The Shakeout in Video Content to the Home

The first round of cord cutting was a distressing challenge for landline telecommunications firms.  They had dominated voice and business communications for a century.  A brief foray in Videotext did not prepare them for the popularity of its sequel – the Internet.  The Internet arrived like a tortoise, but once commercialized in 1995, it soon accelerated enough to support voice, text, video and music delivery.  Increases in retail landline bandwidth (largely DSL and “cable modem”) arrived quickly. The bouquet of websites offering serious, useful, amazing and amusing coverage of every topic recruited Americans to be dedicated followers of the Internet’s wares.   

In the mid- to late 1980s, cable TV fixed the frustrating picture quality of the dozen or so over-the-air broadcast channels that served most communities.  By the mid-1990s, cable television’s DOCCIS standards were in place. Fiber in cable’s distribution network catapulted cable’s capacity to support hundreds of retail TV channels, plus a substantial capacity for high speed retail Internet service.  By the late 1990s, telco landline and cable Internet networks competed for Internet consumers, each frantically seeking to offer faster Internet access.  Cable ISPs retained a product advantage (video TV) until the telephone companies began offering fiber-based TV channel lineups.  Today, just 80% of households buy pay-TV, down from 90% 6 years ago.

Mobile wireless service improved its geographic coverage and its speed available for Internet access.   By 2005, mobile grew beyond voice to become an ISP, and in the process it accelerated the cord-cutting phenomenon that shed about half of all telephone landlines.  Today, only 5.8% of adults have only landline telephone services. Why are we regulating this service like a public utility?

Mobile offered Internet service adequate to reach many of the news, graphics and text sites.  By 2010, mobile wireless speeds accelerated to the point that it delivered a competitive substitute for copper-based cable and landline Internet access services, provided you don’t mind the miniature touchscreen and clunky keyboard.   

By 2020, early rollout of 5G mobile service will support speeds far above 100 Mbps to the end user.  That will outpace any landline or cable Internet “copper-based” product, but not necessarily fiber-to-the home services.  In contrast to the daunting cost of fiber deployment, a neighborhood’s 5G cell hub can be inexpensively mounted on a lamp post.  With capacity to accommodate up to 1.5 million devices per square mile, 5G has the right attributes to become the dominant delivery choice for streaming content.   

By 2014, streaming was a popular service for individuals to launch selections from a movie and TV program library.  Today, there are as many streaming consumers as there are consumers subscribing to pay-TV.  Recently, streaming has offered some live events and TV programs aired on a traditional TV schedule.  Access to TV channels, especially for sports and news, supplies the missing ingredients that allow head-to-head competition between streaming services, cable TV and telco TV.  Although still inconvenient, it is now possible to avoid cable TV or telco TV channel bundles and cherry pick many of the channels you want in your own streaming line up.  As a result of improved program and channel choices, streaming subscribership has stabilized down to a 19% churn rate.

When asked about their preference for an a la carte TV channel lineup, consumers chose some mundane choices and were willing to pay just $28 per month for that TV content.  The top four each chosen by more than 60% of those surveyed were ABC, CBS, Discovery and NBC.  ESPN trailed in position number 19, chosen by 41% of those surveyed.  Although some complain that ISP services have a higher rack rate than ISP and Cable TV service together, the complainers often omit the huge difference in total bill that taxes and regulatory fees levied on cable TV can make.  Over-the-top services, like Netflix and Roku, provide similar content but are not subject to the same regulatory costs and franchise fees.

The evolution in cable, telcos, mobile wireless and streaming leaves no clear leader.  Streaming operators are rich in content but reliant on ISPs for carriage of the streaming service.  New streaming bets such as Google’s YouTube TV ($35 per month for 40 channels, streaming) arrive almost monthly to compete against Netflix, Amazon, Hulu, and others.  Cable has strength in content due to its TV channel lineup, but that strength will dissipate as more people choose a la carte over cable TV bundles and as streaming operators try to get exclusivity for some of their products.  

Cable’s Internet distribution network is a strong foundation for an ISP, but that will soften when 5G is widely deployed.  Telephone ISPs using fiber to the home may have appeal for the long term, and those with a significant 5G product will be a preferred choice in the ISP market within 5 years. 

None of the ISP or pay-TV or streaming operators have insurmountable strengths in every relevant product line.  That leaves the content makers as near term king in this industry.  Cable, Telcos and streaming operators will compete for the right to distribute content makers’ wares for the foreseeable future.  But through the cable bundles, current pay-TV provides content makers with a gross margin of 30% to 60%.  That is a rich prize and will attract new content makers, upsetting content’s current cozy perch.

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