How network technology is opening up the media landscape

The world of electronic media and entertainment is in the middle of a slow-motion revolution. The old terrestrial and satellite television world – where specific technologies and networks essentially deliver linear television (now with a few extras) – is steadily being challenged by IP and streaming services running over both wired and wireless broadband networks.

These are the same networks that people use to browse the web, play games, exchange email and messages, engage in social media, smarten their homes and workplaces. The networks’ ability to deliver video (and emerging interactive content) may be just one more set of applications for the Internet, but for the media and entertainment industry, it’s a game-changer. It means content ownership and delivery networks can no longer necessarily leverage each other to maintain control of the consumer TV, video entertainment and film markets.

As long as Internet access remains relatively neutral, new Internet-based business models will continue to emerge to join the likes of YouTube, HBO, Amazon Prime and Netflix. These new services will be successful by the extent to which they can more accurately provide the content and services users decide they want at the prices they decide they’re prepared to pay. As we’ll see, users are already making choices.

However, it would be wrong to see this technology evolution as a classic disruption where a new technology emerges, is ignored by the incumbents who won’t or can’t switch to take advantage, and then goes on to displace them.

That sort of disruption doesn’t happen as much now because established industries have long since learned to ‘disrupt back’. In the digital realm incumbents now calmly assess new technologies, gauge their strengths and likely impact on a time scale. They then work out when and where to move to take advantage, changing their business models if and when they have to.

So in this sphere, technology-driven change and challenges don’t necessarily mean new companies will always end up replacing incumbents – as we’ll show, incumbents inevitably have the ability (and the time) to take action and strike back with a few disruptive tricks of their own.

Slow motion

In fact, everyone has been agreeing for at least ten years that IP-based video streaming services via the Internet must be the way ahead for video entertainment. But for a variety of reasons the ‘inevitable’ migration has gone far more slowly than many had predicted.

Part of that slow-mo change is no doubt technological. Up until recently the Internet was often too slow and the early services struggled to acquire compelling content to compete with established rivals in content. Plus, access providers were in no hurry to connect competing (as they saw it) ‘over-the-top’ players via a neutral Internet arrangement. We all remember the scuffles between Netflix and ISPs over the cost of supporting video delivery.

Then there’s broadband (and the lack of it). In many territories broadband was (and is) slow to become available and viable streaming services can’t arrive without reasonable broadband to support them.

But perhaps the greatest impediment has been the conservative nature of many television watchers. Multi-channel TV viewers may be happy to use recorders and catch-up services to augment their viewing, but they often feel most comfortable basing these extras around familiar linear programming and the accompanying satellite and cable TV business models. The phrase ‘cord cutting’, which describes the act of ending the big bundle multi-channel TV subscription to rely instead on alternatives – free-to-air television and Internet-enabled streaming for instance – is instructive. Many viewers imagine that they’ll feel unmoored or undirected if freed from a familiar multi-channel environment. Cutting the cord is often felt to be a step into the unknown.

 

Cord Cutting and new service adoption

Despite those impediments, a slow motion cord-cutting trend is well under way in most countries and pay TV network operators are naturally doing their best to fight back against it.

To be clear, the term ‘cord cutting’ is where the user drops or trims cable or satellite multi-channel TV and might then rely on pure Internet access to get free video and multimedia content (from YouTube, maybe) or specialist OTT content services from the likes of Netflix or HBO.

This is not being driven as a network technology choice. Cord cutting (or cord trimming) is a rational response when it’s felt that conventional content services are too broad and too expensive for many individual tastes. If given a choice, many users would prefer a more granular, pick and mix approach to the channels and content they consume, especially if savings are to be had. So cord cutting is not necessarily an overt move to the Internet, more a rejection of the big bundle. Viewers feel that while they’re getting enormous choice, they also know they’re paying for content they will never view or hear.

Any number of surveys show that this is a settled direction of travel. One recent poll conducted by Morning Consult and Hollywood Reporter set out to determine the degree of ‘cord cutting’ current in the US market and how multi-channel TV players might stem the losses.

Not surprisingly 65 per cent of the adults polled agreed that that TV bundles seem designed to force people to pay for channels they don’t want. Ideally, 73 per cent say they would prefer to pick the channels in their package: that’s something that cable and satellite companies have always held out against – their experience having taught them that skillfully curating bundles is the best way to maximise average revenue per user (ARPU) across different demographies.

