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Preparing for Video War

To win the new battle video customers, pay-TV operators must make over-the-top video a key ally

June 21, 2012

4 Min Read
Preparing for Video War

BOSTON -- Managing and Monetizing OTT Video -- When it comes to over-the-top (OTT) video, you can pick your disaster analogy, and many people here have.

Thus far, we've had the standard tsunami image invoked, referring to the Internet video traffic poised to swamp broadband networks. Multiple members of a panel here on the topic of monetizing OTT referred to the "barbarians at the gate" -- a reference to disruptive Web video companies prepared to wipe out the pay-TV business. And Bob Scheffler, distinguished member of the technical staff at Motorola Mobility LLC , says there is a "giant feeding frenzy trying to get at consumers" using a mix of new video service models.

But perhaps the most appropriate disaster analogy came from Toledo Telephone Co. Inc. COO Dale Merten, who held up his smartphone as he reminded the audience that many telephone companies missed the cellular trend entirely, never realizing that one day consumers would carry their phone in their pocket and give up a landline. Pay-TV players are in the same boat where OTT video is concerned, Merten says.

He should know. His company, based in Toledo, Wash., gave up its traditional cable TV service and eschewed IPTV to instead focus on delivering OTT video as a premium add-on to its broadband service, using a Roku Inc. box. At first, Toledo's customers used OTT to augment the DirecTV Group Inc. (NYSE: DTV) satellite service being resold by Toledo, but in the last six months, almost 30 percent of those customers have dumped DirecTV and gone OTT-only.

And, Merten adds, if the NFL Sunday Ticket is made available through Roku, as he believes it will be, that number could go way up. (See Can Cable Break DirecTV's 'Sunday Ticket' Grip?)

Toledo serves an area where there isn't off-air digital TV station available -- at least not without a very tall tower to serve as an antenna. Merten has found that an increasing number of customers are finding they can live without broadcast channels so long as they can access content they do want from other sources. And much of that -- including NHL, NBA and MLB games, nightly network news, and weekly TV shows -- is now available via online subscriptions and services such as Netflix Inc. (Nasdaq: NFLX) and Hulu LLC , which are cheaper than monthly satellite bills.

As many speakers here also noted, however, the trend is happening slowly. Research by Heavy Reading's Adi Kishore, a senior analyst and co-host of this event, shows only about 17 percent of consumers had either canceled their cable service (5.8 percent) or thought they would eventually do so because of the new OTT options (10.8 percent). Jonathan Hurd, director with Altman Vilandrie & Company , also sees about 20 percent of those under 45 "considering" eliminating cable TV subscriptions for OTT.

But, Hurd adds, the trend is happening much faster among younger viewers. And, like Merten, he believes that once a TV viewing habit is lost, it is likely gone for good. So, younger viewers who learn to watch TV without paying for cable, IPTV or satellite service aren't likely to suddenly decide to buy one of those services when they settle down and have kids, he says.

The market trends are setting up well for someone, says Tim Hanlon, founder and CEO of The Vertere Group and an ad industry veteran

"I firmly believe there will be a new entrant or two or three within 12 to 18 months, if not sooner," Hanlon says. It could be a virtual MSO, but it is likely to involve companies outside of today's distribution ecosystem that understand consumer frustration with rising pay-TV bills, he said. (See Pay-TV: Too Costly to Replicate Online?)

What is that disruptive company going to look like? Based on a lot of the talk here today, it will not only be a company that offers content discovery for online viewing and personalized services, but also one that understands that consumers are tired of paying big bucks for content that they don't watch and have access to other another reliable sources for the content that they do want.

If this company is an ISP, they could add this new video service at a small incremental cost on top of a top broadband tier. That's the strategy that Merten and Toledo Telephone are adopting to avoid repeating the disaster that wireless technology wrought on its original phone business.

— Carol Wilson, Chief Editor, Events, Light Reading

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