July 25, 2011

Is OTT killing Pay TV?

Over The Top and cord-cutting is back on top on popular blogs as the quarterly results by IPTV and MSOs are released. Believers in OTT think it is epitome of personalized entertainment service, while skeptics argue it is a platform for reruns and for economically challenged people. While my opinion, based on various reported estimates which are shared below, is that cord-cutting due to OTT services is insignificant today. It is clear that OTT services are gaining widespread adoption and influencing consumer preference. This will immensely affect the Pay TV business.

I will call two specific pieces of research here to demonstrate that while currently cord-cutting is not an immediate threat to Pay TV. It is beginning to exert pressure on the incumbents in two ways. (1) It is offering a true multiscreen TV Everywhere experience to consumers and (2) It is nurturing a cord-never generation of young adults. In my opinion the former is exerting pressure on MSO to invest in new delivery channels and the latter is causing them to think about how future revenue will be affected. Now back to the two pieces of research on cord-cutting. The first is from Nielsen and the second from SNL Kagan.

Nielsen's data from Q4 2010 and Q1 2011 indicate that OTT is not driving cord-cutting across the general population. But in a certain demographic group, usually highly attractive to advertisers, the numbers are trending to the caution quadrant for pay TV industry. Nielsen found that users in the 18-34 age group of light TV viewers are consuming more streaming video than any other group. Nielsen notes that this group stream about twice the average amount of video. The million dollar question that remains to be answered is, how will the preference of this group look over time. Will this group turn into the cord-nevers?

This is the second report. It was released by SNL Kagan on July 20. According to this report by the end of 2011 about 4% of us households will use streaming internet video instead of pay TV. This number is expected to increase to 12.1 million, about 10% of US households by 2016. Unfortunately, the drop in the number for pay TV subscribers to 84.9% of the US population in 2010 (from 86% in 2009) and the continuing decline in the rate of growth of new subscribers indicate OTT growth is robust compared to the growth of Pay TV subs.

To me it is clear that while OTT is not eating Pay TVs lunch today, it is altering the premium video market by changing the consumption preference of customers.