The U.S. pay TV market saw a net loss in subscribers for the second quarter of 2013, in a development that should have traditional pay-TV operators concerned. Consumers have yet to take to cord-cutting in any serious numbers, but the fact remains that consumers are seeing a proliferation of options for receiving TV content beyond the standard old-school set-top-box model. And that, eventually, will have a significant market impact if existing market trends continue to play out.
The Waning of Pay TV
The Federal Communications Commission said in a report late last year that the average cable bill for expanded basic service has increased 6.1 percent annually from 1995 through 2011, rising to $57.46 from $22.25. The average American household spent close to $86 per month on cable packages in 2011.
However, the typical number of channels in a package rose to 124, up from 44. And, the price per channel dropped three cents, to 57 cents. Do consumers feel they’re seeing value for their money?
Perhaps not. Pay-TV as a whole shed 352,000 subscribers in the second quarter. And in fact, IPTV was the only segment of the market to see growth in the second quarter. According to HIS, AT&T U-Verse, Verizon FiOS, regional telcos and Google together saw a net addition of 398,000 during the April to June period, up from 304,000 one year earlier.
Cable was the biggest loser, shedding 588,000 subscribers. That’s up from the 598,000 customers that the segment lost in Q2 2012, but still not great news. And satellite, which has traditionally grown but has hit rougher times in the past year, lost 162,000 subscribers, up significantly from the 62,000 it lost a year ago.
Based on the number of total subscribers at the end of the period, IHS found that cable claims 55 percent of the U.S. pay-TV market, while satellite held 34 percent and IPTV stands at 11 percent and growing.
“Of the three segments in the U.S. pay-TV market, the IPTV sector is enjoying growth, especially in urban areas where it is luring subscribers away from satellite,” said Erik Brannon, analyst for U.S. television at IHS. “In particular, satellite’s lack of a true high-speed Internet service or a triple-play bundling option puts it at a disadvantage when competing against IPTV and cable. Cable, meanwhile, has its own problems, including disagreements between operators and content providers over rising programming costs that squeeze customers in the middle.”
So where does traditional pay-TV stand with the U.S. public? New research from the Consumer Electronics Association (CEA) found that 83 percent of U.S. households still receive a subscription—meaning that penetration is down 5 percentage points in three years.
“Consumers have moved away in droves from traditional broadcast television thanks to a surge in programming alternatives available through wired and wireless broadband connections,” said Gary Shapiro, president and CEO of CEA.
By 2015 there will be an estimated 119 million connected devices, including the TV, delivering broadband Internet to TVs in U.S. homes, a 51 percent increase from the 78.5 million currently Internet connected today, according to The NPD Group. CEA meanwhile found that mobile connected devices are seeing the fastest increase in U.S. household penetration rates. This, combined with increasingly accessible Internet-sourced television programming and increasing household ownership of Internet connected televisions and other devices (games consoles, Blu-ray players), means that barriers to crafting a rich TV experience outside of the cable, satellite and IPTV world are falling, and falling rapidly.
The CEA study found 28 percent of U.S. TV households receive programming on their TVs through the Internet. In fact, 4 percent of TV households report using the Internet exclusively as their source of television programming for their TVs.
Consumer Options for Ditching Cable Score High in Satisfaction Levels
Online streaming sites like Netflix, Hulu Plus and HBO Go continue to grow in popularity — Netflix alone has more than 36 million subscribers as of April, making it the world’s largest subscription video service. But consumers also have plenty of sources for free programming too. Both segments score well with consumers when it comes to ease of use and content availability—meaning that there are potentially darker clouds on the horizon for cable.
According to The NPD Group, a subscription video on demand (SVOD) options like Netflix drives the most online TV streams by far. However, the incidence of consumers who used SVOD and free streaming in 2012 was relatively equal. About 12 percent of U.S. TV watchers reported streaming TV shows for free, compared to 14 percent who watched a TV show via SVOD.
“Over half of the viewers for streaming TV are between the ages of 18 and 34, so the YouTube generation is evolving from short-form and user-generated content to TV shows and, like YouTube, they can watch where and when they want,” said Russ Crupnick, senior vice president of industry analysis at NPD. “Despite the attention lavished on tablets and phones, an astonishing 83 percent of free TV streaming programs are viewed on a computer.”
