Millennials are driving transformation of the paid video market, accelerating a wave of disruptive innovation that pre-dates the Internet.
That’s a message that sounded loud and clear last week at the International Consumer Electronics Show in Las Vegas, where incumbents and start-ups alike announced dramatic new products and services, and where executives from leading incumbents competed to predict the most radical future for the content market, long characterized by subscribers paying for bundles of licensed channels they watch at home.
The theme emerged early on in the show with Dish Network’s announcement of SlingTV, an Internet-based alternative to traditional cable and satellite television service — including Dish’s own.
For an initial price of $20 per month, SlingTV subscribers will have access over a dozen channels, including Disney properties and other channels popular with young adults, such as Cartoon Network and Adult Swim. But the big get for SlingTV is Disney’s ESPN, whose sports programs are currently only available online to existing pay TV subscribers.
Dish’s announcement created significant buzz at CES, garnering SlingTV three awards in Engadget’s annual Best of CES contest, including the top Best of the Best prize.
While SlingTV may be the beginning of the end of the traditional pay TV model, it is by no means the fatal blow. The service will allow users to access live programming, including commercials, using their own Internet connection, and stream content to a variety of devices including Xbox One, Amazon Fire, and Android tablets. But the service is limited to one stream at a time, and does not include DVR or other recording features.
It is also not the first product from an existing provider to challenge the industry’s conventional wisdom. Over the last decade, improvements by ISPs in Internet infrastructure have made it more practical to watch streamed high-definition programming on wired and mobile devices. New services have exploded, many with the active participation of the content and access providers–who, after all, are also the largest ISPs.
(Collectively, the FCC refers to facilities-based program access providers, whether by cable, satellite, telephone or fiber-optic cable, as Multichannel Video Programming Distribution services, or MVPDs.)
The new services include other “over-the-top” Internet content, including from Hulu, Netflix, Amazon, Apple and Internet-only “channels,” such as those curated by YouTube, by far the dominant provider of unaffiliated content.
MVPDs are likewise offering more Internet-based on-demand programming for their subscribers. And individual networks and channels including Fox and CBS allow online access to some or all of their programming to existing subscribers. Fox recently launched the FxNow service, for example, which allows users with an existing subscription to stream any episode of “The Simpsons” any time to a variety of devices (aka, how I spent my Christmas vacation).
Before Dish’s unveiling of SlingTV, the video market was rocked last year by HBO’s announcement of an Internet-only subscription for its programming, previously only available to existing subscribers. HBO had repeatedly insisted it would never offer its programming other than through MVPDs.
The deconstruction of the bundled model, it seems, is now the order of the day, introducing substantial business risks for both content and access providers.
While most MVPDs are well-positioned to shift from offering packages of licensed channels to offering unstructured high-speed Internet access, the transition will not be easy for the incumbents, or their existing customers. And content providers will find it increasingly difficult to subsidize lower-rated channels (which includes some of the worst and some of the best programming) by forcing providers to include them along with their more popular cousins.
Last year, I testified before the Senate Commerce Committee about these trends, which have accelerated in the subsequent months. I noted that even though the average price per channel had been steadily declining, the number of channels in even basic packages was increasing, leading to higher monthly subscription prices.
The increases are deterring new subscribers from signing up and pushing consumers at the margins to cut the cord, encouraging the kind of technology-driven better and cheaper innovations that Paul Nunes and I call “Big Bang Disruptors.”
And though many consumers assume the price increases are imposed by their MVPD, much of the additional monthly fees are passed through to the programmers. According to the FCC, as up to 60 percent of the average cable bill goes directly to mega-producers such as Disney, Fox and CBS. The average cable viewer pays nearly $6 just for ESPN, whether they watch it or not.
For those who watch little else, SlingTV will for the first time offer fans the opportunity to license ESPN more or less a la carte, albeit without the ability to record and replay its programming. Still, live sports are one of the few forms of content that haven’t been available over-the-top. So Disney’s defection, like HBO’s, may further destabilize the MVPD market, encouraging even more realignment of the players as carriers look to improve their leverage in increasingly complex multi-platform deals.
The more the programmers dig in an effort to protect the income they get from MVPDs, ironically, the faster they are assuring the eventual collapse of the old model. But the programmers’ strategy is isn’t as schizophrenic as it looks. Their hope is that Internet-only services will only attract those who don’t already subscribe to an MVPD service and who aren’t likely to in the future.
If SlingTV and its competitors begin to cannibalize the existing market, programmers may decide to press pause. According to Re/Code, Disney and perhaps the other major networks participating in SlingTV reserved the option to bail out of the service if too many consumers sign up for it.
For now, widespread cord-cutting seems unlikely. While MVPDs have lost millions of subscribers in the last few years, content providers have placed severe restrictions on their licenses with over-the-top alternatives. Consumers, it’s true, could soon cobble together an alternative to MVPD service that might approximate existing content options and viewing flexibility. But adding SlingTV, Netflix, and Hulu Plus together would still cost about $50/month, and leave a number of gaps including local and some network programming.
