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Pay-TV 2012: the Big Challenges and Opportunities


The U.S. pay-TV market had an adoption rate that service providers in other nations would envy. For the longest time it seemed that the only way to go was up. The incumbent's quest for more channels was coupled with the desire to add new features like optional pay-per-view offerings and DVR capabilities in set-top boxes.
The result: upward trending subscriber growth -- with a corresponding increased revenue and profit.
Meanwhile, all the status-quo players supported a perpetual increase in the ongoing cost of sporting event programming. The assumption was that these high-cost sports channels would be subsidized by the masses. Everyone had to pay the price -- including subscribers that rarely or never watched ESPN.

The video entertainment ecosystem was tightly controlled by the business development needs of a few large media companies. Others in the ecosystem had to adapt to their demands -- therefore most complied. Nobody seemed to care that the fundamental business models were vulnerable -- because they were based upon dysfunctional business practices that limited innovation.

But what if pay-TV subscribers could find episodes of TV series and movie content from alternative (lower-cost) sources? Moreover, what if those new industry players were subversive and disruptive -- not willing to adopt the nonsensical rules of the legacy incumbents?

What if the marketplace, an assumed captive audience, truly had a choice?

Fragmentation: a Free Market for Video Entertainment

According the the latest market study by eMarketer, the U.S. online video ecosystem is thriving and poised for continued growth. Eager consumer viewership, technology adoption and high-quality content availability are driving the upside potential -- for at least the next four years.

The sites people use to watch premium video online are gaining momentum. Established destinations such as YouTube, Yahoo! and Facebook continue to grow, while other sites -- such as VEVO, the music video site -- are rapidly attracting more viewers and top advertisers.

Even high-profile online services that have struggled in recent months, including Netflix and Hulu, are maintaining market leadership and brand strength in their respective content areas.

"The convergence of audience growth, technology advances and content availability has provided marketers with a wealth of opportunities to attach brands to premium video,” said Paul Verna, senior analyst at eMarketer.

The Market Transition Advances Slowly, But Surely

According to eMarketer's assessment, the trend will continue in the coming years, but will be tempered by challenges -- including digital piracy, a lack of standardization in ad types and cost structures. In addition, there's the tendency for some old-school industry players to try and prolong restraint-of-trade practices that restrict content access to their preferred distributors.

Regardless, eMarketer anticipates that U.S. online video viewers will reach nearly 170 million by the end of 2012. Furthermore, young children (ages 11 and under) and senior (ages 65 and older) online viewers are growing at above-average rates -- as they catch up with the rest of the viewing public.

The momentum for adoption is still advancing. U.S. adult internet users who watch TV shows online will rise by double-digit percentages in the next two years. And, it's expected that nearly 60 million U.S. adults will watch full-length feature films online -- at least once per month in 2012.

"From movies and full-length TV shows to sports streams and made-for-web programming, video is finding receptive audiences on all types of connected devices," said Verna.

I'm expecting the trend will demonstrate that further fragmentation is good for the overall prospects of continued free market development, and that those players who welcome the emerging competitive landscape will help to create the much-needed new business model innovations.

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