How Content Bundles Could Make Cord Cutting Mainstream

While over-the-top video has made huge strides over the past few years, those cutting the pay-TV cord are still, by and large, early adopters.

With the high-prices of cable and the rapidly expanding choice of content available online, why exactly hasn’t the mass market started to cut the cord? Because for all the talk about the cost of pay TV, most people really like the content they get on their set-top box. It’s reliable and easy, much if it’s exclusive and there’s a whole lot of it bundled together.

And it’s that bundle that really matters, both in the world of pay TV and, believe it not, over-the-top.

In fact, it’s the bundle that’s responsible for Netflix’s success. What consumers get with a Netflix Watch Instantly subscription is a whole lotta perceived value by having access to tens of thousands of titles, all bundled together, for a low subscription fee. Hulu is built on a similar concept.

When I predicted last December that 2011 would be the year of the virtual video operator, what I was really talking about the bundle. In other words, 2011 is the year someone — Apple, Microsoft, Google or another company — finally brings a bundle of channels to over-the-top that looks, smells, and even tastes like a pay-TV subscription.

Judging by the news this week, the race to bring that bundled content over-the-top to the TV screen is on. Apple scored a big win, bringing perhaps the second most successful OTT paid service to the Apple TV in MLB.tv and NBA subscription services.

There was also talk this week of Microsoft’s renewed efforts to bring IPTV services to the Xbox, and also a possible new bundled content service platform. This follows up last year’s rumor that Microsoft had been in discussions with media companies to create a virtual service offering of video channels in a subscription package.

For both, it’s all about the bundle.

While economists have long touted the benefits of bundled goods and services and cited the Internet in particular as the perfect distribution channel for  bundled content, many cord cutters have pointed to the expensive bundled cost of pay TV as the reason for their cutting the cord.

But what both Apple and Microsoft understand is that the bundled-goods theory still applies in the world of over-the-top video, because an irrefutable law of consumer behavior dictates that they will gravitate towards perceived value. Sure, content-bundles in OTT may be narrower than the huge array of linear content channels providers in the world of pay TV (such as, say, a subscription to a season of live baseball games), and cheaper, but they are, in fact, still bundled content goods.

So don’t think OTT is going backwards as it begins to resemble, in some small ways, pay TV over the next few years. What’s happening is that the big-players want to push beyond early adopters, and they understand the content-bundle is the linchpin in making cord cutting a mass-market phenomenon.

Question of the week

How important are content bundles for OTT?

How the TV Industry Can Make Up Lost Revenue Dollars

Total subscription dollars for video go down in an OTT world. And while every household in the U.S. cutting the cord is an unlikely scenario, the increased popularity of services like Netflix on Demand and Hulu Plus is real. How, then, does the world of video entertainment and pay-TV make up the lost revenue?

Pay-TV’s Ala Carte Tipping Point

Many pay-TV subscribers, as well as policymakers, have complained for decades over what they view as a rip-off: being forced to order bundled tiers of TV channels instead of being able to select and pay for only the ones they want.

“Why should I have to pay for 100 channels,” the argument goes, “when I only watch a dozen or so regularly? Why can’t I just pay for the ones I watch?”

The notion of being able to pay for TV channels a la carte is certainly appealing in principle. But in reality, it overlooks the way the economics of the pay-TV business actually operate. Without the leverage of the bundler’s wholesale pricing model, networks would need to charge individual users far more for select channels than the per-subscriber fees they currently collect from pay-TV operators to generate the same amount of revenue. The total monthly bill for many, perhaps even most, subscribers would end up being as high or higher than with the bundled tier.

Many low-rated networks, moreover, might disappear because they would not be able to generate enough revenue from direct payments by consumers to sustain their programming costs. The net result would be less choice of channels for consumers.

But despite this, cracks may be starting to show in the traditional bundled pricing model. Ever-rising demands by the networks for higher carriage and retransmission feeds, coupled with shrinking subscriber counts, are driving pay-TV operators’ total per-subscriber programming costs to unprecedented levels that may prove unsustainable.

At the same time, the growing number of over-the-top a la carte alternatives available to consumers, coupled with the bad economy and greatly slowed household formation, is constraining operators’ ability to pass on those higher costs to subscribers.

The result is that the traditional pay-TV bundled programming tier may be approaching a tipping point beyond which it is no longer viable.

According to a recent report by Multichannel News, Time Warner Cable’s overall programming costs rose 6.5 percent in 2009 due to higher carriage and retransmission fees. But Time Warner lost a total of 210,000 subscribers last year, which meant that on a per-subscriber basis, programming costs rose by 8.3 percent. For 2010, it expects to lose 375,000 subscribers while total programming costs will rise another 6.5 percent. That works out to a per-subscriber cost increase of 9.7 percent.

The situation is the same at Comcast. Total programming costs rose 8.8 percent in 2009, while per-subscriber costs increased 11.6 percent. For 2010, total programming costs are expected again to rise by 8.8 percent while costs per-subscriber will accelerate by 12.3 percent.

As the gap between total programming costs and real per-subscriber costs increases for pay-TV operators, the gap between the wholesale price and the theoretical a la carte price of a network shrinks. While it’s hard to know precisely where those two lines will cross, the closer together they get the stronger the case for ala carte pricing.

Given those trends, it’s no surprise to see debate breaking out in the industry over the right price for a la carte access to content. Both Time Warner and NBC Universal, for instance, have rejected Apple’s entreaties to make their shows available to rent for 99 cents each on the new Apple TV OTT platform. Neither programmer objected in principle to making their shows available a la carte; they merely insisted that Apple’s proposed price was too low.

That, plus the fact that Apple has been able to sign up ABC and Fox for its rental service, suggests the major content owners are already assuming an a la carte pricing model for at least some of their TV programming.

The bundled pricing model won’t unravel over night, of course. It still mostly serves the purposes of both programmers and pay-TV operators. But if cord-cutting accelerates and subscriber counts continue to fall, it won’t much longer be able to provide the wholesale leverage needed to support increasing returns for programmers (to say nothing of the operators).

At that point, the bundle will start to fray.

Question of the week

WIll networks be forced to embrace a la carte pricing for TV subscriptions?

Will TV Ever Get an App Store Moment?

Before the launch of Apple’s App store, the mobile application marketplace reminded me of a state-run grocery store I saw in Eastern Berlin in September 1989: colorless and half-empty, offering up aisle after aisle of unwanted goods. That all changed last July when Steve Jobs unveiled the App Store and vendors, carriers and consumers all rushed after mobile apps like Trabant-driving East Berliners in search of a Big Mac. Today’s TV application marketplace is in a similar, pre-App Store state today: lots of competing software platforms, a growing number of connected devices (but none dominant) and a fairly small number of apps. So, when will the TV have its App Store moment?

Memo to Cable Cos: Cord Cutters Aren’t The Issue

It seems the press has caught cord-cutter fever. Reading a recent Washington Post piece, you’d think we’ve entered some sort of Pay-TV apocalypse in which robots battle hipster armies who consume all their video entertainment on Macs, at least when they’re not making music videos. Others are more skeptical, estimating that only a tiny fraction of users have actually canceled their pay TV services. Regardless of who’s right, cord cutting is a red herring.