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CHAPTER II - Video in America--Trends and Consumer Viewing Habits

The video market has been buffeted in recent years by the same forces that have affected the markets for music and news—inexpensive electronic devices that are shrinking in size and expanding in capability, along with the expansion of broadband networks that are more capable and more ubiquitous than ever. These changes are the fruits of investment and innovation by network providers and device manufacturers, which, in turn, have led to a huge growth in programming choices for consumers and new opportunities for content creators. At the same time, there remain many of the public purpose goals associated with video, such as providing information about government and civic affairs and communicating information in times of emergency. The task for policymakers is to align regulation in a rapidly changing environment to best serve the public interest.

In the midst of rapid change, old rules do not map neatly to new realities, and new rules may become dated quickly or developed with limited information. With these issues in mind, the Aspen Institute Communications and Society Program convened a group of 33 stakeholders in August 2013 to consider the future of video regulation. Though the conversation ranged widely—from details about the video market, the consequences of current regulation and business models—high-level economic and social goals for the video market framed the discussion. With its ability to entertain, inform and engage citizens in their communities, video should contribute to a rising standard of living for citizens. This requires a competitive marketplace and the development of robust business models to deliver services. It also needs efficiently functioning markets in which consumers have enough information to make choices, businesses can invest efficiently and innovation can flourish.

On the social side, video has historically had a public-interest dimension. The social goals that video helps further include:

  • Delivery of public goods such as information about public safety and the means for public safety agencies to do their jobs.
  • Universal availability—making sure that the means to receive video are available to all members of society.
  • Localism—providing the wherewithal for people and institutions to create and share video content that is relevant to local communities.
  • Diversity—providing the means by which a range of voices, in terms of points of view and socioeconomic backgrounds, can participate in public discourse.
  • Free flow of information—in addition to ensuring that video adheres to free speech values the video market should also make sure that users can access lawful content over video and other data networks.
  • Trusted environment—users of video and other data networks should feel secure that service providers do not misuse the data that users share with providers and that users have the tools to understand clearly the consequences of sharing personal data online.

These social and economic goals for video shaped the discussion of potential regulation of the future video-market environment.

Video in America: Trends and Consumer Viewing Habits

In terms of the economic state of the media industries at the start of this decade, the overall picture is one in which the total revenue of the U.S. commercial media, as a percentage of gross domestic product (GDP), has stayed steady over a long time horizon, dating back to 1950; though it has declined in recent years, from highs in the late 1990s to 2000. As of 2010, the media industries—defined as books, newspapers, magazines, recorded music, theater, broadcast television, home video, multichannel TV and the Internet—accounted for 2.1 percent of U.S. GDP. In 1950, when several of those categories did not exist, the share also stood at 2.1 percent. In the late 1990s, the figure stood at 2.6 percent, with the decline in the ensuing decade coming from a fall-off in revenue from newspapers, broadcast TV, magazines and recorded music.

For television, the long-term picture is brighter. Television’s revenue as a percentage of GDP stood at 0.38 percent in 1970, 0.93 percent in 1999 to 2000, and 1.12 percent in 2010. The growth in television stems from the expansion of multichannel subscriptions, which in turn has fueled the explosion in the number of TV channels, which consumers have embraced. In 1970, just 7 percent of homes subscribed to pay TV, a figure that grew to 87 percent in 2010 with the rise in subscriptions to multichannel video programming distributors (MVPD). Standard television has maintained its place in people’s lives as measured by the increase in the amount of time people spend watching it. The average household spent 43 hours per week watching television in the early 1970s, a figure that rose to 58 hours by the early 2010s. More recently, according to Nielsen, the amount of time per week per person for TV viewing has grown from 33 hours and 48 minutes for the 2008–2009 season, to 34:01 for 2009–2010, and 34:12 in 2010–2011.

Online television is the new player with the potential to upend the market for TV viewing. With the advent of YouTube, Hulu, Netflix, iTunes, Amazon and services offered by incumbent MVPDs (e.g., Comcast or Time Warner Cable), consumers have the option of switching off traditional linear television and watching TV programming on Internet-connected devices, including new smart TVs capable of receiving content directly over the Internet without the need for an MVPD subscription. Recent data indicates that watching video online when measured across the general population does not occupy a large share of viewing right now, but importantly, it is growing rapidly, especially among the younger demographics. Nielsen finds that as of late 2011 people report watching 33:43 hours of television per week, but just 30 minutes with video on the Internet and eight minutes of video on a mobile phone. For young adults (between the ages of 18 and 24), online video is more popular; they watch 51 minutes of online video, 14 minutes of video on a mobile phone and 25 minutes of television per week.

