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Pay TV's Existential Crisis

10:00 AM -- Tensions are starting to show in the pay-TV value chain, with the recent skirmishes between service providers and content owners likely to escalate and spread as the fabric of the TV entertainment sector undergoes an inevitable shift.

That, at least, is how Heavy Reading Senior Analyst Adi Kishore sees things ahead of this year's TelcoTV event (for which you can still register here -- a shameless plug, but it is our event...).

Every year ahead of the show, Kishore asks a sample of consumers about their video viewing habits, and then he shares his research results at the event. Not surprisingly, this year he expects to find that consumers are viewing more video on alternate screens -- PCs, tablets and smartphones -- and that a growing, if not startling, number of viewers have actually cut the cord on their pay-TV service.

Those results wouldn't shock anyone, given the second-quarter results for video providers. But what's more intriguing is how Kishore sees this gradual shift beginning to affect the pay-TV service (and entire video) value chain, starting with the folks who generate content. (See Q2 Video Scorecard: The Winningest Losers .)

The greater willingness of pay-TV providers this year to fight content owners over their costs is just one outcome and a sign of things to come, he reckons. (See TWC Warns TV Programmers and Pay-TV Providers Drop Channels & Fight Fees.)

"This is part of a shift that has a very long arc," Kishore comments. "It's like any revolution -- it starts with sporadic battles, someone refusing to do something and then gets more and more widespread but very slowly. That is where we are at the moment."

He sees growing awareness within the industry that the current model isn't sustainable. Content generators have counted on passing on their increased costs -- higher salaries to athletes, more expensive special effects -- to the networks and the networks have, in turn, passed them on to pay-TV providers, who passed them on to consumers.

But when consumers have more options for viewing content, and greater sensitivity about the size of their monthly bills, that model breaks down.

The question is whether the downstream pressures to raise prices can be counteracted by upstream pressures to hold down costs. On that front, Kishore is skeptical. And until another option emerges, he believes many within the content segment will fight to preserve what they have.

"This is going to be a slow change," Kishore says. "The owners of content are looking at how they increase the size of the pie. Maybe that means they shut down some channels or move more content to on-demand, to their website or to a syndicate like Hulu. In other words, how do they juggle these options in a way that makes them more money?"

Figuring that out involves a lot of complicated factors, including consumer behavior, new advertising models, new business relationships and even technology shifts. But until all that messy business is sorted, content owners are likely to continue to seek payment where they've gotten it before.

As part of this year's consumer video survey, Kishore will be exploring some of these factors, including cord-cutting, online video preferences and attitudes toward targeted advertising (if it includes allowing some use of personal data). To hear his results in person, join us at TelcoTV in Las Vegas Oct. 24 to 26. Or, if you can't make it there, watch this space....

— Carol Wilson, Chief Editor, Events, Light Reading

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