a cable or telco provider, the Leichtman Research Group study discovered.

Some 26 percent of households use two of the services and 11 percent use all three services.

Beyond the assumption that a shift to on-demand is coming, it is hard to accurately predict how the business model might change, even if such changes have happened often, before.

User behavior with respect to video entertainment--and business models--have changed significantly over the past half century. “Television” was “broadcast TV" 50 years ago, using a simple "free to end user," advertising-supported business model.

About the 1980s, a big change began.

In addition to broadcast TV, “cable TV” began to grow in urban areas, though it had been a product sold largely in rural areas since the 1950s. The new adoption was driven by a new value proposition, however. The new business model was "subscriptions," even if advertising eventually became a significant revenue stream.

Broadcast TV was a new ad-supported medium. Rural cable TV was a “distant signal access” business based on end user subscriptions. There were other changes, though.

Urban cable TV was an “additional choice” service, featuring new channels and content formats not available “over the air.” It had to be. Why else would people pay for something they already got "for free?"

With the advent of videocassette recorders, followed by digital video disc players, “home video” became a new segment of the business, providing the first “watch what you want, when you want to” value proposition. Video rental and later packaged video purchases became the additional new revenue models.

“Video on demand” services then were created by video subscription providers to try and capture some of that market demand, with a transaction-based "pay per view" model.

Today’s Netflix, Amazon Prime, YouTube and other streaming services, plus use of digital video recorders, are the latest version of “on demand” consumption, using a mix of subscription, advertising and pay per view revenue models.

Broadly, “television” has been augmented by “video,” and linear by on-demand formats, for decades. Along the way, new distributors and revenue models have been created. But none have directly displaced the linear video subscription business.

But the continuing movement to "on demand" will eventually lead to efforts at direct disruption and substitution.

It probably comes as no surprise that 62 percent of U.S. households that subscribe to a linear video service have a DVR. In addition to “choice,” consumers increasingly want to “watch what they want, when they want it.”

It would be easy enough to predict a continuing shift to on-demand formats. What is harder is to accurately predict what business models will emerge.

The LRG survey found 36 percent of linear video subscribers also use Netflix, and that 36 percent of those Netflix subscribers stream video daily. About 72 percent stream weekly.

One might safely suggest that--eventually--on-demand subscriptions will begin to grow at the expense of “linear” formats.

Many would predict that will have negative repercussions for linear video suppliers. Might Netflix or some new firm not yet founded emerge in a dominant role in a post-linear television business? Or will the advantages of bundling for many consumers reemerge?

Will the bundled approach go away, or will most consumers find new forms of bundling more valuable than one-off subscriptions?

Cable subscribers pay an average of $85.80 a month (with many paying well over $100), yet watch only about 17 of the 189 channels in their cable bundle. Netflix, in contrast, costs just $9.99 a month. So some surveys suggest only 24 percent of 18- to 24-year-olds have cable, compared to  61 percent who pay for a stand-alone streaming service.

Or will linear video providers be able to leverage their existing business to capture much of the new non-linear business?

Scale matters in the TV business, and if networks widely decide to license access to their content on a stand-alone streaming basis, or on a wholesale business to streaming services, existing scale could well prove decisive.

“Direct to end user” marketing and fulfillment costs are substantial, and no existing linear network has the infrastructure in place to do so on a low-cost basis. It seems doubtful many consumers are willing to pay $20 or more for access to a single network’s content. But it is not clear most networks can afford to charge less.

That suggests a distributor and bundling role still will be necessary, even when all major networks are willing to license content for streaming delivery.

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