What happens when an entire generation grows up consuming a majority of their video online? Between Youtube, Netflix, Hulu, Facebook, Amazon Instant Video and Torrents there is little content that isn't available on the internet. Set-top boxes, smart TVs and game consoles are leading the growth in IPTV (internet protocol television), which is beginning to become more mainstream.
Cutting The Cord
The term "Cord-cutter" has been used a lot lately to describe people that have canceled their traditional cable or satellite service and moved to free or paid online content distributors (ex. Netflix, Hulu Plus, Video Podcast, OTA). A couple of reasons are driving this transition: low costs, easy accessibility, wide range of low cost hardware, entertainment variety, convenience, and consumer choice.
Cord-cutting consumers, despite the reasons listed above, could also be moving online for entertainment on simple principle. Paying $150/mo for cable, only to watch 5 channels has been the bear trap cable and the networks have used for years to subsidize the cost of less popular channels. Only until recently has there been a realistic alternative for TV lovers to ditch traditional cable. I've been a cord-cutter for over a year now, and my wife and I have watched nearly every show we've wanted through an admittedly ridiculous combination of Netflix, iPad Apps, over-the-air channels, and Airplay by mirroring video from our iMac to our Apple TV. The maneuvering is a small price to pay for choice, on principle. We should also acknowledge the limited to no commercials or ads! The rare times we’re forced to watch commercials or ads are when we tune-in our TV the "old fashion" way using a digital antenna to pick up ABC, NBC, Fox, and CBS.
There are still some key television shows that still aren't (legally) available on the internet, even if you want to pay for them *cough* HBO. Popular shows like Game of Thrones, Breaking Bad and Mad Men still require cable subscriptions if you want to watch them up to date, or you can always be a year behind and catch (most) of them on Netflix once they hit DVD. We're currently binge watching Sons Of Anarchy but will be left out in the cold once season 6 starts on FX this year. (Unless we pay $1.99 for each episode on iTunes the day after they air.)
There are less ethical sites that offer streaming or downloading of any of the popular shows you want to watch that millions of people use daily. The torrent and streaming sites are technically illegal and there servers are usually hosted in another country and accessed by people all over the world. It's Napster all over again, but this time it's not catching on as fast for a couple of reasons. First, the bandwidth requirements for video, especially high definition, is much higher than music. Given that America’s bandwidth sucks, downloading HD video files is still a chore for most. Second, downloading a torrent is not as easy and effortless as it was to download a MP3 from Kazaa. It takes a bit more know how to find and convert video files. Nevertheless, millions of technically inclined "pirates" are getting their favorite shows this way not strictly due to access but also convenience. The television studios don't seem too bothered by the piracy for now, and counter-intuitively, a recent study by “UK’s agency for communications regulations, OFCOM, recently published a report that implies that the damage that MPA and RIAA would have us believe is the result of piracy is completely off the mark.”
The study suggests piracy actually helps their cause. Seems all the lawsuits put forth by the film and music industries lobbyist, the MPAA and RIAA, stem from a source of inflated fear. I find it interesting that consumers leverage the same technology content providers have access to, yet content providers aren't providing access the same way? Which means either the business model currently in place is too lucrative to be bothered with silly things like customer satisfaction, or they don’t have an online strategy. In addition, the executives currently in charge are entrenched in the old ways of doing business, and make so much money there’s little incentive to change the current model.
Meanwhile, there is a whole generation some are calling "cable nevers" that are growing up without cable and don't see a need for it. They get the shows they watch legally or illegally from the Internet and are fine doing it this way. They hardly ever watch ads or commercials because the files traded online usually come edited commercial free. Game of Thrones was the number one pirated show last year with over 4 million downloads, equal to the amount of people that actually watch it live. Not only are cable providers missing out on this demographic but the local channels which don't provide live streams are missing ad revenue as well. It would seem like an obvious play that ABC, NBC, FOX and CBS would stream online for free since its OTA free. But deals between regions, local news and commercials create a tangled mess that in the end punishes the consumer. So teens would rather pirate Family Guy without ads and watch it when they want, wherever they want, than to watch it at a specific time with the commercials even if they have access to cable.
There are half measured approaches like Hulu that carried the old TV model into the online model inundating streams of movies and shows with a crap-ton of commercials, even if you pay for a subscription. However, this is to be expected because if you weren’t already aware, Hulu is owned by the networks. While Youtube has increasingly added the capability to put ads on videos, most are either of the pop up variety or can be skipped after 5-10 seconds. The worst, and most annoying, delays are the 30-60 second overlay ads that play in their entirety before you can watch the video. Sometimes the ads are longer than the actual video you’re trying to watch!
Premium Content Exclusively Online
While the majority of people still watch most of their video content using traditional methods, this is slowly changing with premium video content making it's way online. Youtube has invested hundreds of millions of dollars in it's "Original Channels" looking to bring more premium content to Youtube. Director/Producer Bryan Singer experimented with a highly produced sci-fi web series called "H+" in 2012 that debuted on Youtube and was released in bite-sized (roughly 5 minute) episodes. It hasn't been a huge success only averaging about 200K views per episode, but was a sign that Hollywood's elite creators are looking at the internet as another outlet for high quality productions.
As Youtube continues to tweak it's interface to be better suited for a lean back experience (via set-top boxes) while funding high quality content, they're positioning themselves to be a serious player in the future of IPTV. Netlfix and other premium cable content providers appear to be headed for a collision course. Offering paid subscriptions to tons of back-catalog movies, TV shows, and exclusive content that is ad-free. The internet has been clamoring for HBO to offer HBO-Go as a paid app, independent of a cable subscription while HBO has repeatedly stated they have no current plans of offering that option. Meanwhile they've recently announced they will provide such a service in Finland, Norway, Sweden, and Denmark, where HBO is currently not available. As demand grows for great content that isn’t tied to cable plans, it’s just a matter of time before we hit a tipping point and the networks began to break ranks from cable/sat stronghold.
