It's Time for a Reality Check

Good ad climate notwithstanding, economic woes will have a major impact on tech trends this year 1/02/2012 12:01:00 AM Eastern

It is always tempting to talk about technology
as if it drives the economy and, by extension,
the media business. That seems particularly apt
now in light of the impact that tablets, social media
and cloud-based solutions are likely to have on all
aspects of the business in 2012 and beyond.

But three years into the worst economic slump
since the 1948 downturn, economic woes continue
to loom, even though MagnaGlobal is forecasting a
healthy 6.7% jump in U.S. TV advertising in 2012.
Here’s a look at how economic realities may impact
some billboard-size tech trends for 2012.

The dismal science of cord-cutting. Ongoing declines
in cable subscribers have prompted a number
of analysts to argue that younger, urban, tech-savvy
consumers are abandoning pay TV for the world of
cheap over-the-top (OTT) video, with potentially catastrophic
consequences for the TV industry.

So far, there isn’t much evidence of this happening—
only 3 million homes in 2011 relied on OTT video,
according to MagnaGlobal—and a recent analysis by
Turner paints a very different picture of those who
dropped cable in 2011.

This group, it turns out, tends to be young, poor,
rural, less educated and not at all gadget-happy—they
under-index for smartphones, Internet connections,
PCs, DVD players and HDTVs.

“The data says that they are doing this because of
economics,” notes Jack Wakshlag, chief research officer
at Turner.

Moreover, a number of studies have found that the
heaviest users of streaming technologies are also heavy
consumers of pay TV. For example, a survey of video
usage issued recently by Frank N. Magid Associates
found that “the more alternative platforms that consumers
use [to watch video], the more they tend to
spend on traditional TV subscription services,” notes
Maryann Baldwin, VP of Magid Media Futures and author
of the study.

But if the nature of the OTT threat has been misunderstood,
the economic problems that have forced
some consumers to drop multichannel subscriptions
may encourage a number of other worrisome longerterm
trends. These include the ongoing launch of lessexpensive
basic packages (potentially a blow to the distribution
of some networks), much tougher negotiations
for affiliate fees and retransmission consent payments
(a dynamic that could force cable programmers to rely
more heavily on advertising) and, by extension, much
tighter budgets for programming and sports rights.

Combined with the fact that Nielsen ratings for tablets
could be a year away, this could also slow the pace
of TV Everywhere rollouts and the amount of content
on mobile devices in 2012. That’s because some programmers
that are adamant about getting extra money
for multiplatform rights to cover costs and lost ad
revenue will continue to find it difficult to coerce the
spare dollars out of operators.

The Netflix Factor. Just as the economy is impacting
the pay TV industry, which was once seen as a
recession-proof technology, 2012 will also be the year
when the OTT video business smacks into some painful

Netflix, which only a year ago was the face of much
loud PR about OTT, suffered significant subscriber declines
after a major price increase last year. The company
is now in the unenviable position of trying to prove
that the entire OTT business model is sustainable.

Granted, fears of Netflix’s imminent demise are
probably as overdone as the hype that once surrounded
the company. But there is little doubt that the
OTT business in 2012 and beyond will never be the
same, thanks to increased competition from Amazon,
Google, Apple, Microsoft, Dish Network’s Blockbuster,
Sony and a host of others.

Those worries may explain the recent reports that
Netflix has been seriously entertaining a bid from
Verizon. Such a deal would provide Netflix with a
well-funded backer to help it weather the competitive
storm and would allow Verizon to offer additional
streaming video products as part of a subscription to
FiOS TV or one of its other products, much as Dish is
already doing with Blockbuster.

The streaming video smackdown.
Much of this
competition is being driven by the explosion of IP
video-enabled connected devices—some 350 million
worldwide, according to Google—and the fact that device
makers need content to make those gadgets popular.
“No one wins on hardware anymore,” notes CNET
editor-at-large Brian Cooley.

So far, however, these big CE and online players
have not done a great job of using their massive size
(Apple alone is sitting on more than $80 billion in cash
reserves) to claw their way into the TV industry.

“Google and Apple are two of the biggest companies
in the world in terms of market cap, but they have
really struggled in the TV world because they don’t
get [it],” says Bruce Leichtman, president Leichtman
Research Group.

However, there are signs that this too is changing.

Strange bedfellows.
If OTT and multichannel
providers were often portrayed in 2011 as mortal enemies,
2012 is likely to be the year for closer alliances.

Microsoft, which bungled its attempts to get into
cable in the late 1990s and early 2000s, seems to have
learned the most from its failures. In 2010 the company
cut a deal with AT&T’s U-verse to make content
available over the Xbox. At the end of 2011, Microsoft
made a huge splash via additional deals with Verizon
FiOS and Comcast.

This has obvious benefits for Microsoft. But it is also
great for the multichannel provider, because it offers
a way to hook up more sets without a set-top box and
because it provides subscribers with a better new user
interface that allows them to change channels or access
content with voice commands or movements.

“The Xbox is a great example of how OTT can be
good for the consumer and the multichannel industry,”
argues Howard Horowitz, president of Horowitz
Associates, who sees 2012 as a year when OTT players
will be looking for increased alliances with multichannel

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