The TV set and the Internet are getting married, and no one knows what the result of that union might be. In south St. Louis County, Jacob and Robin Metheny show one way that things might go — with worrisome implications for the pay-TV business.
The 30-something couple cut their AT&T U-verse service. "We were paying like $100 a month, and we were only watching three or four stations," said the husband.
So they went back to the days of rabbit ears and broadcast channels — but they kept their high-speed Internet connection and got a $9.99 monthly subscription to Netflix, which offers Internet viewing of hundreds of movies and TV reruns. They connect their two TVs to the Internet through a Blu-ray disc player and a Wii game console. Do they miss cable?
"Eh! It's no loss," says Jacob Metheny, adding the family only misses one show they can't currently get.
Their situation underscores the rapid fragmentation of the TV viewing market, where the rise of on-demand online entertainment threatens the longtime dominance of pay-television services. The digital revolution — which already has made mincemeat of the traditional models for selling intellectual property ranging from newspapers to music — now appears poised to undercut pay-TV providers such as Charter Communications. Based in Town and Country, Charter is the nation's fourth-largest cable company and employs 3,000 people locally and 17,000 total.
New cable and satellite TV customers, after years of growth, appear to have crested the hill — and could soon begin a descent. The fast-evolving market now teems with competitors and competing models for both revenue and delivery. Netflix and similar services offer thousands of movies and TV shows. Broadcast networks and cable channels put certain shows online or sell them through retailers such as Apple. And you can watch on more devices — from laptops to tablets to smartphones.
Increasingly, the Internet and the TV screen are becoming one. TiVo, video game systems, Apple TV, Roku, Google TV and other systems link Internet content to the TV screen. TV manufacturers are marketing sets that connect directly.
Pay-TV operators "ought to be worried. If they're not worried, they're not paying attention to the potential threat," says Ian Olgeirson, senior analyst at SNL Kagan, an investment data and analysis firm.
SIGNS OF DECLINE
About 100 million households pay for TV service through cable, phone company lines or satellite. For the first time, that number dipped slightly last spring and summer. Though the losses have since been recovered, it's a sign that pay TV may have reached the saturation point, with 89 percent of homes connected by wire or satellite. Throw in cheaper or free Web options, and more viewers will be cutting the cable cord, says Olgeirson.
At the moment, people in the pay-TV business are betting that the giant flat screen won't give way to a slim tablet. Internet connections still suffer from clunkiness and limits to the shows you can watch, and the growing presence of high-definition TVs also favors cable subscriptions. Many consumers won't trade that for "fuzzy" Internet reception, says Kurt Scherf, principal analyst at Parks Associates, a digital marketing and research firm in Dallas.
But some of the more tech-savvy and determined customers may provide a window into how television and movies get consumed in the future. In O'Fallon, Mo., Robert Hollis, an engineer by trade, rigged up his own "home theater PC" for Web access on the big-screen TV, using a remote tuner, an HD antenna on the garage wall for broadcast, and a music center and surround sound. He spent $850 on equipment.
Then he cut his satellite TV service — substituting Netflix, Hulu's TV show rerun service and other free Internet video. "I was paying $70 for the satellite. It paid for itself rather quickly," he said.
The devices will get better with time, which is why the industry is busily trying to find ways to make money distributing content across multiple platforms. Cable companies might put pay TV online, for instance, but only for cable subscribers. HBOGo already lets subscribers watch the pay channel's programs over the Internet on demand. "This is really more about evolution than revolution," Bruce Leichtman of Leichtman Research Group in New Hampshire. "The future is going to look more like today than some Jetson-esque future."
Cable companies such as Charter and Des Peres-based Suddenlink are joining forces with TiVo to offer customers a way to connect TV to the Internet, as well as time-shift programming — allowing the viewer to record and watch later. Over the long term, these cable providers hope to become the Googles of video search, offering searchable video on demand. Borrowing tactics from Netflix and social media, they can track your viewing habits to offer suggestions and allow you to connect with friends to trade recommendations.
"You'll be able to pull down any piece of content and watch it on any device," says Rich DiGeronimo, vice president for product management at Charter.
THE PRICE OF FREE
Cable companies are betting that the television content producers won't make the same mistake that many believe newspapers have made — giving their content away free online. "People are still going to want to watch great quality content, and that's not free to make," says Rich DiGeronimo, vice president for product management at Charter.
Of course, some already are experimenting with giveaway content, including Hulu, an advertising-supported site providing on-demand reruns of recent TV shows, mainly from broadcast networks.
And that has content producers, such as cable channels or Hollywood studios, agonizing over how much content they can put on the Internet, or sell to middlemen such as Netflix, without killing off the golden goose of cable.
Cable stations get 40 to 50 percent of their revenue from the cable companies and the rest mainly from advertising. If the content producers killed cable TV by moving shows to the Internet, they'd rip up their own paychecks.
Worried about the growing influence of Netflix, pay-TV channel Starz announced last week it would delay the availability of new shows on the streaming video service, while CBS' Showtime subsidiary said it would remove some of the programs now offered on Netflix.
Even longtime allies are growing testy with one another. This month, cable provider Time Warner Cable triggered a fight with content producers after announcing it would allow cable subscribers to access certain shows via iPad.
Sports and "event" television, such as the Oscars, will still glue people to broadcast TV and pay cable. It's part of the social aspect of television; people want to talk about the big game or "American Idol" with friends the next day, says Michael Porter, who chairs the Communications department at the University of Missouri-Columbia.
Indeed, a sports fan weaned on cable would feel bereft without it, as Hollis discovered when his brother-in-law came to visit. Most Cardinals games are only available on cable. "If you're not into sports, it's an awesome thing to cut the cable," Hollis says.
As long as the networks and cable can keep such live shows off the Internet, they'll hold their audience and advertisers. "I don't see cable companies going by the wayside," Porter says.
Whatever revenue they lose from Internet video viewing, cable companies hope to make up by selling faster Internet services to carry that video. That trend may already be showing up. At Charter, for instance, revenue from consumer video cable services was flat in the fourth quarter of last year, compared to a year earlier. But high-speed Internet service was up 7 percent and phone service up 8 percent.
Broadcast networks get much less money from cable TV companies, so they're less in thrall to them. But that doesn't mean they're looking to the Internet — where advertising yields a fraction of what networks can charge for broadcast ads — as the next profit center. Would putting recent "CSI" episodes on the Internet cannibalize the broadcast audience?
"I'm only getting pennies online compared to the dollars I'm getting on the network," CBS chief Les Moonves reportedly groused last May in Los Angeles, during a roundtable discussion among industry chiefs.
"We're not a part of Hulu, and that's why."