Analyst: Over-the-top video won


Predictions that many consumers will drop cable and satellite TV in favor of over-the-top (OTT) video services like Apple TV and Google TV are being dismissed by Wells Fargo Securities analyst Marci Ryvicker as misguided speculation. Rather, she says, OTT will be a complement to, not a replacement for, pay TV.

In a research report issued Monday (9/20) to clients, Ryvicker spelled out six obstacles to OTT becoming the exclusive video choice of consumers. “While we cannot dispute that over the top viewing does exist, we believe widespread adoption of an EXCLUSIVE OTT model is highly unlikely,” she wrote.

“Yes, the technology is evolving rather quickly (think Apple TV, Google TV etc. – covered by Wells Fargo Securities analyst J. Maynard) but in our view the content providers (networks AND studios) cannot afford to disenfranchise the cable MSO – we attempt to prove why in this report. Bottom line – we view OTT as a complement to, not a replacement of, pay-TV,” Ryvicker said.

Her 15-page report spelled out details of each of the six points, but here is the summary of her six obstacles to OTT displacing pay TV for many consumers:

“OBSTACLE 1: HD Content Is Limited OTT. While most internet streaming services provide some sort of HD programming the supply is limited due to i) technology constraints, ii) the difficulty in securing digital content rights and iii) the necessity to ”remaster” older content into an HD format. It is highly doubtful in our view, that homes who just spent hundreds to thousands of dollars on their HDTVs would cut the cord for lesser quality programming.

OBSTACLE 2: Sports Content Is Mostly Linear – Online Options Require A Subscription. Sports programming is still mostly linear. While we do realize that some content is available online, it is mostly geared towards out-of-market games (i.e. DTV’s NFL Sunday Ticket) or as an additional pipe for pay-TV subs. We do not see this changing given broadcasters are already negotiating for digital sports rights, per our contacts.

OBSTACLE 3: Bandwidth Becomes Constrained In An Exclusive OTT Model. The average bandwidth consumption per HH today is 12GB. Based on our calculations, complete OTT viewing would require, on average 161GB in SD, or 418 GB in HD, translating into a massive bandwidth consumption increase of 14.4x and 35.8x respectively. Let’s assume that OTT does occur, we would argue that the MSOs are in the BEST position to monetize broadband demand.

OBSTACLE 4: User Interface/Content Aggregation Is Key – Technologies Are Working Within The TV Ecosystem, Not Against It. Today’s average television viewer wants her content within minutes, if not seconds. Unfortunately, content aggregators have been unable to consolidate all the content into a centralized location. We realize that many companies are currently trying to do this, but have been met with varying degrees of success.

OBSTACLE 5: Content Providers Cannot Afford To Disenfranchise The MSOs. 1) An a la carte model becomes uneconomical for both the consumer and the content provider pretty quickly. 2) We believe that Netflix must provide compelling content to cause cord cutting – saying anything else means households will watch less TV, not more – and this goes against every statistic we could find. Compelling content is not cheap. We estimate $3B for Netflix’ current 15MM subs. At this point, we would view Netflix as just another over builder – at a higher cost with less choice. 3) Broadcast nets own the majority of their primetime content and would not put their syndication business at risk by eroding the current window. In fact, from a content perspective, we view CBS as one of the most insulated from OTT.

OBSTACLE 6: Distributors Are Becoming More Competitive With OTT. 1) The Netflix streaming model is replicable. 2) Focus is on lower tiered/more affordable program packages. 3) TV Everywhere is gaining traction.”

RBR-TVBR observation: Competition is growing and will continue to grow in the video space. YouTube already has lots of video content that people love to watch. But have you heard of anyone cancelling their cable/satellite service and getting all of their video entertainment from YouTube? The early-adopters of the new OTT services are likely to be video junkies who want more, not fewer, video choices and are willing to pay for multiple services.