To cut the cord or not: Is OTT ready for prime time?

Samantha Bookman, FierceOnlineVideo

Last week, NPD Group issued a report that said subscriptions to premium channels like HBO and Showtime were declining while subscriptions to SVOD (subscription video on demand) services like Netflix (Nasdaq: NFLX) and Amazon (Nasdaq: AMZN) Instant Video were growing. The premium channels reportedly disputed those findings and the connection made between subscriber losses on their end and growth on OTT's end.

NPD kept the report up but sent out a clarification, saying "… upon further examination of the results, there is data supporting the conclusion that individual subscribers are either subscribing to more [premium] channels, or adding channels over time."

The kerfuffle made it pretty clear that premium content providers are intensely guarding their brands, perhaps more so than in years past--and that online video has become the biggest threat to traditional over-the-air (OTA) and pay-TV services.

What is clear is that content streaming is growing: Conviva, a vendor-agnostic big data processing and video intelligence provider that lists HBO, M-GO, and Viacom (NYSE: VIA) among its customers, said it processed 45 billion video streams in 2013, a four-fold increase in two years, and those streams were viewed on 1.6 billion devices.

Meantime, viewing on linear media is tapering off: "According to a report by media analyst Michael Nathanson at MoffettNathanson Research, we are entering a zero-sum game for TV. The audience is no longer expanding," wrote Forbes' Dorothy Pomerantz in a January article. Broadcast viewership fell 10.7 percent in 2013 while cable viewership saw a 1.5 percent drop, the article said.

Pomerantz noted that broadcasters are combating this change by making "the best shows possible," citing a movement from reality shows and dumbed-down programming to groundbreaking, thoughtful programs like "Breaking Bad."

This year we may also see the most competitive pricing ever from pay-TV operators as they look to retain current subscribers and regain those who've cut the cord, as well as lure "cord nevers" into the fold.

What evidence do I have of that? While the cost of pay-TV subscriptions continues to rise, the promotional offers filling my mailbox look pretty sweet. First-time subscribers to Comcast's (Nasdaq: CMCSA) Xfinity service, for example, were offered a gift card of up to $300 during the holiday season, while Verizon's (NYSE: VZ) FiOS and DirecTV (Nasdaq: DTV) were throwing out $100-plus incentives.

Further, OTT, while already an $11 billion market worldwide according to ABI Research, may not yet be ready for prime time--both technically and in the audience's mind.

During a holiday visit to family members who also cut the cord recently, I found out from my brother that he was reconnecting cable. He had several reasons for making the decision, but a big one was that his mother-in-law was unhappy with the OTA channels available and wasn't interested in OTT alternatives like Hulu Plus.

One family's decision does not a trend make, but here's the thing: After nearly two years as a cord cutter myself, I'm also sorely tempted to reconnect the coax. My reason is that I want clear HD reception: My antenna can't pick up any broadcast channels since we moved to a different part of the Boston metro area, and my solution, Aereo, doesn't look great on an HD TV (its quality is great streaming over a smartphone, though). If I want live TV, my options are limited.

Pay-TV providers--which dominated the global market with $110 billion in video service revenues in 2013--should take advantage of this difficulty in adjusting to OTT that many older consumers have. While a younger generation of "cord nevers" may not care if they ever have cable, my age group grew up on lean-back TV, as did our parents. And while OTT has vastly expanded the range of entertainment options available--Netflix, Hulu, Crackle, YouTube and so on--it still doesn't reach the comfort zone where we just hit a power button and pick up live news and sports, reliably delivered.

The question is, will subscription drives by cable and satellite operators, and supposedly higher-quality programming from broadcasters, stop the OTT juggernaut? Many analysts and tech reporters don't think so. First, cable continues to consolidate. And consolidation has historically kept prices high since operators aren't being challenged by the competition. "The increased competition hasn't had much effect on the full retail prices that long-term customers pay," noted a Wisconsin State Journal article, citing analyst Jeff Kagan who estimated subscription rates climb 5 to 6 percent each year.

Now, though, consolidation between cable companies won't eliminate competition. Consumers can choose OTT over the local cable franchise.

And there are signs that the OTT environment is about to morph. Rumors are brewing that the mythical virtual cable operator will soon rear its head, most likely Amazon. The online retail and video giant reportedly approached three major media companies about online TV rights, although it denied that it has any plans to offer a pay-TV service.

No matter what analysts are saying about the online video market, the situation on the ground is changing faster than quarterly reports can keep up with. With net neutrality most likely dead in the water, Netflix retooling its pricing scheme, and broadcasters increasingly looking at more ways to license their content and cash in--expect 2014 to be an interesting ride for the OTT scene.--Sam

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