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Web TV Players Are Finally Creating the Moment of Truth for Cable Providers

The new Apple TV and others put traditional subscriptions in jeopardy

Just over two months ago, Dish unveiled Sling TV at the Consumer Electronics Show. It was a big deal: the service offers premium cable channels like AMC, Adult Swim and the 400 lb. gorilla of cable networks, ESPN, and at $20 a month, live. Its slogan? "Take back TV."

Monday, news that Apple is planning a similar creation leaked to The Wall Street Journal—indeed, the service is set to include every broadcaster except NBC (and thus none of NBC's sister networks, either) and several cable channels, and to run between $30 and $40 a month. A few days earlier, Sony announced that its own TV service, revealed at last year's CES, was literally ready for primetime—it, too, will have broadcast networks (only ABC was still holding out) and several cable players involved, including Viacom, which owns all-important Nickelodeon. Sony's similar Vue service went live today in a few cities.

Networks were loath to talk about the trend on the record, characterizing Internet protocol TV (IPTV, as folks fond of initials in the industry are calling it) as a product "geared toward a younger, tech-savvy demographic that doesn't have a cable subscription as a bridge to a larger package down the road," in the words of one exec.

"We look at it as a value package targeted at a small package of broadband subs who don't yet have traditional subscriptions," the source said.

At this point, it looks a lot like a la carte is coming, whether the industry likes it or not, and it would be foolish not to see these moves by huge tech and telecommunication players as an attempt to supplant traditional cable plans. Smaller Web-based packages appear attractive to the consumer, largely because they look like cheaper cable subscriptions.

But that's not what they are.

As net neutrality laws cut into the margins for cable providers and telecoms, those companies continue to round out the bottom of the American Consumer Satisfaction Index alongside health insurance companies and scandal-plagued General Motors. That means one definite thing: telecoms are going to have to raise prices on people who hate them, and if consumers can take even a few dollars back, they'll do so gleefully.

"Apple TV isn't just trying to reinvent the content bundle," write analysts at MoffettNathanson. "They are trying to break apart content and navigation from the transport function."

In simpler terms, cable has been a railway and your TV has been a train locked in to network schedules and airtimes; now it's going to be a highway on which you can travel wherever—and whenever—you want. But you still have to pay another fee for connectivity.

In some ways, this is good news for advertisers—it puts inventory where viewers are going, which is to streaming services that allow them to watch whenever they want. Though in a much more urgent way, it's a worrying proposition—inertia has been a major force in the television market, because it's one of the few places in advertising where you are buying an accountable guarantee. If a network doesn't make its deliveries (the numbers of viewers promised to you, the advertiser), it has to make it up to you. That's something advertisers don't want to lose.

Measurement companies are trying to get in on the ground floor: "As long as the [multichannel video programming distributor] can provide Nielsen Catalina Solutions with the requisite household level exposure data, it can be from any source—broadcast, cable, satellite, or 'over-the-top' streaming services," Carl Spaulding, evp of Nielsen Catalina, told us. But there's no industry standard yet—no metric as easy as television's ratings point with which to sell ads or impressions.

And splitting up the connectivity subscription from the content cost means that the other side of television's two-pronged revenue stream, subscriber fees, is probably going to change, too. The owners of the pipelines—cable or satellite—may either be negotiating a few products the way Dish is with Sling TV, or simply leaving the messy matter of retransmission fees and blackouts to players like Sony. Apple doesn't own any cables. Or any Internet connections, for that matter. That's all the business of Time Warner Cable, Comcast, Verizon and so on, with competitors likely to spring up in the South and the Midwest after this month's ruling on municipal broadband.

It's worth noting that there is a long way to go before this happens—Todd Juenger, a major skeptic on what many see as the shift away from traditional cable, put it this way: "We note that there are 100 million cable subscriptions in the U.S. today, and 10 million broadband-only homes—risking revenues on the former group to attract the latter is likely bad business, unless the content providers believe that the former will inevitably decay, or they can assuredly be made whole on a trade from a traditional cable sub to an over-the-top sub."

But cable ratings are decaying, and perception (or misperception, in Juenger's view) of the speed of that decay may ultimately be more detrimental to cable than the decay itself. As Juenger stated, "With data pointing to declining ratings in traditional linear TV attributable in part to Netflix and other form of streamed video consumption, four content providers have become more open to working with [over-the-top] bundlers like Apple."

While oft-rumored consolidation between cable companies will certainly slow this process, if it doesn't come up with a cost-effective alternative to free-floating services like these, the decay may not stop.

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