If you gave or got a TV set, game console, Blu-ray player or DVR for the holidays, you might become the kind of person who scares executives who run movie and television production studios, broadcast and cable channels, and cable and satellite systems.
Many of these devices now make it easy for people with home broadband networks to feed content from the Internet, including Hollywood movies and TV shows, onto their TVs.
What media moguls fear: 2011 could become the year when increasing numbers of people watch Web TV content from sources including Netflix, iTunes, YouTube, Amazon, Vudu, Hulu Plus and Crackle — and trim or even cancel their monthly subscriptions for cable, satellite or phone company TV service.
“You can’t have a discussion in the media business today without this becoming the sole topic of conversation,” says Craig Moffett, a media analyst at financial services firm Bernstein Research. “This is the whole shooting match.”
It’s sure to be a big topic this week at the International Consumer Electronics Show convention in Las Vegas, where companies will unveil the new Web-enabled TV devices they’ll sell this year.
There’s still wide disagreement over how many people will take to Web TV and how quickly they’ll do so. Research firm SNL Kagan estimates that 16.5 million homes have a Web TV device and 2% use it to watch Hollywood TV shows and movies.
But most everyone agrees that the proliferation of broadband-enabled devices could lead to the biggest revolution in viewing habits since the advent of cable TV in the 1970s.
“The pace of change here has been mind-blowing,” says Shawn Strickland, Verizon’s vice president for consumer strategy and planning. “We’ve been looking at this issue for the better part of a year, and our perspective has pretty much done a 180” to a belief now that pay-TV “cord cutting” — industry jargon for consumers who drop their cable or satellite TV service — “will happen.”
If he’s right, Web TV could upend the pay TV industry that generates about $140 billion a year from ad sales and consumer subscription fees, says analyst Laura Martin of financial services firm Needham and Co.
The pieces are falling into place.
SNL Kagan forecasts that by 2014, about 46.3 million homes will have at least one TV with a broadband connection to the Internet and 7% of all households will depend on the Web instead of pay TV to watch professionally produced content.
That could lead to a world in which “low-cost streaming services like Netflix will increasingly become a ‘good enough’ substitute for traditional pay TV,” says analyst Spencer Wang of financial services firm Credit Suisse.
Increasing content online
Any forecast has to be taken with a grain of salt, however, because we don’t know yet the extent of programs people will be able to see online.
Most of the content legally available on the Web now is old, requires a subscription or rental fee or comes from broadcasters who already also offer their shows for free.
It’s great for fans of, say, the classic sitcom The Jeffersons or last year’s episodes of Showtime’s Dexter. But there’s no free lunch for people who want to watch the new season of HBO’s Big Love, the Super Bowl or American Idol.
It’s unclear whether that will change soon. Seven companies — CBS, Disney, Discovery, Fox, NBC Universal, Time Warner and Viacom — account for about 90% of all the professionally produced video that people watch.
“It’s hard to imagine that they will shoot themselves in the head” by offering more of their hottest shows online in a way that undermines their lucrative relationships with pay TV providers, Moffett says.
But some of the Internet’s biggest powers are working to change that:
- Apple last fall relaunched its Apple TV box, which feeds Internet video to the electronic hearth. The company’s now cutting deals with studios including Disney and Fox for Apple’s iTunes to rent episodes of some recent TV shows for 99 cents apiece.
- Google has introduced Google TV, a service that helps people find TV programming on the Web, including videos on Google’s YouTube. The major networks are blocking their shows from Google TV, at least for now.
- Netflix and Hulu are signing agreements with studios and program producers as the two vie to become the Web’s leading subscription service for streamed movies and TV shows.
“I’m really shocked at how much content is available online,” Verizon’s Strickland says. “Every day, you’re seeing a new announcement that’s breaking down the wall.”
Studios may be forced to accommodate Web TV if they see increasing numbers of people using the Internet in their living rooms to play online games, shop or keep up with their Facebook friends on their TV, says Jeremy Allaire, CEO of Brightcove, a broadband video service company.
“That’s going to create the basis for enough adoption” of Web TV to make pay TV cord-cutting a reality, he says.
Those who expect a Web TV surge also observe that many consumers are fed up with pay TV’s annual rate increases. The average cost for basic service — the programming tier that includes popular ad-supported channels such as TNT, USA and Discovery — will hit $49.72 a month this year, up 63.7% from 2000, SNL Kagan projects.
