Patching the cord

What ever happened to cord-cutting? Not that long ago, the smart money was on over-the-top video busting up the traditional pay-TV subscription bundle and ushering in an a la carte, on-demand world.

These days, the big money, if not necessarily the smart money, seems to be betting the other way.

In just the past few weeks, Barry Diller-backed Aereo launched a subscriptions streaming service in New York City, Cisco announced a deal to buy NDS for $5 billion, word leaked of Intel’s plans to create a nationwide, virtual cable TV service and Netflix, the one-time poster child for cord-cutting,  began chatting up Comcast and other cable operators about addings its channel to their old-fashion, through-the-cord TV subscription services.

While varied in their particulars, what all those moves have in common is that they represent big-money bets on the future of bundled TV subscriptions and at least a tacit acknowledgment of the limits of a la carte distribution.

AEREO: Though Aereo’s future likely will be tied up in court for a while, there’s no question where Diller wants to take it. The service currently offers a package of broadcast TV channels, streamed to any device, for $12 a month. But the company envisions adding additional channels over time. “We’re starting with live broadcast for the Internet,” CEO Chet Kanojia said at a news conference last month to announce the service. “This is about the generation growing up — they expect things on their terms.”

Aereo doesn’t aim to cut the cord, in other words, so much as to replace it with its own subscription streaming service offering much of the same content currently available from pay-TV providers. Diller has so far put $25 million into the venture.

CISCO: Cisco announced this week it will acquire TV software maker NDS for $5 billion. NDS provides software for managing video delivery to set-top boxes. But its main asset is its VideoGuard digital rights management system designed to help pay-TV service providers deliver content securely to other types of connected devices.

The description of VideoGuard on the NDS web site makes no bones about who its intended customers are:

By delivering OTT content to subscribers’ TVs and connected devices, pay-TV operators can expand their service, generating significant additional operating and advertising revenues. They also remain the primary supplier for all types of video content including broadcast, VOD and OTT.

Cisco plans to integrate NDS’ software and DRM with its own Videoscape streaming platform, which it also markets to pay-TV service providers looking to enable over-the-top, TV Everywhere delivery.

The deal represents a $5 billion bet by Cisco that over-the-top video will remain within a subscription walled garden controlled by the incumbent service providers.

INTEL: Intel has made several forays into what we now call the over-the-top video space, beginning with its ill-starred ViiV initiative in 2007. It later partnered with Yahoo in its pioneering efforts to bring over-the-top a la carte video and other web content to smart TVs and other connected devices, helping to spark dreams of cord-cutting. But it shut down that unit last year and stopped development of its line of smart TV SoC chips.

Now, sources tell the Wall Street Journal, Intel is in talks with media companies about plans for a nationwide virtual cable service that would offer “U.S. TV channels nationwide over the Internet in a bundle similar to subscriptions sold by cable- and satellite-TV operators.”

There are plenty of reasons to be skeptical of Intel’s chances of getting such a service off the ground, not the least being the failure of Apple and others to secure the necessary content rights for their own planned subscription services. But for Intel even to be discussing its plan with the media companies represents an acknowledgment that the bundled subscription remains a resilient business model.

NETFLIX: With 23 million subscribers, Netflix is the largest over-the-top video distributor in the U.S. But the company has recently held conversations with cable operators about adding a Netflix channel to their pay-TV service. While those talks do not appear to be bearing fruit, at least not yet, they represent a tacit admission by Netflix of the limits of standalone, over-the-top delivery.

With its content costs rising rapidly, Netflix needs to grow its subscriber base at least as quickly to keep its margins in line. Selling standalone subscriptions one at a time may no longer provide the sort of growth curve Netflix needs to keep up. One way to grow faster would be to join the bundle and add subscribers in bulk.

So is cord-cutting over? Hardly. But insofar as investments in cord-cutting plays are premised on breaking up the traditional pay-TV bundle they’re up against a tougher nut than many cord-cutting promoters assume.

Question of the week

Can a la carte pay-TV ever compete with the value of a subscription to a bundle of programming?
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Paul Sweeting

Principal Concurrent Media Strategies

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