The Death of Cable TV? "Cord Cutters" are Not the Threat.

We might be further from mainstream cord cutting than some people would like.

With Apple TV, Google TV, Boxee and a host of other streaming video services launching, there’s a ton of talk in the connected TV space about “cord cutting,” or dropping your TV subscription and getting all your TV programming over an IP data connection.

According to a report in Engadget over 20% of peak internet downstream bandwidth is Netflix streaming. Let me start out by saying I am somewhat skeptical of this data and they don’t publish the research methodology. But for the sake of discussion let’s take it at face value and extrapolate a bit.

Netflix recently published their Q3 numbers. They have 16 million total subscribers. 11 million of them use streaming for at least 15 minutes a month. Now 15 minutes a month is a pretty low threshold. For the sake of argument, assume 6 million of these people are getting most of their video programming though Netflix On Demand and using most of that bandwidth. I consider myself a pretty heavy Netflix On Demand user and I use it maybe 20 hours a month, and that is well under half of our TV viewing. In the average American household, the TV is on for ~250 hours/month. So 6 million people getting most of their programming via streaming is almost certainly an overestimate.

There are 300 million people in the US, and the market penetration of TV is effectively 100%. Therefore using the 6 million number, roughly 2% of Americans are getting their programming via Netflix on demand. The 115 million TV household number is not really that relevant as most houses have multiple TVs. When little Sally turns on the TV in her bedroom while mom watches in the living room, the household bandwidth doubles.

These 2% are using up 20% of the available downstream bandwidth.

Netflix streaming grew 145% in the last year. If it does that again in the next 12 months Netflix will use 50% of the available downstream bandwidth.

What happens when video streaming goes really mainstream and 50% of Americans start becoming heavy streamers via Netflix? Assuming there is no other growth in bandwidth demand (very unlikely) it will be necessary to have a nearly sixfold (580% increase) increase in downstream bandwidth to keep the same level of service we have now (500% of current bandwidth to support video streaming and 80% of current bandwidth for everything else).

So what does this all mean?

It means that the mainstream adoption of streaming will require massive capital expenditures in infrastructure to support, and it’s not Netflix’s infrastructure that will need most of the upgrades. It’s the local MSO, the one who is getting less revenue from cable TV subscriptions. How will this get paid for? Higher fees for data. Unlimited data will go away. Metered data will become the norm.

At the end of the day, there’s no free lunch.

What Does "Watch TV" Mean?

The average American household consumed 8 hours and 21 minutes of TV per day in 2009.
-Nielsen

There are three different usage paradigms for television: active interaction, passive consumption, and background consumption.

Active Interaction
People have been working on cracking this nut for a long time with little consumer success. I was working for an interactive TV start up in 1990; we did classified ads, sports scores, photo albums, and weather. Recently TV widgets have become a hot new meme -- they're just another take on the same interactive TV ideas that consumers have already rejected. Television watching is in its essence a passive medium. All the wishing in the world is not going to change that. The only real success in active interaction with the TV has been the console-based video game business. From a real world perspective, this consumption paradigm is de minimis and I expect it to remain so.

Passive Consumption
Passive consumption has some brief interaction at the beginning of the session to start or select a video, followed by a long period of passivity. Over the years, this interaction has changed from choosing a channel, to putting a tape in the VCR, to starting a DVD, now it's becoming manipulating the VOD interface (either a local DVR or a streaming service). This brief interaction is followed by a long period of passive, albeit engaged, consumption. If the capability exists in the delivery channel, users often skip commercials. This is what is generally considered "watching TV," but it does not constitute the majority of the TV consumption in the US. This is the consumption paradigm that most "TV start-ups" are focused on. This business has been disrupted many times since 1975, when Sony introduced the Betamax. Each time, the programming selection method changed, and each of these changes was a disruption that was predicted to bring down TV. None of them did. TV consumption continues to grow. It will be disrupted further but this disruption, like the previous ones, will not change the majority of television consumption.

Background Consumption
The vast majority of television consumption in the US (better than 75%) is background consumption. Background consumption is what drove the average daily household television viewership in 2009 to 8 hours 21 minutes. Since 1997, despite a fracturing media landscape, despite dozens of new consumption channels, the average American household consumes ~20% more TV now then it did before the internet revolution. Americans are NOT watching less TV because of the internet and online video: they are watching more. Many Americans leave the TV on in the background at home during all their waking hours. They briefly engage with it and go back to other tasks. It's companionship. It's serialized, interrupt-driven content snacking. They leave the TV on while the cook, or eat, or clean the house, or surf the internet, or tweet and play on Facebook, or play World of Warcraft, or have sex. Commercials are not skipped in this use case. Attention is shifted away, attention is shifted back. The influence is subliminal but very real.

Finally, the expected default behavior of television is not to wait for user input. You turn it on. It makes noise and shows you pictures. It does not start an interrogative. If you like what it's showing you, you leave it alone. If you don't, you change the channel.