It's Time for a Reality Check - Broadcasting & Cable

It's Time for a Reality Check

Good ad climate notwithstanding, economic woes will have a major impact on tech trends this year
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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 realities.

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 operators.

E-mail comments to gpwin@oregoncoast.com

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