Finding OTT's tipping point: three factors could push it past pay-TV subscriber totals

Barbara Kraus, Parks AssociatesThe evolution of content distribution and the consistent growth of over-the-top (OTT) streaming generates industry predictions of the inevitable decline and fall of pay TV. As video ecosystems collide, the industry remains in a state of great change.

While streaming continues to grow, the number of pay-TV subscriptions in the U.S. is expected to remain relatively stable and to continue to grow elsewhere in the world. While media coverage focuses on cord cutting, the impact has been minimal thus far. Total pay-TV subscriptions in the U.S. are expected to decline by 0.3 percent between 2015 and 2019. To some extent, the actual number of subscriptions will be propped up by increases in the number of pay-TV households, although the actual penetration is expected to decline from 83 pereent in 2015 to 80 percent in 2019.

Several issues influence the impact of streaming on pay TV. The key is to try to identify the tipping point -- that point at which consumers believe OTT streaming better fits their needs than does a pay-TV subscription. There are three potential tipping points:

Live TV

Consumer adoption of live TV streaming is good for connected devices, as it will increase usage on those devices. Assuming streaming services have sufficient content available, device makers have the opportunity to provide a holistic content access experience.

Consumers like live TV and sports. At this point, however, most continue to need a pay-TV subscription to watch their local teams. Currently, live TV offerings from streaming providers have some limitations. For example, Dish Networks' Sling TV offers live TV, but has experienced major outages, does not allow for pausing or fast-forwarding during commercials on many channels, and has limited channels for viewing.

When streamed live TV is as reliable as cable, fiber, or satellite, it will be a more disruptive competitor. Streaming services will be more disruptive with affordably priced ad hoc programming. Both the technical issues and content licensing will take time; so, while more households will adopt streaming live TV, the adoption trend will be gradual.

Content availability

New companies entering the streaming market have hit roadblocks in acquiring content rights. An anticipated 2015 launch by Apple was postponed until 2016 due to slower-than-expected negotiations with content providers. Both Intel and Microsoft made moves to create online streaming services only to pull the plug due to content rights issues.

By virtue of their long-term partnerships that reach footprints with millions of subscribers, traditional pay-TV providers continue to hold the cards in negotiations with content providers. In terms of raw numbers, no streaming devices compete with traditional providers at this time; the number of device categories and brands create a fragmented market.

While content providers are willing to work with streaming services, bundles of channels -- rather than ad hoc channels -- may be required, similar to packages provided by traditional pay-TV providers. Streaming services will not necessarily be able to get the same pricing. Content licensing negotiations are protracted and the content developer owns the cards. However, streaming channels, such as CBS All Access, show great potential for connected devices. With CBS All Access priced at $5.99 per month, the question is how many channels a household will be able to subscribe to on an ad hoc basis -- before the monthly prices meet or exceed that of a cable package. 

Pay-TV subscription prices

Whether annual or more frequent, continued increases in pay-TV pricing with no additional value provided to the subscriber incent consumers to explore disruptive options as those options improve in terms of reliability and content availability.

Competition from OTT streaming services may be the inflection point to force improvements in pay-TV customer service and more competitive pricing. Pay-TV and broadband providers have had little true competition and are still in the position to call their own shots. They are not particularly interested in retaining customers simply because many have nowhere else to go unless the household is willing to switch providers every year or two for new customer promotions. The number of broadband households continues to increase, and pay-TV subscriptions are holding steady in the U.S. and growing across the globe. True and disruptive competition from live streaming has the potential to provide strong subscriber benefits.

That said, pay-TV providers will not sit by and let other entities take their business. When competition improves to the point that it negatively impacts both acquisition and retention, these companies are perfectly capable of adjusting pricing, improving service, and innovating—doing what the market requires to maintain their positions.

When live TV streaming disrupts the market in a major way, cable, satellite, and telco providers are not going to sit idly by. Most will be in a position to implement their own streaming services and offer a complete content access service to consumers -- live, VoD, OTT. The top tier of providers -- AT&T, Comcast, Verizon -- have the deep pockets to price their competition out of the market if that is their strategy.

At some point, a viable streaming service with sufficient content and satisfactory prices will disrupt the market, but that service is not here yet.

Barbara Kraus is Director of Research at Parks Associates.

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