TV Inflection Point Might be "A Few Years" Away, says Moody's

Cable TV companies do not face immediate revenue threats from over the top video alternatives “for the next few years,” according to Moody’s Investor Service.

Perhaps the key phrase is “for the next few years.” At some point, a transition to OTT streaming services is going to hit an inflection point, the rate of change will go non-linear, and the business will change rather quickly.

So far, the changes have been gradual. In 2014, cable suppliers lost about 1.2 million accounts, while AT&T and Verizon picked up about a million accounts. Satellite suppliers gained about 20,000 accounts. So there was a net shrinkage of about 126,000 accounts, on a base of 95.2 million.

The decline of cable accounts has been underway since 2012, the Federal Communications Commission reports.

On the other hand, late in 2013, for example, U.S. cable TV operator high speed Internet access accounts surpassed video accounts for the first time. That does not necessarily speak to the health of the video subscription business, though, as cable losses were to the benefit of telco suppliers.

A change in adoption from rather slow and linear to exponential tends to happen for adoption of most important new technologies, however. There is a longish period where it seems not too much change is happening, but then an inflection point where adoption rapidly increases.

A firm that misses the transition quite frequently begins a period of irreversible decline. On the other hand, such inflection points are common in the communications business.

Until the early 1990s, few people actually used mobile phones. But mobiles suddenly became the primary way people globally make phone calls and arguably also have become the way most people get access to the Internet.

The inflection point everywhere in the developing world seems to have happened between 2002 and 2003.

In 2000, one might still have looked at tele-density figures for Africa and south Asia and still have concluded that not much was happening, in terms of adoption. But that changed, sometime around 2004, when a growth inflection point was reached, both in terms of income and use of mobile phones.

That has direct implications for Internet access as well. Over time, the volume of smart phones, compared to feature phones, will shift dramatically in the direction of smart phones. And that will rapidly change the usage of Internet apps.

Statistics showing wide disparities in use of the Internet around the world are snapshots in time. What is equally important is the pace of change. One might have argued, based on statistics from 1990 or 2000, that many in developing regions developing regions still were not able to use phones and computers or get access to the Internet.

But an inflection point occurred in India around 2004.

One might wonder how close we now are to such an inflection point in the video entertainment business, as some studies suggest an uptick in customer churn, in a business that generally has been seeing smaller churn rates for a decade or more.

Moody's analysts said that the strength of the high speed access business, limited competition, and customer inertia would give cable operators time to adapt to the rise of new entrants to the sector.

"OTT options will take a small number of traditional pay TV subscribers, but the shift in the pay TV sector will be evolutionary, not revolutionary," said Moody's Vice President Karen Berckmann.

One advantage for distributors is that content owners are not pushing too hard for change. "Content providers are treading cautiously so traditional cable operators now have the chance to build financial flexibility and prepare in case industry fundamentals change more significantly."

Some would argue from history that is likely to happen. Change will be incremental until the inflection point is reached. Then change goes non-linear and exponential.

The danger is that an incumbent has not prepared in advance for the rapidity of the eventual shift. The greater threat is that the incumbent simply does not possess the desire and skills to make the transition.