Nearly all broadcast and cable TV networks offer free streaming of their programming via the Internet; however, based on NPD’s latest information, consumer usage of free-streaming TV sites varies. Hulu.com dominated free streaming TV, accounting for 43 percent of total streams during 2012. After Hulu, the five broadcast network sites (CBS.com, ABC.com, FOX.com, NBC.com, and CWTV.com) accounted for another 30 percent of total streams. Four cable TV sites -- abcfamily.com, comedycentral.com, MTV.com, and A&ETV.com -- round out the top-ten free streaming TV sites.
Critically, NPD’s research shows that streaming consumers are very satisfied overall with the experience. All of the top 10 free streaming sites have strong consumer feedback with 75 percent or more of each of these site’s users reporting that they intend to return to the site in the future. Hulu.com, in particular, has very committed users, given that two-thirds say that they “definitely” will return to the site.
These free sites generally perform well on convenience and site organization too. Most of them also perform well on current release availability; however, Fox.com streamers rate the site much lower on this measure, due to the fact that Fox generally delays availability of its programming. “The consumer response to program availability on Fox, speaks to the often-controversial question of whether the audience detects shows that are windowed,” Crupnick said.
Also, it’s no secret that consumers are increasingly looking to personalize their TV experiences in terms of where and how to watch content. OTT can beat cable at that game as well, considering that OTT usage would appear to vary by device.
“The battle in living rooms across the U.S. isn’t only between people deciding what to watch, it’s between the devices vying to get content onto the screen,” said John Buffone, director of the device practice of Connected Intelligence for NPD Group. “Consumers have a lot of hardware options, on average 1.5 internet devices per connected TV. When it comes to watching streamed content, TV viewers have to choose between the unique set of applications, user interface, and other characteristics offered by each device.”
While connected video game consoles are projected to see the lowest percent growth in installed units, they will remain the primary device delivering Internet to the TV. By 2015 the number of installed Internet connected video game consoles is projected to increase 22 percent as consumers begin to swap out their existing consoles for next generation consoles that rely heavily on connectivity.
Among those using their consoles for gaming, the report quantified a variety of non-gaming activities. The activity with the highest rating among PS3 users was watching a DVD (34 percent) followed by watching a Blu-ray disc (30 percent). Users of the Xbox 360 utilize the device for watching You Tube (24 percent) and watching DVDs (23 percent), while Wii Users highest non-gaming activity was to stream a movie through Netflix (21 percent).
Takeaways for Cable
When it comes to the impact that over-the-top (OTT) content is having today on the business models of cable and broadband operators, it may not all harken dark times ahead. A global survey of cable and broadband providers by Incognito Software found that nearly 70 percent of providers said that they recognize new business opportunities presented by OTT services, far outweighing the number of respondents who acknowledge the competitive threats.
Some providers are launching their own proprietary OTT services (22 percent). In North America, nearly all operators are deploying TV Everywhere to capitalize on consumer thirst for multiscreen viewing. Many operators are also rolling out service add-ons — such as unlimited video streaming or speed boosts — to sweeten the pot for consumers. The vast majority of respondents employ more than one strategy, or plan to employ more than one strategy in the future (70 percent).
Of the providers who reported growth in bandwidth consumption, 75 percent attribute this increase to streaming video sites. Notably, that OTT usage is driving network capacity upgrades and an increase in new policy and monitoring implementations to manage the network for congestion and the user experience. Software and management investments can be leveraged down the road to implement unique hybrid offerings that bundle OTT with broadband (which remains a growth area for cable) and scaled-back TV packages. Nearly 82 percent of respondents said that they have already upgraded their network infrastructure to cope with increased subscriber bandwidth usage.
"The widespread growth and popularity of OTT content across multiple devices is forcing cable operators to rethink their business models and how best to add value to their subscribers — and the survey results show that there is no single answer when looking at operators of different sizes and across multiple geographies," said Stephane Bourque, president and CEO of Incognito Software. "Whether operators take a positive or negative view of OTT content, one thing is constant: their network usage is going to increase. Investing in better bandwidth monitoring and management tools will allow them to offer more customized services on a per-subscriber basis, which will ensure customer satisfaction and loyalty in the long run."
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