Cable companies should be worried.
Like Manhattan’s bridges and tunnels, cable and satellite services have for decades been the only means for consumers to access premium channels, specialty networks — basically anything beyond the free, over-the-air and public-supported networks that have been around since the inception of television.
But these bygone gatekeepers to content are being challenged, finally, by the networks that once depended on them for survival. It’s not just millennials cutting the cord — content providers are too.
That changing dynamic and the economics behind it are shifting the balance of power between creators and carriers.
“We are at a big turning point for the industry right now,” Roku General Manager of Content and Services Steve Shannon told TheWrap.
“Historically, what has stopped [networks] is really just preservation of the existing business model and not wanting to cannibalize a wonderful business with a lower-margin business on the Internet. But the millennials and the cord-cutter segments of the market have become so large now that they’re just too large for the programmers to ignore,” Shannon added.
Nearly a quarter of Americans in the coveted 18-to-34 demographic have either cut their cable or satellite services or never signed up to begin with, according to an October ComScore survey. Instead, 61 percent of millennials subscribe to pay streaming services like Amazon Prime, Hulu Plus and Netflix, accessed via devices like Amazon Fire TV and Roku.
If networks can get a piece of that pie, Shannon says, they can supplement their revenues as well as break free from the traditional advertiser-based cable model.
“Both the programmers and the advertisers need to find a way to get to the cord cutters, the cord nevers, the millennials who don’t subscribe to traditional pay TV services,” Shannon said.
“They’re absolutely determined to do that, and they will,” he added. “And the way they’ll do it is to go over the Internet.”
Dennis Wharton, executive vice president of communications for the National Association of Broadcasters, said broadcast television is ready to embrace over-the-top platforms.
“What networks and stations are doing now is, we’re hedging our bets,” Wharton told TheWrap.
“We can’t be a single-platform delivery service,” he added. “Let’s try to get our programming on as many devices as is humanly possible.”
Wharton said broadcast — which includes the major networks ABC, CBS, Fox, NBC and the CW, as well as local stations nationwide — is better prepared to survive the transition to streaming content than cable.
“I would be more worried if I was part of the cable business model than the broadcast TV business model,” Wharton said.
Because broadcast programming still makes up the bulk of television viewership, he argued, broadcasters can survive the transition to over-the-top while cable packages become fragmented.
“The bundle is not being broken up; it’s being splintered to some degree,” Wharton said.
“We realize that the fragmentation of the audiences are real,” he added. “This is not your father’s TV business — you want your programming on every device that’s out there. Whether it’s tablets or smartphones or smart TVs, broadcasters have already moved or are moving to those devices.”
Broadcasters may be justifiably confident. Wharton cites the record-breaking success of hits like Fox’s “Empire,” live programming like NBC’s “The Voice” and in-depth news coverage like “60 Minutes” on CBS as evidence that viewers still turn to broadcast TV over on-demand most of the time.
But cable providers aren’t yet ready to roll over either. Comcast’s Cable division boasted a Q4 revenue increase as subscribers rose to 27 million. Chairman and CEO Brian Roberts attributed much of that growth to a boom in broadband sales, but claimed cable television trends were the best in seven years.
DirecTV reported 149,000 more Q4 subscribers than the prior year in its February earnings release, but the satellite provider plans to raise fees significantly in 2015 to cover new carriage rates from Disney and the NFL.
Mike White, DirecTV president and CEO, conceded that audiences are growing less inclined to accept big, expensive carrier packages, but he insists that programmers still need service providers like his to survive.
“There’s no doubt that there are going to be customers that would be better served with smaller bundle,” White said during the February earnings call. “That’s just a fact given that most customers want more choice.”
“But I think you also have to recognize, as they do that, [networks are] probably potentially also undermining their own advertising model,” White added. “So I don’t think it’s a one-way street at all … That’s why we’ve said we’ve got to have an ability to do things over the top. That’s what the customer wants.”
New services like HBO Now propose to do just that, with and without the cable middleman.
Until very recently, HBO has only existed as a premium offering to cable and satellite subscribers. But the combination of the strength and popularity of HBO’s original content and the very real problem of piracy prompted the network to become the first premium pay TV programmer to step over the cable gatekeepers and offer its service directly to consumers, starting on the Apple TV platform in April.
Cablevision signed a deal in mid-March to become the first cable provider to offer HBO Now to subscribers of its premium Internet service, and Dish Network’s Sling TV on Wednesday became the first live Internet TV service to carry HBO. (Sling TV, which launched Feb. 9, would not provide subscriber numbers.)
Most other networks are too small to stand alone, but packages like the streamlined bundle Apple TV is offering for subscription this fall allow even those programmers to sidestep service providers.
Meanwhile, cable providers are shooting themselves in the foot by requiring subscribers to log in to view content on services like HBO Go and Watch ESPN. The process, known as authentication, ensures that only people who pay for the networks via their cable bill can watch them online.
Industry executives agree that authentication is deeply flawed.
“Cable companies are trying to force people into authenticating their zip codes to protect their content from getting outside of their borders, or outside of their subscription base,” Wharton said.
“Not enough people know what their username and password is — there’s a lot of confusion,” Shannon said. “A lot of folks will download something like HBO or ESPN thinking they can use it, even though they’re not paying for it on a traditional pay TV service.”
“There’s a flipside,” he added: “There’s a ton of people who have access to HBO, ESPN or Showtime, or any of those, and they just don’t realize that they can access them [online].”
Even certain broadcast networks, which are otherwise available for free over the air, cannot always be streamed live online, depending on a user’s location and service provider.
Shannon suggested cable companies — which usually also provide Internet service — should be able to recognize connected over-the-top boxes like Roku, Chromecast and Apple TV and verify them automatically to skip that log-in step.
“Where we’d love the industry to end up is where these apps are automatically authenticated when they are using the Internet through the modem from that same pay TV provider,” Shannon said.
Eventually, every device that’s connected to that modem’s authenticated Wi-Fi network would be approved, too, eliminating the need to reenter your password on your phone, tablet, laptop and desktop.
This sort of change may mean cable providers can stay in
Roku believes all TV will one day be streamed, which will lead to a new economic model of more focused ad content — as opposed to the current strategy of “carpet bombing” during programs — and an opportunity for telecoms to diversify and improve their broadband packages.
“There are too many compelling reasons both for consumer value proposition and for industry economics for any other future to exist,” Shannon said.
“Just like the Web is on the Internet, and the email is on the Internet, we think TV will be on the Internet,” he added.
The National Cable & Telecommunications Association declined to comment for this story.
For its part, all broadcast needs is the new-old technology of the antenna to thrive in the cut cord future.
As Wharton says, “We were wireless before wireless was cool.”