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How Pay-TV Providers Failed the A-la-carte Test

As consumers demanded greater flexibility and convenience in acquiring entertainment content, personalization of the user experience wasn't merely a nice-to-have feature -- it became a key requirement.

Unfortunately, most traditional pay-TV providers failed the test of providing more consumer-centric offerings. That mistake may prove to be deeply regrettable.

On-demand viewing of TV programs and movies in the U.S. will generate $10 billion dollars in online video annual revenue. In contrast, revenue from retail DVD video disc sales and rentals will continue in decline, with no future leveling in sight. Also, traditional pay-per-view service revenues are still flat across the board.

According to the latest In-Stat market assessment, there will be three growing on-demand video revenue streams:

- Transaction- Video-on-Demand (T-VOD) encompasses online TV rentals, pay-TV VOD rentals and pay-per-view.

- Subscription VOD (S-VOD) includes online video subscription services, premium TV channels, as well as free VOD with a pay-TV service.

- Electronic Sell-Through (EST) covers the purchase of TV and movie content, independent of subsequent content delivery methods.

The success of on demand electronic sell through (EST) will hinge primarily on the buy vs. rent decision. Realistically, EST cannot replace historic retail DVD video sales.

However, the migration of DVD rentals to online T-VOD services, will help fill this revenue gap. Subscription VOD will see the highest growth rate, but also the most intense competition.

"The transition to on-demand video does not mean that linear TV is coming to an end," according to Keith Nissen, Principal Analyst at In-Stat. "What we are seeing is the economics of the digital entertainment world have begun to shift. The future will be a hybrid ecosystem, made up of both linear TV and on-demand video revenue streams."

Pay-TV and broadcast TV services still generate the majority of the revenue, but both business models are currently under stress. On-demand viewing of video content, whether by transaction or subscription, is taking hold. In order to ensure the continuation of existing revenue streams, new value propositions must be created.

That said, many consumers demonstrated an interest in a-la-carte service offerings years ago. However, the incumbent pay-TV providers resisted the requirement. Now, it appears that those alienated consumers have found what they desire elsewhere. Even as providers show signs of a willingness to adapt to market requirements, it may already be too late to regain the trust of the marketplace. Only time will tell.

In-Stat's latest market study findings include:

- U.S. TV download revenue will more than triple between 2010 and 2014.

- Online a-la-carte rental of TV episodes will directly compete with online subscription TV services, such as Hulu Plus and Netflix, and may detrimentally impact the use of incumbent "TV Everywhere" services.

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