Just because consumers can save money by cutting the cable, that doesn’t mean that they will. Assuming that Boxee is successful, what will happen next?
I couldn’t help notice an article in today’s New York Times entitled Cable Freedom Is A Click Away which outlines one way to install a cobination of Boxee and Hulu desktop onto a Mac mini as a way of getting rid of Pay TV service. The premise: it saves you money.
Now, mind you, you’re going to have to give up premium cable programs such as Dexter or Weeds and replace them with the slim pickings at Funny or Die and College Humor websites. If you don’t know the trade-off already, it’s the difference between major-league sports and their high-school facsimilies.
And it’s not easy. There’s a whole lot of figuring to do, cables to connect, and remotes to understand. And there are many people who will be willing to undertake this task.
I say this not as a systems engineer…but as someone who’s spent a number of years following technology adoption, consumer behaviors and the like. And the three questions that we really should be asking about Boxee are as follows:
Question 1: Is It Compelling Enough?
As in compelling enough to drive a large enough number of consumers to a free platform. The logic (that Boxee and other over-the-top video solutions save you money) is pretty clear.
Not Pure Substitutes
It’s also clear that media companies are using windowing and premium content as a way to make certain that over-the-top video isn’t the same thing as what you get on Pay TV. I’ll argue that an evening of clicking through podcasts and YouTube videos isn’t the same as watching professionally-produced, long-form programming.
Now that the Roku Channel Store is open, I had a chance to spend some time with web video on my television set. I hate to say it, but poorly-written, over-acted dramas shot with limited casts in abandoned office spaces just don’t make for good television. After watching a dozen different web series, it’s clear that the magic of an early-nineties independent film (with the constraints of limited cast, limited location, etc.) doesn’t translate to short-form episodic programming.
But Will Middle America Make The Leap?
I’m not talking about people who live in the industry, who live by technology, and who haven’t been in a Wal-Mart…ever. I’m talking about the average person in this country. Will that person get rid of basic cable? Will they make a capital investment of several hundreds of dollars…with the promise of saving more over time?
Keep in mind, these are the same people who went out in large numbers and bought flat-panel television sets, because we thought we needed them for the digital transition. We focus on the monthly payment and not the total amount of the loan. Housing crisis? Adjustable-rate mortgages?
I understand the logic of rationality, but people aren’t rational. This is why marketing (and advertising) exists. We make emotional decisions for all the wrong reasons. And we do it in very large numbers.
The Numbers
Furthermore, numbers play a significant role in explaining the opportunity for Boxee and other over-the-top video solutions. According to the 2007 U.S. Census update, 62% of U.S. households have Internet access, with 82% of those (or 50.8%…or 59.9 million households) subscribing to a broadband service. It’s reasonable to assume that the dial-up, over-the-top audience is about as small as can be.
Starting with only half of the market, over-the-top video faces a number of challenges in becoming a mass-media delivery platform. The next two questions work from the assumption that over-the-top video can be successful in getting large numbers of Americans to cut the cable.
Question #2: What Will Happen To Programming?
The over-the-top model is entirely ad-supported. This comes at a time when Comcast is willing to pay billions for access to NBC Universal’s cable properties. Cable revenues (and profitability) are at an all-time high. And even Boxee’s executives admit that it’s difficult for them to find programming partners willing to jump ship from the oligopoly of Pay TV.
I don’t buy the argument that the prosumer video category will drive production of far-less-expensive but otherwise acceptable programming. If we just stop paying those high production costs, get rid of retirement and health insurance benefits, and otherwise tighten our belts — then we’ll be able to have ad-supported, over-the-top programming.
What will ESPN be like without the $3.50 that each cable subscriber pays for it? Will those hordes of high-school volleyball videographers and commenters make the leap up to the big leagues? And will over-the-top production values (think basic cable) be worth watching?
Not to mention the protection that media companies will build into their premium properties. Windows are a simple tool, but let’s not forget the fact that the media companies control their own over-the-top distribution, and they control the flow of programming onto these sites. And yes, we do value last week’s episode of Scrubs very differently than Season 4, Episode 3 of The A-Team.
Question #3: What Will Happen To Internet Access?
I know, the FCC chairman already gave a speech about network neutrality, and many people in the media and blogosphere have taken this speech to mean that we now have network neutrality. Which simply isn’t true.
Let’s think about it this way. If people start unbundling the triple play (Pay TV, telephone, and Internet access), then what will happen to the individual services?
I should be clear that I don’t think that the majority of people will unbundle the triple play. We’ve had options like this in the past (naked DSL, lifeline telephone services, party lines, metered access, and so on and so forth), and the take rate has always been low. We give people the option, and they choose the bundle.
The obvious answer is that the individual services will become more expensive. Take cable modem services (which rely on existing multichannel network infrastructure). If the multichannel (Pay TV) services see declining revenues, then it’s only logical that the Internet access services will become more expensive.
So bandwidth caps, measured service, quality of service, and so on will become part of the reality for Internet access services in an over-the-top video world.
In Other Words
Let’s think of an alternate reality: one in which there were 78.8 million over-the-top video households and roughly one million Pay TV subscribers. What would television look like in that world?
Would there be an American Idol? Would there be an online audience for the New York Times?
Because it’s easy to sit in a major U.S. city, to pay $30 a month for Internet access, to get high bandwidth and low latency service, and to envision that:
(a) people make rational, dispassionate choices about the ways in which they spend their money,
(b) everyone else in the country (including those in rural areas) pays an equally-low rate for 10+ Megabit Internet service,
(c) Internet access prices will remain low in perpetuity, regardless of what people do with it, and
(d) media will remain unchanged by a transition to an entirely ad-supported model.
All of these assumptions are incorrect. People aren’t rational and dispassionate about money. Broadband Internet access services can get quite pricey if you want to stream video in less populous areas. If over-the-top becomes a primary platform for multichannel video, then Internet access services will become more complex and more expensive. And media will definitely change if the subscriber subsidy disappears and there are fewer production dollars available.
But I don’t think these things will happen. Take a look overseas to the complexity created by over-the-top video. In Britain, BBC’s iPlayer has created so many issues for ISPs tasked with building a network and business model to deliver Internet video. Project Canvas, I believe, has run into its fair share of challenges, and that’s been moving along with Ofcom’s blessing.
The rest of the world continues to look at the subscription + advertising model as the most successful one, and countries that mandate ad-supported content are finding media companies in dire circumstances. Before you say that the rest of the world doesn’t matter in the U.S., think again. Those global markets for programming syndication pay for long-form video production here in the United States.
If Boxee (or any of their competitors) is successful, they’ll most likely get bought by one of the major multichannel set-top box or software platform manufacturers (Cisco, Motorola, ARRIS, NDS, etc.). And that’ll be the end of it. The service providers and media companies already have a strong hold on this market, and they’re not about to give up control.