Capital Currents - A la carte, OTT and TV Everywhere
Is there a real demand for a la carte pricing?
One of the themes at the recent Consumer Electronics Show was the convergence of television and the Internet. Will it actually happen? Everybody thinks it will. It has started already, but they just don’t know when it will be complete. And it could lead to a reincarnation of a la carte cable pricing, as CED Editorin-Chief Brian Santo noted in the January issue.
You remember a la carte. It was the goal of former FCC Chairman Kevin Martin. Cable subscribers should not be forced to pay for a ton of cable channels they never watch. In 2004, when the FCC was led by Michael Powell, the FCC did a study of a la carte pricing and found that cable subscribers would save money only if they subscribed to fewer than nine cable channels. But under Kevin Martin, the FCC reversed its position in a 2006 report that found an a la carte option would save all consumers money.
I reported in detail on the unethical behavior that led to that report in my February 2009 column. Anyway, the cable industry refused to go along with a la carte pricing, and Kevin Martin took every opportunity to release decisions that punished the industry. The current Commission, under Julius Genachowski, has revisited and reversed some of those punitive decisions.
Lately there has been a surge of video services that use the Internet in one way or another. They come in several flavors. Some, like Apple TV, Boxee and Roku, require a separate standalone box to connect to digital TVs. They have not been very popular. Some services, like Netflix, are available to viewers with “smart” TVs and Blu-ray players that connect over the home network to a cable modem and stream video directly to the TV.
Other services, like the Comcast application for the iPad, turn the Internet into a universal program guide and remote control to allow user selections. In the case of the Comcast app, those selections are delivered as linear or on-demand cable programming. In the case of Google TV, the search can include over-the-top (OTT) services like Netflix and Amazon Video on Demand, as well as cable or satellite programming.
Another flavor is TV Everywhere, the cable industry initiative to allow cable subscribers to display programming on PCs, phones and tablets. TV Everywhere has several significant challenges, including copyright and licensing contract limitations; differing display format requirements; a need for rock-solid authentication to prevent piracy; and the wide variety of operating systems used by PCs, phones and tablets. But in order to work as planned, TV Everywhere needs the Internet. Maybe not at home if the cable company supplies a home network gateway box to convert cable transport protocols so that programs can be delivered to a tablet on a home Wi-Fi network. Recently developed standards for remote user interface (RUI) would make this possible. But to watch cable programming while you sip a latte at Starbucks, TV Everywhere needs the Internet.
One feature that is common to several of these services is that they are over the top. So while the cable industry may not spin it this way, even TV Everywhere is OTT when you use it outside of the home.
But TV Everywhere presumably contains the same bundle of programming that comprises a home cable subscription package. Those other OTT services are different. They are a la carte.
At a keynote session of the 2011 CES, the CEOs of both Verizon and Time Warner expressed the view that OTT a la carte video services are too much trouble for most consumers. Consumers prefer to subscribe to a single aggregator rather than trying to piece together separate a la carte services from a variety of different providers. Moreover, the different OTT transport technologies, such as Apple QuickTime, Microsoft Silverlight and Adobe Flash, need different receiver capabilities and might not work well with one another, leading to consumer confusion.
My wife wouldn’t even consider pulling multiple services together. Not only is keeping track of the services complicated, but in the long run, the multiple bills may amount to cost increases rather than savings. The better approach is one vendor, one package of services, and one remote control that changes channels and turns everything off and on. The trend is for consumers to consolidate services – cable, Internet, phone – on one bill. The a la carte approach is the antithesis of that.
The existence of OTT services certainly allows subscribers to cancel their cable programming service, retain cable modem service and watch programming delivered over the Internet by OTT services. Of course, OTT services are subscription services – they’re not necessarily free. Whether these subscribers will save money depends on the OTT subscription costs.
Is there a real demand for a la carte cable pricing? OTT services will have the opportunity to test that demand, and test whether a business model can be built around their versions of a la carte pricing. But will they be merely complementary add-on services for cable subscribers, or will they be robust competitors against cable and satellite? Don’t hold your breath on that last possibility.