It goes without saying that the maturation of the linear TV business, and the growth of the streaming business, could have significant repercussions for revenue earned by telcos and cable TV companies in the U.S. and other markets from consumer customers, though not as great an impact as will the development of the internet access business.
The reason is that linear video has become a significant--in some cases very significant--contributor to fixed network telco revenues. Video represents a greater contributor to consumer account gross revenue per account than does voice, for example.
So a clear and key strategic challenge for fixed network providers serving the mass market is how to finesse the transition from linear to OTT formats. Some will point to leadership by Netflix and others as evidence that linear providers cannot make the transition to OTT. We do not know that, for certain, as linear providers have huge incentives not to cannibalize their existing business by moving prematurely to OTT.
Some 13 percent of US homes (15.4 million) now buy internet access but not linear TV services, according to SNL Kagan researchers. Kagan estimates that such cord-cutting homes will reach 28 million by 2021, and possibly more.
It is not a new challenge. Telcos faced the same problem with OTT voice and OTT messaging. Some urged telcos to embrace OTT fully. The problem is simply that the financial returns for doing so (matching OTT prices and plans, for example) would simply destroy most of the existing business, where a strategy of measured decline (the course virtually all telcos have taken) actually produces better financial results.
That, in fact, was the strategy used by AT&T earlier: harvesting a legacy business as long as possible, to buy time to create a new set of revenue drivers.
Nor is lack of leadership in OTT a show stopper. U.S. telcos--especially Verizon and AT&T--have grown more through acquisition than organic growth. When the time comes, assets will be acquired.
So it might not, in that view, be too alarming that the number of U.S. customers relying solely on OTT for video entertainment keeps growing. That is the current pattern, and a pattern that is expected to continue. So the classic past pattern--harvesting the legacy revenue stream while building new revenue sources--will hold.
Steps will be taken to retain as much of the linear business as possible. Effective price reductions (skinny bundles and triple play) are part of that strategy. At the same time, efforts to organically grow the OTT business will be undertaken. Ultimately, the tier-one providers will buy their way into the business. They have done it before. They will do it again.
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