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Cable Technology Feature Article

March 14, 2012

'Over the Top' Cable TV Might Be Closer, But It Still Isn't Quite Here

By Gary Kim, Contributing Editor

If you accept the notion that the video entertainment subscription business has reached, or passed, the peak of its product life cycle, the obvious question is what product might arise next to take its place. Intel (News - Alert), like many others, thinks it knows the answer. Most any answer is going to involve Internet delivery, in some way. 

For the moment, about all one can say is that cable TV and satellite TV are facing rather steady “drip, drip, drip” market share loss to telco providers. But those market share shifts are different from what Intel wants to do.

Intel is developing an Internet-based TV service that it hopes to sell to U.S. consumers, a strategic shift for the chip maker that makes it the latest technology company to look at a foray in the pay-TV business.

Intel's interest in doing so is one more example of a firm deciding it wants to "move up the stack" in terms of end user value. Instead of supplying components to other retailers, Intel would vault up to become a service provider itself.

Among the attractions are the sheer size of the business, about $65 billion in annual revenues for distributors, and a product that can claim a relationship with nearly every household in the United States. But Intel, and others, face huge challenges. Consumers might want the service, but content owners might not want to support it, at least not right now, for fear of cannibalizing the existing business.

Credit Suisse analyst Stefan Anninger says that in the third quarter of 2011, 83.2 percent of U.S. households bought a video subscription from some provider, down less than one percent from the third quarter of 2010. Nor is that necessarily a clear indication of demand change. In fact, one might argue that customers are not so much abandoning subscription video services as refusing to buy when a new household is formed.

While there were 1.8 million households formed in 2011, only 16.9 percent of them signed up for such services. At the margin, for whatever reason, new households are simply exhibiting radically new behavior where it comes to buying of TV entertainment subscriptions.

It might be overreaching to argue that the maturation of the legacy subscription TV business means an immediate or near term shift to new online forms of consumption.

Consumers are turning to their iPads, laptops and mobile devices to watch video on the web rather than on TV. But so far that has been largely supplemental to traditional consumption, as Netflix and Redbox, Hulu and YouTube have shown.

Still, only about nine percent of U.S. respondents to a Deloitte (News - Alert) survey say they have stopped buying video entertainment subscriptions from cable, telco or satellite providers, while another 11 percent report they are considering doing so.

Perhaps the important finding, which suggests why virtually everybody believes some form of over the top Internet delivery is the inevitable replacement product, is why people are considering doing so.

The 11 percent who report they are considering abandoning subscription TV services say they now can watch almost all of their favorite shows online.

One would guess that, as typically is the case when product substitution occurs, that the first “switchers” are users for whom the existing solutions have low value, compared to product price.

If you really care about ESPN (News - Alert) or other video subscription channels, you cannot easily replicate the experience online.

The classic example of an early “cord cutter” is the person who doesn’t watch much television in the first place and does not have children or other family members who do enjoy television, making a $100 a month fee “high” in relationship to value.

And that could pose a problem for would-be “over the top” video service providers. Customers who do not value subscription TV might find even existing online alternatives workable products. That will not be the case for mainstream TV viewers, who already have demonstrated high demand for the existing major programming networks and channels.

Nor has Intel, or any other major provider of new “over the top” video services actually gotten programming rights that replicate the sorts of programs offered by subscription video services. The exceptions to date are those providers allowing streaming on a restricted basis, only when a standard video service is purchased.

Edited by Tammy Wolf

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