Will LInear Video Follow Voice and DSL Patterns?

Are telco voice and high speed access the future model for what happens to the linear video business model? Some might argue that is reasonable.

It just stands to reason that an eventual shift to video streaming could have negative repercussions for some entertainment video distributors, the model and precedent being the replacement of digital subscriber line accounts with fiber to home or fiber to neighborhood replacement services, and the earlier switch out of fixed voice to mobile voice.

In the first switch, fixed line voice customers stopped using fixed voice, and started using mobile instead. Also, the suppliers that got the replacement product revenue often were not the same firms selling the legacy products.

So revenue recipients shifted as the legacy market shrank. But it is a complicated transition.

Where the consumer fixed voice product involved just one or a couple of lines per location (in the days of dial-up Internet access), the advent of mobile voice actually expanded the addressable market to "people, instead of places."

So where a three-person household bought one fixed voice line, it now buys three mobile accounts. "So units sold" grew substantially.

On the other hand, revenue per account arguably is lower for mobile products, compared to fixed products. Where a fixed voice line might cost $50 a month, a mobile account might represent $20 a month, for the voice portion of the service.

But won't linear video distributors also begin to offer OTT alternatives? Yes, Dish Network, for example, already does so. But there is some amount of cannibalization of existing accounts, in addition to net subscriber gains.

We have seen this pattern before, when telcos replaced DSL with fiber connections for Internet access, and earlier when customers switched from dial-up to broadband.

On one hand, a supplier gains a new fiber-based high speed access account. On the other hand, that same supplier also loses a copper-based access account when a customer switches from legacy to optical access service.

PwC’s annual five-year forecast for global entertainment and media shows slower advertising growth rates.

In 2014, PwC predicted advertising would increase 5.5 percent annually over the next five years; now PwC says that rate will slow to just four percent annually through 2019.

In the United States, TV ad spending is growing by just a little more than three percent annually on average, compared to five percent growth rates between 2013 and 2014.

Those dips are happening because OTT services are siphoning off viewers, and ad rates are set by the size of audiences.

That is one example of how the advent of over the top video streaming will act to lower gross revenue and profit margins in the TV business, as has happened in other businesses faced with replacement of legacy products by Internet-enabled products.

Since we are early in the transition from linear to over the top, it is hard to predict the revenue impact on legacy distributors. But it already would be reasonable to argue that Netflix has capped the growth of linear video subscriptions, at the very least, siphoning off growth that otherwise might have gone to pay per view and premium channel spending. In other words, Netflix is a substitute for HBO and Showtime.

Gross revenue might be an issue as well. A Sling TV subscription costs $20 a month. Netflix might cost $8 to $16 a month. A typical basic linear TV subscription easily can run $80 a month. So gross revenue compression is a clear issue for any linear video provider moving to OTT distribution.

And as telcos have found, what one gains can easily be offset by accounts replaced. So far, the displacement in linear video has not proven so large. In 2012, 80 percent of Americans bought subscription linear video. By 2016, 77 percent will do so, PwC forecasts.

But what happens if the mainstream consumer begins to replace linear subscriptions with OTT subscriptions? Perhaps nobody really knows, yet

What percentage of $80 a month accounts drop to $40 a month or are abandoned? Keep in mind that both happened with voice services: a majority of consumers simply stopped buying, switching to mobile voice.

Many consumers pay less because they buy discounted triple play services. If past proves to be precedent, linear video will suffer subscriber losses, gross revenue decline and margin compression. even if some amount of new OTT business is gained.