An Unstoppable Shift?

Is linear TV dead? Not according to the conventional wisdom. But while some say it’s alive and well, it might be more appropriate to label it “Live and Well.” That’s because live TV—from sports to game shows to reality “event” programming—seems the last slice of programming for which we must tune in at a specific time to get the full experience. Go outside the realm of live TV (especially sports), and consumers are fast losing interest in appointment viewing. In most cases, it just doesn’t make sense. In fact, according to Comcast’s just-released annual “TV Pulse Survey,” some 62% of consumers have used time-shifting (VOD, DVR or online) to watch primetime TV shows—and that’s up more than 60% from one year ago (and up 80% from 3 years ago). The trend couldn’t be more clear. Most of us now admit that we have absolutely no idea when at least some of our favorite shows actually air on linear TV. Why would we? Many are available on numerous platforms at the touch of a button—whenever and increasingly wherever we want to watch them.

 

So no big revelation, right? The cable and larger TV industry has been talking about this phenomenon for years. But now the numbers are adding up just as the cable industry faces unprecedented competition for eyeballs. Cable can either be the best place to time shift with super-responsive VOD, the “network DVR,” easy-to-use authentication and other new features or it can watch those eyeballs gravitate to “over the top” technologies such as gaming consoles, computer screens and mobile devices. These devices aren’t always “over the top,” of course. In addition to basic authentication, cable operators have plenty of opportunities to offer apps and other services that integrate into any additional platforms (and many are doing so). But the mere existence of these options creates an urgency that the cable industry has never really faced in its long history. Perhaps it’s alarmist to call the lure of over-the-top content an existential threat. But then again, what else would you call it? Authentication will likely stop some of the potential bleeding, but it’s still unclear whether consumers will bite en masse. And it’s also unclear whether content owners—both cable nets and the actual producers of individual shows—will at some point stop relying so heavily on traditional distributors to reach viewers. Yes, they need those license fees. That’s a big carrot and stick, all wrapped into one for cable operators. But the world is changing fast. Perhaps too fast.

 

Some recent events deserve attention:

 

First, consider Netflix. In 2008, the online streaming and DVD rental firm struck a deal with Starz. A few heads turned, but many pundits wrote it off as an isolated case because Starz had just shut down its own streaming service and was looking for a new home. But it turns out that was just the beginning. Last month, Netflix inked a deal with indie production house Relativity Media and then just this month struck a $1-billion deal with Epix that spans five years. Can you say “momentum”? It’s certainly unclear whether other major studios (Epix reps MGM, Lionsgate and Paramount) will follow suit, but Netflix is no longer “that DVD rental place.” It’s becoming major competition for cable operators’ VOD businesses, not to mention traditional distributors’ roles as the main outlets for premium cable networks. Bloomberg reported this week that HBO co-pres Eric Kessler isn’t keen on a deal with Netflix, preferring to maintain exclusivity over big hits like “True Blood” and high-value archived content like “The Sopranos.” But how long can premium nets like HBO and Showtime hold out if Netflix keeps picking off studios and other content owners? True, Epix needs money more than HBO and Showtime, perhaps giving them one billion reasons to saddle up to Netflix. But until only recently, Epix hadn’t been giving Netflix the time of day. Minds can change. And often it’s momentum that eventually results in a tipping point.

 

Secondly, there’s Hulu, which is shifting much of its best content to a pay model and now reportedly even planning an IPO. Once again, this is an example of forward motion that shows little sign of slowing down. It’s becoming less likely that even successful implementation of TV Everywhere and authentication will push Hulu to the sidelines. In fact, consumers have become so trained to use Hulu that the site may soon find itself in a position similar to Netflix: Lots of momentum that eventually tempts more content partners to jump on board. Even Viacom, which exited the Hulu venture in March to the collective groans of Comedy Central fans everywhere, could be tempted back into the mix at some point—especially if Hulu continues to do a good job aggregating eyeballs.
That is, if Viacom doesn’t do a deal with Netflix first.

 

And how’s this for scary? How about a merger between Hulu and Netflix? Why not? Sure, it’s a potential “too many cooks in the kitchen” scenario because of the unwieldy number of partners that would have to sign off. But if both sites continue to build audience and content, it could be a powerful combination. Let’s face it: These sites have millions of subscribers/users. They’re fast becoming Internet-based VOD cable systems that ironically use the broadband pipe that cable built to deliver competitive content to subscribers. The power of these over-the-top services has the potential to turn cable’s worst nightmare of becoming a “dumb pipe” into a reality in just a few years. Is that likely to happen? Not under the current business models, which heavily favor traditional distribution. But things change. Sometimes faster than we think.

 

Of course, for the time being TV distributors have much going for them. People still watch most of their content on traditional linear TV, and advertisers still spend most of their money there. And distributors can continue to spook content owners by threatening to slash license fees if they don’t stop putting so much stuff online and/or doing deals with the likes of Hulu and Netflix. But while those threats are scary in a world in which all of that online content is free and garnering little in the way of ad revenue, they gradually start to lose power as content owners get a piece of online subscription fees and funnel bigger pieces of ad deals to online venues. While over-the-top services aren’t going to kill traditional distribution any time soon (and perhaps never if authentication truly takes off in a big way), the existential threat is out there. Ignoring it or writing it off as a transitional hiccup on a road back to the good ole’ days may be a bit naive. The good ole’ days are gone. The new days are here. And they’re a lot more complicated.