Over-the-top programming is already very competitive with cable offerings in a few small areas of the business: new hit movies (can be rented from iTunes as easily as cable VOD), out-of-market sports packages other than the DirecTV-exclusive NFL Sunday Ticket (e.g., MLB Extra Innings) and adult video (see prior post on this topic). Over-the-top is least competitive with cable in offering basic and premium cable networks. Aereo, if it survives the legal challenges it faces, represents a portion of the package, for those who can not or do not want to use their own antenna to pick up free broadcast television.
It is difficult to imagine that over-the-top video will have the same access to "cable" content in the future than it had in the past. Cable programmers make too much money selling their services to multichannel distributors (and the advertising on such services to major national advertisers). Starz walking away from renewing a deal Netflix is the best example of this. As noted in a New York Times article about the 2012 DirecTV-Viacom deal "free access to people who don’t subscribe to DirecTV or another similar distributor is likely to become more restrictive, thereby fortifying the existing model of TV distribution." Someday over-the-top providers might be able to provide some programmers with enough money to make it worth their while to jeopardize their relationships with traditional multichannel distributors, but that day does not appear to be in the next year or two. Nothing -- short of new governmental regulation, that is -- can force a critical mass of cable programmers to sell to the potential disruptors of the multichannel ecosystem.
Over-the-top programming often requires juggling multiple devices and subscriptions. The most satisfying way to "replace" a multichannel subscription probably involves a combination of Netflix, Hulu Plus, iTunes rentals, Aereo, Roku services, over-the-air broadcast signals, etc. and none of them are available on any one device. (Although apps like Fanhattan could help consumer's manage the juggling).
Over-the-top content providers can and will develop their own original content, but it is unclear if this content will be a suitable replacement for a multichannel subscription. Netflix with its original content initiative and YouTube with its investment in original channels are pouring resources into original programming. If there is a return on this investment and it continues, it will make over-the-top more attractive. On some level it does not matter if the new content is a good substitute for what comes with a multichannel subscription, programming is rarely a zero-sum game. The growth of VHS rental didn't hamper the growth of cable subscriptions, but it did destroy the repertory movie house. One notes that the last attempt to enter the multichannel business head-on with original content was Cablevision's Voom and that didn't work out very well.
The rising price of a multichannel video subscription is the one given. With more distributor competition (hello, Google Fiber), the programmers are in a strong position to raise prices. Even Viacom (which "lost" the PR battle in its standoff with DirecTV), still managed to get a 20% price increase -- not bad for a losing effort, if not the 30% they had sought initially.
The distributors, resigned to paying more for content, are seeing what they CAN get at the negotiating table. Two things come to mind: greater TV Everywhere rights (an interesting #1 on this list) and greater restrictions on the amount and quality of content that cable programmers can put online for free or sell to over-the-top providers. Given the small incremental cost of the former and the relatively small revenue contribution over-the-top sources are providing today, these tradeoffs are not that difficult for cable programmers to accept.
|The metaphorical "pricing umbrella"|
As multichannel prices rise, to the extent that TV Everywhere is very valuable to the consumer, he or she will be content. To the extent that it isn't that valuable, he or she is a loser. However, the consumer facing a higher multichannel bill now has more incentive (and more money) to consider alternatives. In other words, the higher multichannel bill creates a pricing umbrella for over-the-top video.
|This is NOT what I mean by over-the-top video|
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