Pay TV providers say that’s still a bargain: A typical subscriber receives about 130 channels now, compared with 63 in 2000.
But no one regularly watches all 130 channels. And the average monthly cost for each channel that people in a household actually watch at least once a month — including the most popular programming from local TV stations that transmit ABC, CBS, Fox and NBC — has increased to $1.84 from $1.36 in 2000, Credit Suisse analyst Wang calculates.
Royce Brown, 53, an electrical engineer who lives near Oklahoma City, decided he’d had enough early last year when his monthly payment for TV, broadband and phone services hit $185. “I just said, ‘I cannot handle any more of this.’ “
He canceled his subscription to AT&T’s U-verse television service. He replaced it with an Apple TV box for Web video and a rabbit-ear antenna to get local over-the-air channels free. Brown also decided to spend $8.99 a month to subscribe to Netflix, which largely streams movies and TV shows to devices including his Apple TV.
“I now have more shows that I want to watch, available to me at any time,” Brown says. With Netflix, a $42-a-month broadband subscription from Cox and a MagicJack, a device that enables users to make cheap phone calls via the Internet, “I’m saving a lot of money.”
Web TV isn’t for everyone: For example, Brown can’t watch CNN’s live newscasts or live sports events on ESPN.
Even so, stories like his led to speculation that a groundswell of Web TV switching already has begun. Lending credibility to the idea: Total pay TV subscribers declined in the second quarter — for the first time ever — to 100.1 million, down 216,000 from the previous quarter. The industry lost an additional 119,000 customers in the third quarter.
Pay TV companies say the Web had little or nothing to do with the declines. Many young adults in this slow economy continue to live with their parents instead of moving to their own places and becoming new pay TV subscribers, they say. And companies also lost customers who bought subscriptions in 2009 because they mistakenly thought that would be the only way to watch TV after broadcast stations made the federally mandated switch from analog to digital transmission.
That argument will become unpersuasive, however, if pay TV providers continue to lose customers in early 2011, Strickland says.
Don’t expect much change?
Skeptics say that forecasters who expect a dramatic change to Web TV don’t appreciate how important television is to most people — and how comfortable they are with their current viewing habits.
The pay TV business “isn’t going to change much” in the next three years, says Leichtman Research Group President Bruce Leichtman. Cord-cutting “is happening on the fringes. I’m not seeing anything substantial.”
Indeed, ordinary viewers who watch TV every day and enjoy talking with friends about the latest shows may find Web TV more expensive and less satisfying than pay TV.
“Somebody who uses Apple TV only could be spending easily $100 to $120 a month just (renting shows) for a few hours a day,” says TiVo CEO Tom Rogers. That’s why most people who are attracted to Web TV think of it “not as a substitute, but as a supplement” to pay TV.
Even people who are comfortable with the programs and prices on the Web, and want to use it to cut their monthly subscription bills, may find their bargains short-lived.
That’s because cable operators also account for about 54% of all residential broadband subscriptions, and their market share is growing. Cable lines typically offer faster speeds than phone company DSL services, which account for 30% of the market.
Cable companies say that if they begin to lose pay TV subscriptions, they’d probably have to charge more for broadband.
“We are earning a reasonable return on capital, but not an excessive one,” says Time Warner Cable CEO Glenn Britt. “There’s perhaps an illusion here that (Web TV offers) something that’s free. It’s not.”
Cable companies could raise prices across the board. Or they could begin to charge customers for the amount of broadband service they use, much as electricity, water and gas utilities do. Because video uses a lot of Internet resources, people who cut their pay TV service in favor of Web TV could end up paying much higher broadband fees.
But cable companies also would enter a minefield if they fiddle with broadband pricing.
Competitors, including new and growing wireless Internet services, could step in and use a cable price increase “as a way to gain market share,” Allaire says. If that didn’t keep cable broadband prices in check, he believes the Federal Communications Commission, which wants to promote widespread broadband usage, “would step in and take action.”
But most major cable, satellite and phone company TV services are trying to have their own angle on Web TV. They are beginning to make it possible for their subscribers to watch their pay TV programming via broadband, particularly on portable devices such as smartphones and tablet computers.
“We intend to be in all those devices,” Britt says. He sees Web TV “as an opportunity, not a threat.”
One way or another, then, the Internet is about to reshape the USA’s favorite pastime.
“An awful lot of mainstream households for the first time are recognizing what’s out there in broadband,” Rogers says. “And their mind-set for the time being is, this is more choice — and this is really good.”