Even with the changes in the composition of viewing, the number of MVPD subscriptions has remained steady. Between 2010 (year-end) and June 2012, the number of subscriptions grew modestly from 100.8 million households to 101.0 million. During that time, cable MVPDs lost market share, falling from 59.3 percent to 55.7 percent of the market, with direct broadcast satellite gaining (33.1 percent to 33.6 percent) and telco MVPDs growing (from 6.9 percent to 8.4 percent).

As for the new and old ends of the market, the FCC reports that the number of households that rely only on broadcast television has not changed in recent years, with 11.1 million households having only over-air television in 2012, the same as in 2010. Broadcast industry revenues were $24.70 billion in 2012, an increase from $22.22 billion in 2011 fueled mainly by political advertising. Broadcasters increasingly rely on fees from MVPDs for retransmission consent; in 2008 revenues from retransmission consent were 4.5 percent of total industry revenues, a figure that tripled to 14.5 percent in 2012. SNL Kagan projects that retransmission fees will account for 23 percent, or $6.05 billion, of broadcast station revenues by 2018. As for online video delivery (OVD) services, SNL Kagan counts 22.8 percent of households as Internet-connected TV households, meaning that some device such as a game console or OVD set-top box enables the viewing of online content on the television.

Nonetheless, the possibility of consumers cutting the TV cord (i.e., foregoing pay TV options altogether and watching video programming over the Internet) raises concerns for established industry players. At present, the incidence of cord-cutting is not high in the United States. According to Deloitte, less than 1 percent of MVPD subscribers will cut the cord in 2013. A separate study by Leichtman Research found that 0.4 percent of households had dropped their pay TV service to rely exclusively on Internet services to watch TV programming. Still, the greater prevalence of this practice among young people is cause for concern by the MVPD industry in the long term.

Notwithstanding data showing that online video is not cutting greatly into TV watching in traditional measures, online viewing of video occupies a significant place in people’s media habits. Overall, some 78 percent of online American adults have watched or downloaded online video in 2013, up from 69 percent in 2009; for those between the ages of 18 and 29, nearly all (95 percent) had watched or downloaded online video in 2013. Also of note is uploading video; some 14 percent of online adults had uploaded video in 2009, a number that more than doubled—to 31 percent—by 2013.

The current state is, therefore, one of impending disruption as “over the top” (OTT) video delivery (i.e., consumers watching video online and eschewing traditional television) seems poised to upend broadcast or cable as a means of video delivery. As discussion unfolded, however, different views surfaced on the pace and path by which this disruption may unfold. It is true that new entrants often turn monopoly platforms into commodities. Broadcast television undercut profit margins for newspapers and movies, cable challenged broadcast, and satellite has done the same for cable. The Internet has mortally challenged the business model of the printed newspaper, while the mobile Internet threatens the Windows and Intel stronghold on the online access platform. Wireless and fiber access promise to be new challenges to broadband Internet service providers in the cable and telephone industries. As ineluctable as these patterns may be, however, the high fixed cost to entry for online access means that the disruption to the access market may not happen as quickly as some envision, although it is clearly occurring.

One possible inhibitor to rapid change in the market is ease of use. There is no “eBay for video” that aggregates content in a way that makes it seamless for consumers to navigate video across different display devices.

Standards also come into play in two ways. First, with the multiplicity of access devices (computers, tablets, handheld), video standards should enable different platforms to operate together. For set-top box manufacturers, this may raise the cost of developing new set-top devices that might hasten convergence and thus market disruption—although it should be noted that many new Internet-enabled set-top boxes rely on their own proprietary standards. Second, harmonizing TV standards, which would result in more efficient spectrum use, would (by freeing up more spectrum in the commercial market) promote competition in the video marketplace.

Another inhibitor to new entrants in the video market is access to content. If a new “over the top” video provider wants to appeal to a wide swath of the market, it needs access to the programming that appeals to a range of consumers. Yet contracts negotiated by the content industry for certain types of programming, such as sports and other must-have programming, tend to be long term, expensive and at times, restrictive. A new entrant in video, both MVPDs and online video distributors alike, may not even have the opportunity to negotiate for desirable sports programming until early in the next decade. This control over licensing by the content owners continues to play a significant role in new distribution opportunities and no doubt will impact the pace at which change in the video market unfolds.

The pace of market change also depends on whether new means of access complement old ways or substitute for them. Traditional ways of watching television (e.g., in front of a large screen in the home) will not go away quickly; many people who do this will also watch video on a new-media device such as a tablet. And even though the phenomenon of “cutting the cord” is more prevalent among young adults, not everyone embraces new video platforms. That said, behavior on the margins—a minority of elite users flocking to new ways of consuming content—can have real impacts on traditional markets well before new practices become mainstream.

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