Needles in Haystacks

As expected, the  House Subcommittee on Communications and Technology FCC oversight hearing featured some controversy. Commissioners Pai and O’Riely pointed out just how severely the chairman has been depriving them of information about enforcement proceedings and such things as the memorandum of understanding between the FCC and the FTC about enforcement in areas of overlapping jurisdiction. The fact that FTC commissioners had access to the MOU nearly a week before FCC commissioners did speaks volumes about the chairman’s close to the vest style.

Most of the press reaction concerns some unscripted remarks toward the end of the hearing on wire tapping. The background is the desire of law enforcement to intercept the communications within the sort of terrorist groups that were responsible for the recent Paris bombings. This desire is framed by a request for back-doors that will allow law enforcement to easily break encryption, but it’s not going anywhere. Not only will the backdoors not work because terrorists and criminals can use any encryption they want, but crypto is essentially irrelevant to the law enforcement problem. The Internet’s role in carrying all communications at all times and all places means that the the search for terrorist chatter faces a “needle in a haystack problem” that won’t be improved by weak encryption. In fact, the Paris communications probably took place in the clear, without any encryption. So there’s that.

The high point of the hearing – the only time it rose above partisanship – was the agreement of the FCC not to pursue regulation on Over-the-Top video streamers. E & C ranking member Pallone had made public statements before the hearing to the effect that OTT is moving too quickly for the FCC to exercise meaningful oversight, and it doesn’t take any convincing for the Republicans to be on-board with deregulation.

Some fascinating things are taking place in the OTT market, quite apart from regulation, that deserve some attention. I’ve previously commented that the rise of streaming has not led to a rash of cord-cutting. It’s not that it won’t happen some day, but today’s reality is a slimming down of cable packages as most households use both linear TV packages from cable companies and their equivalents and streaming services such as Netflix. A recent report by Clearleap shows the duality:

  • Streaming service penetration is now on par with cable. Of those surveyed, 78.85 per cent reported currently subscribing to cable, and 71.37 per cent confirmed that they had used a streaming service(either previously or currently).
  • Millennials are leading the OTT revolution, leaving cable behind. Of respondents between the ages of 18-29, 70.32 per cent use a streaming service, while only 64.41 per cent have a cable subscription. Additionally, just over one quarter (26.48 per cent) of respondents in this age category have never subscribed to cable, confirming that younger viewers don’t have the same attachment as their parents or grandparents.

Users are generally happier with their streaming services than with their cable companies because they perceive better value from streaming. The most interesting finding is that consumers are willing to pay more for streaming services than they already pay. Clearleap asked respondents to design their own steaming packages from bundles of movies, basic cable, OTA television, sports, and several other options. Consumers weren’t eager to include sports in these ideal bundles; only 24% chose sports, while 53% wanted movies. 43% of current streaming users would be willing to pay between $10 – $25, more than these services cost today. So there’s some pricing flexibility.

Streaming isn’t only a great deal for consumers, it’s a boon for content producers as well. As the Wall Street Journal reports, major producers are making money hand-over-fist from streaming:

Licensing content to Netflix and other streaming services such as’s Prime Instant Video has become a fast-expanding, high-margin source of revenue for the biggest content owners, including Walt Disney, Time Warner, 21st Century Fox, CBS,Viacom, Discovery Communications and AMC Networks.

But it’s not all flowers and candy for the studios, because they also have an interest in cable company revenues, which are threatened by streaming. From the same article:

But it is clear the presence of their shows on these platforms is hurting traditional TV ratings, which drive ad revenue, and making it easier for pay-TV subscribers to quit.

Now it would appear that the issue here is absence of live, OTT TV programming from streaming services, but it’s more than that. Cable is heavily invested in sports programming, while consumers are much less enthusiastic about paying to watch sports. The first big shock to the traditional cable revenue model came from ESPN:

That jarred with the fact that greater-than-expected subscriber losses at ESPN caused Disney to lower its forecast for cable operating income growth, which triggered a stock-market bloodbath. In the two days following, Disney and its five biggest content peers—Time Warner, 21st Century Fox, CBS, Viacom and Discovery Communications—saw $43.5 billion wiped from their combined market capitalization.

There’s been a bidding war for sports programming among cable-dependent networks for the last several years because sports programming was perceived to be immune from commercial skipping that became a thing with the spread of DVRs such as TiVo. This has led to exaggerated unfairness in baseball in particular, with rich teams getting lucrative cable contracts while small market teams live on table scraps. Hence absurdly long and costly contracts for star players in the twilight of their careers.

So the content and streaming industries have some issues to work out before we see cable TV shrivel up and die from the total takeover by streaming. Perhaps the ultimate conclusion to this story will be the disintermediation of streaming, as consumers deal directly with content producers rather than with middlemen such as Netflix. Studios are already leaning toward Hulu because they can be stakeholders rather than suppliers.

As this happens, however, consumers will have the same problem the intelligence services have with their missions today: searching for the programming we’re going to like in a sea of crap is a needle-in-haystack problem. And there are going to be business opportunities for those who can solve it.