Year of the cable cut

Today, almost all Canadians watch TV by subscribing to what are called broadcasting distribution undertakings (BDUs): cable, IPTV and satellite TV. But with a broadband Internet connection, you can cut out those distributors and go around them and watch television on your TV, laptop or tablet for (theoretically) less money – otherwise known as Over-the-top (OTT).

This is expected to be a big thing in 2011, so much so that this has been proclaimed the “year of the cable cut.”

Many of these potential cord-cutting solutions have been available in the U.S. for most of 2010, but very few consumers have cancelled their TV subscriptions. There was a drop of 700 000 subscriptions in the last quarter, but it appears that the losses were mainly in older, poorer households without Internet connections. Looks like the economy is more to blame than OTT. Based on the data so far, only about 3 per cent of U.S. homes have cut the cord... and kept it cut.

In the 1980s, the initial adoption of VCRs was slowed by the fact that there were competing platforms: VHS and Beta. The lesson learned was that there is a significant risk to betting on one video or TV technology before the eventual standard emerged. We are seeing some of that in OTT adoption today. With so many non-compatible technologies, many consumers are waiting for a clearer picture.

Many folks never figured out how to make their VCR stop blinking 12:00, let alone get it to do more complicated things. OTT is worse. A few months ago a former tech exec, current venture capitalist and licensed pilot tried an OTT service. Afterward he tweeted “I tried XXXXXX TV yesterday. Flying a Cessna is easier and has fewer controls than the XXXX remote.” (Names have been redacted to protect the innocent. Or the guilty.) Complexity and difficulty to install are big barriers, at least for most users.

Watching TV is a passive activity. Viewers aren’t called couch potatoes for nothing. Most of the time, we tend to watch what is on and don’t bother actively thinking about what we want to watch, search for it, stream it, etc... We are “linear” TV programming addicts. Even in markets with 50 per cent DVR penetration, only about 3-5 per cent of television content is watched in a non-linear fashion. I know that sounds low, but a lot of content doesn’t lend itself to being recorded or streamed. Have you ever saved the Weather Channel from last July and watched it now?

Video, especially TV-equivalent quality video, uses up a lot of bandwidth. YouTube is one thing, but every hour of HD you stream is about 2.6 Gigabytes of data. Given that most Canadians have monthly bandwidth caps from their ISP, even those with the biggest plans can stream fewer than 30 hours per month. Not much when the average home watches 30 hours per week.

The bandwidth cap situation is much better in the U.S. Some of their ISPs have theoretically unlimited usage. But that may not last. In the most recent quarter, streaming TV was watched by only a tiny percentage of Americans…but that tiny percentage accounted for more than 20 per cent of all internet traffic during prime time. If OTT grows even a bit, I predict that we will see most U.S. ISPs instituting bandwidth caps. We are also likely to see Canadian caps go up to U.S. levels over time due to competitive pressures.

Finally, the TV industry is very cautious about OTT. They aren’t sure that the new revenue model will be as profitable as the old model, and they are not making all their crown jewel programming available via streaming. As a consumer, you may be mad at them for doing that, but as long as that stays their policy there will continue to be two big problems for consumers trying to cut the cord. First, you will need to stitch together OTT services or devices to duplicate even 90 per cent of the content you get now. Second, getting that last 10 per cent will be impossible. The networks and other players will deliberately keep their biggest audience grabbers (things like American Idol) away from the paws of the streamers as long as they can.

None of the above means that OTT won’t be huge some day. None of it means that a number of Canadians won’t mind missing some content, won’t mind being an early adopter, or won’t do virtually anything to cut the cord. But for 2011, I predict that out of the more than 9 million households in this country that pay for cable, satellite or IPTV services, fewer than 250,000 will do so.