Highspeed Cable Cannabilizes Cable Television Sooner Than Expected

Back in August of 2006, I wrote this post regarding the potential for residential video viewers to begin disconnecting their cable television subscriptions. Instead, I suggested, they would make use of the soon-to-come boxes allowing wireless internet access from highspeed cable directly to their televisions.


That day seems to have arrived sooner than anyone expected for quite a few American viewers. Specifically, several friends, including a consultant, S, all warned me that I was overly optimistic in my belief that we were only a few years from the point at which fairly average people would begin to unplug their cable television service.

Friday's Wall Street Journal featured an article entitled, "Turn On, Tune Out, Click Here," in the Technology section. The piece begins with this passage,

"Kenny Johnson, a senior credit analyst for Fox Home Entertainment in Garden Grove, Calif., recently took a hard look at his finances -- and canceled his c-television subscription.
With a newborn child at home and growing household expenses, he says the decision saved him and his wife more than $40 a month -- or roughly the increase he is paying at the gas pump every month for his commute to work. The couple held onto their DSL Internet connection, which costs about $38 a month.

Now the Johnsons access most of their television shows online, through Web sites like Hulu.com, in addition to the free broadcasts they pick up over the airwaves. They also bought a set-top box that allows them to stream shows via Netflix.com to their television set, including episodes of NBC's "The Office" and Showtime's "Weeds."

"To me, it looks just like my cable," Mr. Johnson says.

In the past two years, nearly every major network show and many of the biggest cable programs have become available on the Internet. The virtual library of content includes everything from "Desperate Housewives" and "CSI" to "The Colbert Report" and "Mad Men.""

This last sentence is, of course, the key change in the past few years. I cannot say I foresaw this over two years ago, but I did envision something similar, but actually more costly. Rather than charging for this programming, networks are actually giving them away for free, with a smattering of advertising.

How lucky can viewers get? We might have had to pay by the view at individual network, program or producer websites. Instead, the same television executives who paid for their programming with ad revenues have graciously replicated that model online.

The piece further notes,

"Many shows can be viewed for free and are accompanied by a dollop of ads that's small when compared with the number of commercial breaks on television. As a result, some cost-conscious consumers are ditching their cable subscriptions altogether.

"I'm saving a lot of money," says Tony Leach, a product manager at an online stock brokerage firm in the Bay Area. Mr. Leach canceled his $60-a-month cable subscription two years ago and has watched all of his favorite television shows on the Internet ever since.

The online television bonanza reflects a scramble by networks and cable stations to avoid the fate of the music business, which is still reeling from the effects of piracy and early missed opportunities to capitalize on the Internet.

Complete episodes of about 90% of prime-time network television shows and roughly 20% of cable shows are now available online, according to Forrester Research analyst James McQuivey. There are still notable holdouts, such as Fox's "American Idol" and current seasons of HBO series like "Entourage."

The number of people watching all of their programs online is still small; some estimates put the number at just 1% of the total television audience. In part, that's because watching online isn't as easy as channel surfing on the couch, TV remote in hand. Viewers must either watch shows on their personal computers, or use a device like Apple TV, which allows them to download shows from the Internet onto their television sets.

Within the next several years, however, media and technology executives say that a host of new technologies will make television access to online video a mainstream phenomenon. Vudu Inc. already sells a $299 set-top box with a remote control that allows users to download television shows for $1.99 per episode. Microsoft and Sony both sell television shows that users of their Xbox 360 and PlayStation 3 videogame consoles can download over the Internet for viewing on television sets.

Netflix subscribers can buy a $99 set-top box from Roku Inc. that streams videos on their television sets. The service is included at no extra charge in the monthly Netflix fee for renting DVDs."

This, of course, is key. I have written a few posts about the set-top box issue in the past. Now, with more options than just AppleTV, it's a fair bet that in only a year or two, the current trend away from cable television subscriptions will increase markedly. For example, again, from the Journal article,

"Still, research firm Nielsen Online estimates that in June, 3.2 million Internet users watched more than 106 million video streams on Hulu.com, a site that wasn't available to the public until March. Walt Disney Co.'s ABC.com delivered nearly 27 million streams to 2.9 million viewers that same month, according to Nielsen. The data include everything from behind-the-scenes clips and segments of shows to complete episodes.

Other research indicates that online video-watching is cannibalizing television audiences. According to a spring survey by Integrated Media Measurement Inc., a research firm that tracks media consumption, more than 20% of viewers in the firm's 3,200-person panel watched some prime-time network television online, up from roughly 6% in the fall. Half of those online viewers said they were no longer watching those shows on television.

"What this study is showing is that the long-vaunted convergence of the TV and the computer is happening faster than anybody thought it was happening," says Tom Zito, Integrated Media's company's CEO."

Eventually, one would conjecture that this will affect the economics of the current cable distribution system. And, on that topic, the article reports,

"Tensions are beginning to heat up between cable operators and cable channels over free Web video. Glenn Britt, CEO of Time Warner Cable Inc., has been one of the most outspoken people on the topic, telling cable program executives to not expect to continue sharing subscription revenue if they keep giving their top shows away for free online. When asked how programmers have been responding to such comments, Mr. Britt says, "Not well."

Executives at several cable channels were reluctant to discuss the topic, at the risk of further straining discussions about Internet television with their cable-operator partners. "We can't just cut the cable companies out," says one of those executives."

Meaning, as I understand it, that cable system operators intend to keep more money if their content suppliers continue to give that content away freely on their own websites.

"Last year, the average home received 118.6 cable channels but only tuned into about 16 of them, or 13% of the total available to them, according to the Nielsen Co."

This, too, is one of the reasons I predicted this effect a few years ago. I can personally attest to watching only about 5-8 channels, while my daughter uses perhaps an additional 3. She, too, has no compunction about watching video content on one of the two wireless laptops to which she has access on a regular basis.

Thus, the closing passage of the Journal piece is prophetic,

"Jeff Pulver, founder of PrimetimeRewind.tv Inc., which makes it easier to locate Web television shows, says he believes the Facebook and Google generation won't look askance at getting television shows from the Internet.

Still, adds Mr. Pulver, who also co-founded the Internet phone company Vonage, "Some people will [continue] to subscribe to cable, the way their grandparents did.""

That's pretty much how I feel, too.

Only this weekend, my daughter and I discussed buying a Tivo unit to secure better content access, as well as, of course, the digital recording capabilities which will restore my 'watch one record another' channel feature which I lost when Comcast insisted that I use their digital set top box. In fact, my daughter even counseled against going with the cable operator's digital video recorder, based on her knowledge of the units' flaws and failure statistics.

It won't be surprising to me at all if we unplug from Comcast's television services within two years. I'll save about $600/year, which means the most expensive of the new wireless internet-to-television boxes will have a 6 month payback. Schumpeterian dynamics are quickly moving internet-based video content, that is not business news, into a competitively-advantaged position relative to packaged video content services offered by cable operators.

I rather doubt I'm alone on this issue, as the Journal article notes.