Research: The Cord Cutting/OTT Debate Continues

While some analysts predict over-the-top (OTT) video services are the beginning of the end for cable subscriptions, others say cable is alive, well and continues to grow. For example, IMS Research is forecasting that U.S. digital cable-TV subscribership will increase by 7.8 million from the end of 2010 to the end of 2015, even as the platform as a whole is forecast to drop by 2.75 million subscribers during the same period.

The firm also forecasts compounded average annual growth of 2.5 percent in digital satellite-TV homes and 20.1 percent in IPTV homes during the same time period. Despite various research firms’ warnings about OTT video potentially causing large-scale subscriber losses for the pay-TV industry, IMS Research continues to see overall health.

According to Anna Maxbauer, senior analyst in charge of the database service at IMS, “Though I wouldn’t call the U.S. cable platform’s recent performance a downward spiral, it’s possible the recent drops indicate a larger permanent change among consumers. I don’t think the cable operators will recover their pre-recession market share without a serious change to their offerings and prices.”

She continues, “The economic downtown continues to challenge consumers’ commitment to expensive services, however we cannot assume everyone that is giving up their pay-TV subscriptions right now is moving to paid or even free OTT services. We also expect that a share of consumers will come back to pay-TV at some point, especially as the economy improves.”

Compared with Netflix’s recently reported monthly ARPU of $12.19, IMS Research says U.S. MSOs aren’t in a bad position, noting that Comcast reported a monthly ARPU of $133.43 for video customers in its 4Q10 results.

“Consumers dropping their pay-TV service aren’t necessarily high-value cable customers. Many are likely basic customers looking for a lower-cost or free video entertainment option,” explains Anna Hunt, principal analyst and author the research firms upcoming report on OTT video services. “Cable companies are seeing continual growth in services such as HD and DVR, and increasing on-demand consumption; video revenues are continuing to grow. As a response to growth in OTT offerings, pay-TV operators are aggressively expanding their on-demand portfolios and incorporating their own OTT strategies with online content delivery; catch-up TV services; and support for portable devices, such as Time Warner Cable’s TV app for the iPad.”

However, this doesn’t mean that OTT’s popularity will wane in any way. Paul Erickson, senior analyst at IMS Research, says, “There are still considerable tradeoffs in content availability when it comes to cutting the cord. People will continue to consume a mix of OTT and traditional pay-TV for a while to come.”

And here’s something to ponder: “It is not unrealistic that, in the future, pay-TV operators’ content can be sufficiently secured and delivered to general consumer-electronics devices on an OTT basis, resulting in increased demand for these connected devices,” Erickson believes. “Future demand for OTT hardware will eventually be driven by the combined appeal of both traditional and non-traditional pay-TV services.”

Netflix And ‘Cord Mending’

In its letter to investors yesterday, Netflix management noted a world where cord mending will replace cord cutting:

“Given what’s happened in the music and newspaper industries, producers of movies and TV shows naturally enough fear Internet services will hurt their existing business. That fear was heightened last year when, during some quarters, total MVPD households in the U.S. contracted for the first time in history, leading to extensive speculation over two possible drivers of “cord cutting”: (1) the rise of entertainment available via the Internet; and (2) the recession, specifically the decline in household formation, rampant foreclosures, and the rise in unemployment.

“Since last year, online video use has more than doubled and the recession has receded somewhat. So, if online video use was driving cord cutting, the behavior would have intensified. On the other hand, if it was the recession that was driving people to drop MVPD subscriptions, cord cutting would have moderated. In fact, not only did cord cutting slow, it became cord mending, with total U.S. MVPD households growing in the latest estimates. 

“Simply put, the data shows that Netflix is a supplemental channel to MVPD. While Netflix is likely to show huge growth again this year, we think MVPD cord cutting will be minimal to non-existent. We hear some stories from customers who have Netflix and no MVPD service, but these are generally people who rely on free broadcast TV (which is now in HD) and supplement with Netflix, rather than switching from MVPD to online.

“Looking at it from all of these angles, content owners that license to Netflix make more money – now and in the future – than content owners who don’t license to Netflix. A few media executives are still vocal about their fears of negative long-term impact on MVPD subscriptions from Netflix, but the evidence continues to pile up against their concerns. Our subscribers overwhelmingly enjoy both their Netflix and the variety of sports, current season TV shows, news and entertainment available through MVPDs.”