Consumers get wise

But now that there are alternatives to the linear TV model with the likes of Netflix, viewers, especially younger viewers, are changing their approach. According to the survey above, while 42 per cent of average Americans of all ages still view cable or satellite TV more often than Internet streams, 27 per cent said they used streaming platforms more and 46 per cent of 18 to 29 year-olds said they currently consume more video via streaming across the Internet than they view traditional cable or satellite TV. This is more than double the 20 per cent who say they view traditional television more often than streaming content.

Little wonder then that cord-cutting is on a steady rise as more people (especially the younger demographic) works out that they can drop the big content bundle and save.

The second most common reason given for big bundle cancellation is the realization that users can now access all the content they desire through streaming services if they were prepared to go to the trouble of choosing a mix of services – indeed there is evidence that younger demographics actively enjoy exploring and following up recommendations from peers, rather than having a broad selection chosen for them by a pay TV provider.

 

How large are the defections?

Cable company Comcast suffering a recent net loss of around 106,000 subscribers – its sixth straight quarter in a row of declining TV customers. Comcast says the erosion is attributable to growing market competition.

Meanwhile the other US giant, AT&T, lost 359,000 DirecTV satellite subscribers. It blamed an increase in customers ending their promotional discounts along with competition from over-the-top (streaming) services.

So is this just a bad pay TV period which will eventually right itself?

Unlikely, but that doesn’t mean there aren’t adaptations and hybrid solutions that include streaming to slow the trend and keep the incumbents firmly in the game over the longer term. The traditional pay TV giants are now naturally looking to accommodate the online viewing experiences by offering their own online options for different types of bundle. One approach is to offer so-called skinny bundle streaming services at lower cost. Sky, for instance, has followed many other broadcasters by bundling Netflix. But it has gone further than simply reselling the popular streaming service, by actually integrating Netflix into its bundle (for an extra charge), enabling users to manage Netflix viewing though its user interface via the Sky set top, rather than having to exit one service to get to the other.

This looks very likely to be the way ahead. For Sky it’s a way of keeping some customers who might otherwise cord cut and, just as likely, attract new, younger customers to the big bundle. For Netflix it’s a rational next step to maintain subscriber growth once it mops up most of the customers it’s ever going to get under its own steam.

The unstoppable migration

So it’s fairly clear that viewers are migrating slowly to a ‘different way’ of connecting to and consuming media and entertainment – one which offers even more choice, but increasingly charges them only for the content and services they prefer to access.

With technical availability of streaming over the Internet creating very meaningful service competition it is inevitable that the consumers that are attracted to this approach will get their wish. Next generation network technology and a cloud-based architecture will be flexible enough to instantiate business models which will meet user requirements – even linear TV. What’s on offer is not just a different slicing and dicing of video (TV, movies, short form). Other forms of entertainment – games, virtual reality and augmented reality can be delivered over the same infrastructure and this diversity of service content types is a major factor driving consumer demand and business model change.

Essentially consumers want services available from the same interface and they want to be able to view and, where appropriate interact, on a variety of platforms – television screens, tablets, PCs, smartphones and even smart speakers. Research has identified all this as a consumer aspiration for many years – with the rise of Internet streaming it now looks as though consumers will get their way at last.

In fact the BBC has played (as it always has done) a major role in advancing digital media and entertainment technology in the UK. The BBC as a puller-through of the online and digital media consumption habit amongst UK consumers. Its iPlayer service, originally designed as a strictly catch-up TV play when it was launched in 2007, has matured into a destination in its own right with one major ‘channel’ BBC3, available only online.

At the time of the iPlayer launch the BBC ran straight into the mounting controversy over net neutrality, Internet video and the extra strain it was bound to put on the Internet and therefore the supposed need for upstream charging. Not to mention the potential revenue loss for ISPs who had, or were planning, their own Video on Demand services. The BBC ploughed on, however, and in the event there was no sign of the Internet “grinding to a halt” as the saying went.

Picture stalling put in a regular appearance in the early days, but that didn’t put off viewers. What it did do was provide another good reason for Internet users to upgrade to DSL broadband which was finally taking off thanks to BT’s changed attitude to unbundling which up till about that time it had been doing its best to thwart. In exchange for it being able to set its own service prices, BT took its foot off the unbundling brake and the DSL broadband market took off, as did iPlayer and other video on demand viewing.

As a result, the UK now has the most digitally tuned-in population media and entertainment-wise, much to the chagrin, it must be said, of the commercial Pay TV players – Sky in particular – which from time to time objects to what it sees as unfair subsidy for the BBC content via the license fee.