Renting is up. Buying is down.

The purchase of physical media (CDs, DVDs, etc.) continues to decline, and the downward trend is accelerating. Digital media downloads are declining as well. Consumers are increasingly comfortable with “renting” content by paying for access to subscription services — music, movies, TV shows, and even games and books are all moving towards an access model. In short: “renting is up, buying is down.” This may have a corollary effect in the TV and online video markets. The pressure for pay services to unbundle, along with the appearance of overt-the-top (or OTT) services, is causing waves of disruption in the television landscape — the technology is forcing us to redefine “TV.”

Video viewing habits are changing rapidly. There are more U.S. broadband subscribers than cable subscribers for the first time in history. Time spent watching linear TV fell another 15 minutes per day in Q3 (just like it did last year) and viewing SVOD services increased 12 minutes per day. Also for the first time, Americans spent more time looking at their mobile devices than watching their TV according to Nielsen.

Access vs. Ownership

New subscription services coming into the market will fuel a shift toward more on-demand viewing. From the content side we'll see unbundled subscription services from WWE, HBO, CBS, Starz, and Showtime. From the operators we'll see packages from Dish (SlingTV), Sony Vue, Verizon. Collectively, these will further complicate an already difficult and frustrating consumer purchase decision.

What’s this really all about? The content companies (primarily premium subscriptions channels) want to protect their services against Netflix and reach the group that doesn’t yet subscribe to pay-TV services. The operators are trying to reach a specific audience that their pay services don’t reach. Dish wants to get millennials with a $30-40 package that includes ESPN. Sony wants to try to woo their PS3 and PS4 buyers (35M systems) to pay for a 75 channel package at maybe $60-75 (not going to happen…). And Verizon wants to create a national package with a number of new channels that are not on traditional pay-TV services.

In the long run, this is the beginning of the dog chasing its tail: unbundle by offering diverse OTT packages, add OTT services to set-top-boxes like Comcast’s X1, then break out the broadband services separately, and rebundle.

Netflix's future

Having reached a subscriber count larger than HBO's for the first time, Netflix is the poster child of new TV services. However, Netflix may be facing a significant crunch ahead. Their US subscriber base may be capping out, and they have billions due in content fees as well as the possibility of billions of fees related to net neutrality. Analysts have estimated that Netflix will only be able to operate at a 15% margin vs. HBO’s 37% going forward, which raises some serious speculation that there could be some kind of advertising service or sponsorships added to Netflix in the future.

Best available screen

People tend to watch content on the largest/best available screen. Tablet video views were up 29% last year and smartphone views were up 59%. Interestingly, most of the non-TV viewing is occurring in the home, even if there is a TV available. Millennials in particular will use their laptop, phone or tablet as a more private viewing experience.

Connected TV viewing is much bigger than most people realize.

Hulu sees 70% of its viewing coming from devices connected to a TV and Netflix has over 65% (varies based on data source). The surprising secret is that there are a lot more TVs connected to the Internet than it may appear – include game consoles, streaming media boxes, Smart TVs, Blu-ray players, etc., and the total penetration is massive.

66%

US HH have a TV somehow connected to the Internet

Source: Nielsen

Gaming

Gaming returns to CES

Gaming is slowly returning to CES after defecting years ago for their own conference - E3. This year, 637 exhibitors claim to offer gaming or accessories, up from 511 last year.

The game console business continues to grow with the new Xbox One and Playstation 4 consoles outselling their predecessors by about 70% in their first year. Revenue for consoles is expected to hit $4.8Bn for 2014. Sony has sold 15m PS4s since it’s launch, outpacing the Xbox One, which is still up 102% YoY. Premium online gaming is also impressively popular. Although only 8m of Sony’s 55m total Playstation owners pay $50 per year for PSN; half of Xbox's 48m owners pay $60 per year for Xbox Live Gold.

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