Netflix went from a movie rental (Blockbuster-killer) to next generation online network. They're now acquiring established content from 3rd-party studios while paying and creating their own exclusive premium content, in similar style of the HBOs and Showtimes of the world. Last year they announced that the beloved sitcom "Arrested Development" was coming back exclusively on Netflix (May 2013) and the Kevin Spacey/David Fincher political drama, "House of Cards" - released last week to much fanfare. Netflix CEO, Reed Hastings, has steered them on an aggressive course to acquire more original content. Chief Content Officer, Ted Sarandos, indicated in a recent interview with GQ, that he “hopes for the company to generate a minimum of five original programs per year moving forward.”
While a lot has been said about the importance of their first exclusive TV show "House of Cards", the upcoming Eli Roth directed show "Hemlock Grove" based on the horror novel with the same title may be another feather in their digital cap. Netflix is betting that as they continue to add quality exclusive content it will drive more users to their service. Netflix can't rely on other studios content forever as each contract negotiation continues to get more and more expensive as long as Netflix is depending on them to drive subscriptions. Once they have a few hit shows under their belt they’ll gain back some leverage in licensing agreements with content owners.
What is unique about Netflix when compared to the HBO's and Showtimes is their release schedules. In the way HBO was a paradigm shift during the early days of cable, Netflix is leading its own shift; “binge-watching” TV series. Admit it, we all love being able to push on to the next episode. It feels like cheating, doesn’t it? Since Netflix's inception, customers have been binge watching entire seasons of television shows, and they've taken notice. The entire first season of House of Cards was released this weekend and some people watched the entire season already while some are creating their own pace. It's an entirely new, some say mistaken, way to release content. Releasing the manufactured restraints that traditional television has placed on TV shows like time limits, built in commercial breaks, and big ratings numbers are all shed in Netflix's business model. Some may argue that people will subscribe long enough just to watch their favorite show then cancel. While I'm sure some penny-pinchers will, I’ll bet Netflix has data that says most will stay and continue to pay the $7.99/mo for the convenience of unlimited access to content.
The Future Of The Commercial
So what happens to the advertising industry when an entire demographic gets used to watching less ads? Will ads go away entirely? Of course not. The money will and is shifting to where the eyeballs are going. Online. Advertising dollars will continue to be spent in traditional media, and every year more of those dollars are being shifted to the internet in a variety of formats. Unlike traditional TV, internet content is displayed and consumed in many ways. So why shouldn't the advertising reflect that as well?
Targeted advertising is pretty common, and for good reason. A lot of major internet-based networks and podcast rely on sponsors that are mentioned during the show that tend to be more narrowly targeted at the specific demographic. Typically, most of the sponsors tend to be more tech related as the technically inclined are the early adopters to this new media. Advertising delivery strategies will begin to vary as more people flock online to view their content.
Traditional commercials may have more of a home on Youtube, especially as viewers get more comfortable consuming longer clips of video from the website. There are even rumors of Youtube allowing channel owners the ability to offer up subscriptions to their fans. Even old advertising methods from the 50's are making a comeback. We've started seeing the shift back to the old TV model of product placement in a lot of TV shows as of late. Apple, Samsung, CNN, Sprint, and Microsoft are just a few companies that have all paid to have their products highlighted, grossly at times, in shows the past couple of years. I'm sure it will continue if traditional commercials become passé to the younger generation. (Just keep it classy folks)
The Log-In Black Market
The popularity of pirating using torrents, live streams, and usenets have been well documented, but the elephant in the room no one seems to address is log-in information. Netflix has been the most liberal on this front by allowing customers to access their service from almost any device, no questions asked. Log-in at home, log-in at a friends house, or give your mom your log-in so she can watch it on her Apple TV. Netflix allows you to do this without much fuss although they clearly state that you shouldn't do it in the Terms Of Service. Log-in access enforcement is just as liberal with cable and satellite authentication for websites and apps like HBO Go, Showtime, CNN, and ESPN.
People with the proper authentication share their information to friends and family members that allow them to watch HBO without actually paying for anything. Sure, HBO probably could care less, the cost has already been paid and any extra eyeballs are just vessels for word of mouth marketing. Still, I'm sure there are some HBO & Netflix accountants estimating the money that could be made if these freeloaders were turned into actual customers. Thankfully there hasn't been much done to stop what I, or many of you, know is occurring rampantly among 20 somethings. In my opinion these companies are smart in not pressing the issue. They're playing the long game and hoping eventually the freeloaders will turn into paying customers. Which is consistent with the aforementioned study suggesting that piracy promotes. This is just another form of piracy. The old way of restricting as much as possible and suing anyone that skates along the edges creates more trouble and builds negative sentiments about the company.
The next few years are going to be interesting and somewhat parallel to what we saw play out with the music industry. However the television studios and networks aren't nearly as desperate as the record labels were in 2000, and the existing contracts between the studios, networks, and distributors are much more convoluted then what the music industry had. This is why it's been like pulling teeth to get a modern interface and overhaul of how our television content is presented in the digital age. Apple, Google, Microsoft and others are trying to hammer out deals to emulate the success of iTunes for music. It seems it's going to take years to fully get these knots untangled. One thing does stand out among the confusion - we the people are driving this change in how we view content. As the average bandwidth speeds continue to rise, expect video piracy to increase and simpler ways to share are created. Just like we saw with music, consumers will go down the path of least resistance.
- Gone Streaming -