Some interesting data has been surfacing about our TV-viewing habits. However, much of the information seems contradictory, muddying the picture. Does cord cutting mean Americans watch less TV than before, or more?
Are streaming video services like Netflix (NFLX), Amazon (AMZN) Prime and Apple’s (AAPL) iTunes killing cable TV? With all the white noise obscuring what’s going on, it can be difficult to determine what trends are developing, who’s driving them and who stands to benefit.
Let’s start with the who. When it comes to change and technology, high school and college students often lead the way. They’re the ones that first picked up on social networking sites like Facebook (FB) and they’re on the leading edge of the viewing behavior changes now hitting the TV industry.
I have a teenage daughter. She has a computer in her room, but still watches plenty of television programming — too much, from my perspective as a parent. However, none of it is live; YouTube and iTunes streaming are the primary sources of video content on her computer and her iPad.
Her preferred method is binge watching, or waiting for a year’s worth of episodes from a TV show, then watching the entire season in a few marathon viewings on NFLX. And she’d just as soon watch it on a smaller display like a computer, iPad or even her iPod as on one of our big screen TVs.
Everything about this is different from the traditional model the TV business developed around — it means no prime time and no advertising revenue for the networks. And by some metrics, it indicates TV is dying. At the same time, when you factor in TV shows that are streamed over the Internet and time-shifted (saved on a DVR), then The Atlantic argues the amount of TV being watched by Americans is actually higher than ever.
So what, exactly, does the future hold for TV? Everything is subject to change — we’re talking teenagers and technology here, two of the most volatile things on Earth — but this is how I see it right now.
Television Networks
The companies producing the content don’t need to be worried about losing viewers. Whether the programming is on cable or streaming, it’s being watched. The issue is payment for the content, since networks are seeing advertising revenues slide (they’re down an estimated 7% this year). More product placements (advertising that’s not removed during streaming or downloading), lower-budget shows and higher licensing fees are in the future.
TV Manufacturers
Lost in all this talk have been the Sonys (SNE) and Samsungs (SSNLF) of the world, but they have plenty of reason to be worried. “Good enough” quality digital music in the form of MP3s, streaming and portable wireless speakers completely trumped the higher quality of CDs and traditional stereo systems. The same thing seems to be happening with video. Even as manufacturers are hoping to rejuvenate their struggling TV sales with big, expensive, 4K UltraHD sets, teens seem perfectly happy to watch a low bit-rate stream on their tablet or even a smartphone.
Cable Providers
Theoretically, they should be in a neutral position. If people are cord cutting and ditching cable TV for streaming video, it would make sense that they’d just end up paying the cable company more for faster broadband with a higher data cap. That one-for-one replacement scenario doesn’t seem to be playing out, though. For example, in Q2 Time Warner Cable (TWC) lost 191,000 paying video (cable) subscribers; countering that, it gained only 8,000 new broadband data subscribers.
Streaming Video Services
These companies could be the big winners — NFLX is up 300% this year, showing plenty of investor confidence — but long-term success will depend on whether NFLX can continue to source new content at reasonable rates and continue to gain paying subscribers. (Account-sharing has been a problem for the network.)
At the same time, licensing costs are up 700% over the past two years. As TV networks lose ad revenue, their response is to make some of that back by jacking up the costs for NFLX and others to stream their content. Avoiding escalating fees is one big reason why Amazon Prime, NFLX and Hulu are moving toward producing their own content.
If there’s a missing piece of the puzzle, it’s this: If new broadband internet subscriptions aren’t keeping up with cord cutting cable TV cancellations, how are people watching those streaming videos? Surely teens are not racking up 20 hours a week of TV over a cellular connection?
According to Business Insider, that missing piece is free Wi-Fi. Between the workplace, college dorms and public Wi-Fi hotspots, people have access to so much free Wi-Fi they’re able to survive and get their TV fix merely by hanging around where there’s free Wi-Fi. Even if you’re not into watching NFLX while sitting in Starbucks (SBUX), in the time it takes to drink a grande Skinny Cinnamon Dolce Latte, hours of TV shows could have been downloaded to a tablet, smartphone or laptop for later viewing.
If cable providers raise broadband fees to make up for lost TV subscription revenue, they risk having more customers jump ship to join the free Wi-Fi bonanza.
Changing the Channel
New TV series are more likely to follow the Arrested Development model than the current network/cable combo. They’ll produced in-house by a streaming video service with the entire series released online in one shot, keeping down licensing fees, attracting new subscribers due to exclusivity and satisfying those teens who want content on demand and online. (And they might even grab a few award nominations along the way.)
So, TV is a business in flux. Teens seem to be leading a charge to a future where content is delivered over the Internet, on demand, driving us toward cord cutting. Ultimately, we don’t know what the business is going to look like in a decade, but the bets now are on streaming services like NFLX coming out ahead.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.
