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Five Stumbling Blocks to Mass Adoption of Internet TV

You down with OTT?

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With all the recent hype about networks such as HBO and CBS starting to offer their shows on the Internet, the fact remains that more than 100 million U.S. households still prefer to get their TV service delivered by hard-wired cables or satellite dishes.

But it’s no secret that millions of other consumers are cutting the cord and switching their TV viewing habits to Internet TV shows — whether that’s free content on YouTube or paid subscriptions such as Netflix. Furthermore, it’s only a matter of time before all TV content is distributed over the Internet.

If you’re not following the Internet TV transformation as closely as I am, you may not be familiar with the most important acronym in TV today: OTT, which is short for “over the top.” The term grew out of the first-gen of Internet TV distribution via set-top boxes. Today, it’s simply jargon for delivering video content over the Internet rather than via traditional TV systems. You’re sure to hear this term a lot as TV transitions to the Internet.

Given that millions of consumers are ready for Internet TV and that the technology is largely already in place, why hasn’t it happened yet? It may be because there are still major stumbling blocks, including these five:

1. If most pay TV content is going to stream from separate websites or services, does that spell the death of bundled TV subscriptions?

It seems likely that expensive cable/satellite multichannel packages — or bundles — are simply dinosaurs waiting to go extinct. If that’s so, then how will couch-surfers and mobile-bound consumers easily access unbundled premium channels and first-run content without having to set up separate relationships with each provider?

The answer may be the rise of “micro-bundles,” sometimes also called “skinny bundles.” As the name implies, these are slimmed-down versions of traditional cable offerings, customized more closely to the consumer’s preferences.

Major players including Sony, Dish Network and Verizon are in the process of negotiating digital streaming rights to micro-bundles composed of various premium channels, which may address the problem. There are several startups working on it, as well.

As a caveat, any company offering such micro-bundles must figure out how to build a scalable, profitable business, which will be no easy feat. In addition, industry incumbents offering such new packages will need to be mindful of the existing economic structures currently in place with their industry partners.

2. Can sports fans feed their appetite for live sports on the Internet alone?

At this point, one could argue that major sports programming is the glue holding the old cable bundle together. And for the near term, that’s not going to change. Most major U.S. sports rights are locked up by incumbents through 2020, if not longer.

But leagues and their rights holders haven’t been able to hold back the tide of online innovation, so many major sports are already being offered over the Internet through paid packages such as and NBA League Pass. Meanwhile, some sports entertainment franchises such as the WWE (WWE Network) have already launched comprehensive OTT offerings.

For many sports fans, the full cable TV sports experience also includes the highlight and talk shows that are currently intertwined with the live programming rights. Those are available only on a limited basis on the Internet, so the true TV sports fan (and his or her household) isn’t going to happily migrate to OTT sports until it’s at least as good an experience.

The X factors here are today’s OTT powerhouses such as Netflix, Amazon, Hulu and YouTube. If and when Internet and technology platforms with large cash hoards and soaring stock prices decide to get serious about taking major sports OTT, they will throw down the big money to buy the rights and make it happen.

3. In an OTT world, how will viewers get local news, and more broadly, what happens to the network affiliates model?

This is a thorny issue, and one that is not easily answered right now. The major TV broadcasters in the U.S. are networks in part because they deliver their content via local affiliates around the country, a model left over from the era of analog over-the-air TV transmission. If consumers can get local news, non-news local content and reruns OTT, what’s the use of a local affiliate? And does that mean local TV news shows are as endangered as local newspapers?

Local ad revenue and retransmission fees from cable operators are the lifeblood of local affiliates. There is still a lively market for local TV ads, which suggests that something will fill the void. Local news may shift to new broadcast TV industry initiatives like Tablet TV from Motive Television (backed by Granite Broadcasting, which owns nine network affiliates), while some local news content may be included in the emerging network OTT services such as the one CBS recently announced (CBS AllAccess).

Retransmission fees are another matter. But as cable subscriptions continue to fall, there will be pressure to lower these fees, further weakening local affiliates.

4. Why aren’t Google and YouTube already dominating this market?

YouTube is the largest online video community and repository, with more than one billion users, 40 percent of whom have already migrated some of their viewing to mobile devices. That makes YouTube a quietly dominant player in OTT, especially considering that it is owned by Google, with its $370 billion market cap and $62 billion in cash reserves. They could literally do anything they want right now, but so far they haven’t actually flexed much muscle.

That’s likely about to change. YouTube is widely rumored to be planning a premium subscription service of its own, and in all likelihood, it will get into the video production business to feed that service.

YouTube has also helped power a new generation of content creators, linked together by ad-supported multichannel networks, or MCNs, which have built huge audiences. YouTube is involved with these companies in myriad ways: As an investor, partner, provider of content production subsidies and more.

5. And finally: Do emerging OTT powers and video incumbents actually know what consumers want?

Consumers want choice, convenience, a great experience and value. With moves like the recent HBO and CBS announcements, incumbents are being dragged kicking and screaming into the OTT world, and they will have to think critically about consumer desires to remain competitive.

It may seem like the Wild West for a while, because I don’t expect much industry-level collaboration. The current environment of having to pay separately for Netflix, Hulu Plus, Amazon, HBO and other premium channels is already overwhelming for consumers, and it doesn’t address two of the four things I stated above, offering a great experience at a reasonable price. How many $9.99-per-month subscriptions do you think a consumer will purchase before they start wishing they had their old cable bundle back?

I think there may be an opportunity for next-generation “super aggregators” to re-bundle all of the individual premium channels into a phenomenal experience at a great value. There’s no clear leader yet, but maybe a company will emerge with a beautiful programming guide and user interface, a wide array of premium and longer-tail content, and the relaxed “lean-back” experience TV viewers crave. There are a few exciting startups in existence today focused on this mission, including and Roku.

The future of OTT is upon us, but the forecast is still uncertain until these and other pressing questions are addressed. One thing is certain, though: There’s a lot of money to be made migrating the old cable and satellite model to the Internet.

Daniel Leff is the founder and managing partner of Luminari Capital, a digital media fund with a targeted focus on the innovation and disruption happening broadly throughout the $500 billion global video ecosystem. Luminari Capital is an investor in Pluto.TV and Roku. Reach him @Dr_Daniel_Leff.

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