Still, the rapid introduction of so many new models and pricing options suggests that the end of one size fits all approach to content aggregation and distribution is a question of when, not whether.
And as with most Big Bang Disruptions, the change will likely continue to proceed gradually—and then suddenly.
Why? The real shift here is demographic. As viewers who are today under the age of 30 become a bigger part of the market, their very different viewing habits will force substantial reinvention of the video industry. The millennials, perhaps a majority of them, have already cut the cord to incumbent pay TV services. Many never had them.
And these are clearly the consumers that new over-the-top services are hoping to attract. “Millennials don’t choose paid TV,” SlingTV CEO Roger Lynch told CNET. “So we designed a service based on how millennials consume content, with no contracts. You can come and go as you please.” For the millennials, it may be a la carte, over-the-top, whenever and wherever programming or no paid programming at all.
In the interim, we are already seeing the emergence of two video markets: one for older consumers who grew up on the traditional MVPD model, and another for younger consumers who are put off by having to pay for channels selected for them, many of which they are unlikely to watch.
SlingTV suggests an increasingly uneasy alliance between content and access providers, targeting a market they have so far failed to engage. And they are trying to do so without the rest of us noticing — keeping the old model intact as long as possible so it can subsidize experimentation with new services.
But the hopes of incumbents to control the timing for a new video market may prove ephemeral. That’s because a new kind of competitor is also putting pressure on the industry to either reinvent itself or be dismantled for parts. Improvements in Internet and video technology haven’t just changed the economics of producing and distributing content for the incumbents. It’s also given rise to a new universe of programmers — often the consumers themselves — who produce a remarkable volume and range of original content.
Looming ever larger in the background of these seismic shifts is the rise of advertising-supported micro-channels, like those that attract millions of viewers on YouTube. From highly-produced scripted shows to cat videos and everything in between, younger consumers increasingly don’t recognize the distinction between old and new media.
The shift is especially visible in the growing market for mobile video consumption. At a CES panel discussion that featured senior technologists from Verizon, AT&T, and Ericsson, George Strompolos, a former YouTube executive who is now chief executive of video sharing service provider FullScreen, in 2015, 65 percent of video views will take place on mobile devices.
CBS chief executive Leslie Moonves, at another CES event, acknowledged that reality. “The real reason for going over the top is not to be able to circumvent MVPDs, it really isn’t,” he said. “It’s to make our content available to people who are using mobile.”
In the midst of this revolutionary change, policy makers have been notably absent, and often seem unaware that it is even taking place. Though lawmakers and regulators have fretted for years about a perceived lack of competition and packaging choices for television programming, it is worth noting that all of these disruptions are happening in spite of, not because of, the legal rules and regulations that affect providers.
MVPDs are severely constrained, for example, by rules that require them to carry local channels and to pay to retransmit programs that are otherwise supported by commercial advertising. And they are forbidden from buying network programs from anyone but the local affiliate, setting up the kind of negotiating stalemates that have led to some notorious programming blackouts — blackouts Congress and the FCC wring their hands over, even though their own outdated rules are largely the cause of them.
Innovators trying to work within this tangle of conflicting regulations can find themselves caught in their web. In some sense, for example, there is little difference between SlingTV and failed start-up Aereo, which also offered subscribers access to a limited number of channels on devices connected to the Internet.
Little difference, that is, except that SlingTV is being launched — at least so far — with the consent and cooperation of the content providers, with complex licensing agreements limiting what content is to be streamed to what devices and under what conditions.
Aereo instead used tiny antennae to capture over-the-air programming and then saved it to individual DVRs it housed in its own facilities. Its channels were only limited by the broadcast range of local over-the-air providers, including network affiliates.
Though Aereo captured and recorded broadcast television signals using technologies that would be considered legal if located in the consumer’s home, the U.S. Supreme Court last year found the start-up looked too much like a cable provider to avoid having to play by the same set of rules for licensing and retransmitting content. Yet when Aereo subsequently asked the FCC to give it that status, the agency refused, forcing the company into bankruptcy.
In December, the agency instead proposed simply to change its definition of MVPD to include many of the new over-the-top services, subjecting them to the same set of antiquated restrictions.
That’s just the opposite of what’s needed. MVPDs need to react quickly to the changing dynamics of the emerging video ecosystem, freed from both their protections and restrictions if they have any hope of creating new services that can compete for the next generation of video consumers.
Leveling the playing field by making everyone play with both arms behind their back might be more comfortable for regulators, but it will almost certainly prove to slow rather than enhance new forms of competition that will benefit consumers across the board. As FCC Commissioner Ajit Pai wrote at the time, “In evolving markets like these, the government should be hesitant to extend the outdated regulations and classifications of old.”
The video revolution, it seems, will not be televised. At least not in Washington.
Larry Downes is co-author with Paul Nunes of “Big Bang Disruption: Strategy in the Age of Devastating Innovation” (Portfolio 2014). He is a project director at the Georgetown Center for Business and Public Policy.