U.S. Digital TV Proliferation (Part I)


Believe it or not, TV went digital a long time ago.  This is why so many U.S. homes have TV set-top boxes and there exists a plethora of over-the-air broadcast sub-channels.  It is also the reason The Nielsen Company had to change the basis of its TV-measurement system from tuner frequencies to network codes embedded in program content.

The digital TV that we are talking about today is a little different from those early days.  Over-the-top (OTT) applications (apps) now allow TV content to be displayed via any smartphone, tablet, computer or internet-enabled smart TV or dumb TV attached to a streaming device like an Apple TV, Roku, Amazon Fire TV or Google Chromecast.  It does not require a TV set-top box or a subscription to a traditional pay-TV service provider such as cable, satellite or telco.

According to comScore, 51 million homes7 in the U.S. have some non-traditional OTT capability; and they comprise 54 percent of homes7 in the U.S. that have Wifi.  Mathematically speaking, that means that 94.4 million U.S. homes have Wifi or roughly 79 percent of all TV homes.

The new digital TV landscape is excessively complicated.  There is connected TV (CTV), OTT and virtual multi-channel video programming distributors (vMVPDs); not to mention, skinny bundles and subscription video on demand (SVOD). 

CTV refers to television that is distributed via a streaming device that is connected to a TV like those mentioned above.

OTT refers to any TV services that distribute TV content digitally via the Internet rather than by traditional pay-TV set-top boxes.

vMVPDs are services that provide TV content over the Internet that include packages of TV networks similar to what someone would buy from a traditional pay-TV provider.

Skinny bundles refer to the smaller packages of TV networks that vMVPDs offer subscribers for less money.

SVOD services offer libraries of TV shows and movies that may be watched at any time on demand via the Internet; e.g., Netflix, Hulu and Amazon Video.

Some of these digital TV services are rapidly proliferating.  The digital TV industry as a whole is predicted to hit scale sometime around the middle of the next decade. By this we mean that OTT distribution will become the dominant form of TV content delivery.  At this time, many of the available digital TV services are not fully distributed.  

Here follows some information about the various offerings:

Amazon Video is the most widely distributed of all the new OTT SVOD providers.  It is included with Amazon Prime.  According to Fortune1, there are 90 million U.S.-based Amazon Prime subscribers.  Surprisingly, it is reported that not all of them are aware that they have access to Amazon Video as part of their Prime service.  Some subscribers purchase Amazon Prime for reasons other than Amazon Video; these include free 2-day shipping and discounted rates on overnight delivery for products purchased on Amazon’s shopping site.  It is also important to note that Amazon Prime is commercial free.  There is no advertising.  In terms of usage, comScore reported that Amazon Video ranked third behind Netflix and Hulu.

Netflix is another OTT SVOD service.  It is reported to have 54.8 million U.S. subscribers2 and according to comScore it ranks number one for share of OTT viewing ahead of Hulu and Amazon Video9.  Netflix is another big OTT player that does not accept advertising.  Netflix’s CEO, Reed Hastings, is reported to have posted on Facebook “No advertising coming to Netflix.  Period.”8

Hulu is yet another popular OTT SVOD service.  It is reported to have more than 17 million subscribers6 including 450,000 subscribers4 for its vMVPD service – Hulu with Live TV.  If you exclude the latter, and not taking duplication into account, we estimate Hulu to have around 16.6 million subs.  Although not reported, the vast majority of Hulu’s subscribers are said to have opted for the lower priced ad-supported service rather than the more expensive ad-free option.  This represents an OTT opportunity for advertisers.

The TV networks themselves are also getting into the OTT SVOD game.  These include HBO Go, Showtime, CBS All Access as well as Turner’s Filmstruck and Boomerang OTT services.  According to comScore, there are 10.1 million homes9 that view TV network apps via OTT.  The share of total OTT viewing time for all of them combined is somewhat modest at 14 percent9.  This total TV network share of viewing number is lower than the individual OTT share of viewing numbers for Netflix or Hulu. 

Moving on to the vMVPD side of the digital TV business, there are a handful of players with various business strategies at play.  For some pay-TV providers, vMVPD services are a way to hedge their bets against cord cutting.  These companies are hoping that vMVPD subscriptions will make up for lost subscribers to their traditional pay-TV services.  SlingTV and DIRECTV Now are examples of this strategy, both are owned by pay-TV satellite companies, Dish and DIRECTV, respectively.  This strategy appears to be working; in the 4th quarter of last year, DIRECTV Now gained 368,000 subscribers offsetting a loss of 207,000 AT&T U-verse and DIRECTV satellite subscribers for an overall increase of 161,000 U.S. video subscribers.  As of the writing of this blog, Sling TV is estimated to have 2 million4 and DIRECTV Now is estimated to have 1.15 million subscribers10.

Another business strategy involving vMVPDs is that of Hulu with Live TV.  Hulu is owned by four TV-network powerhouses -- Disney/ABC (30%), FOX (30%), NBC (30%) and Turner Broadcasting System (10%).  For these companies, Hulu provides leverage in negotiations with distributors as well as a way for them to dabble in digital distribution without having to individually assume the entire cost.  As has been widely reported, Disney is in the process of purchasing FOX’s stake in Hulu as a result of its acquisitions of 21st Century FOX and FOX’s cable TV network properties.  When this transaction is completed, Disney will own a majority share of Hulu.  There is much speculation around what Disney intends to do with its stake.  Disney is planning to launch its own branded OTT service next year.

Google’s vMVPD play is called YouTube TV.  YouTube’s online video site, separate from YouTube TV, is enormous in scale with over 1.5 billion unique monthly users3.  In 2016, it was reported to have 131 average million monthly unique users2 in the U.S. alone.  YouTube TV, on the other hand, has around 325,000 U.S. subscribers5.  The user-generated content provided on YouTube’s online video platform could be a non-starter for advertisers who prefer higher-quality content like what is provided by traditional TV networks.  If YouTube is able to convert more YouTube users to its new YouTube TV service, it will represent a coup for the company as it will generate a new subscription revenue stream and bring in more ad dollars from large advertisers who are wary of advertising in homemade programming. 

Sony Playstation Vue is another vMVPD service.  It provides an opportunity for Sony to grow its business beyond gaming and electronics into the TV distribution space.  The service is reported to have 455,000 subscribers5.

The final and smallest entrant to the vMVPD vertical is a company called fuboTV.  According to Crunchbase, fuboTV has raised $75.6 million dollars across multiple funding rounds.  Investors include large media companies -- 21st Century FOX, Sky and Scripps Communications.  fuboTV specializes in premium sports TV networks.  It is reported to have around 100,000 subscribers5.

There is a lot of hype and excitement surrounding these new digital TV offerings; the one-to-one ad targeting precision and easy access to data is outstanding.  There are; however, some downsides as well.  One is that TV viewing impressions are migrating from traditional ad-supported TV to commercial-free OTT TV options like Netflix and Amazon Video.  This trend reduces the overall supply of TV impressions for advertising; and based on the economic principles of supply and demand, a decrease in supply often leads to higher prices.

The second part of this two part series dives into the advertiser-related implications of the proliferation of digital TV.  Stay tuned…  pun intended.

1. Fortune, By Don Reisinger, October, 18, 2017 “Here’s How Much Amazon Prime Customers Spend Per Year”

2. Statista

3. TechCrunch, By Lucas Matney, June 22, 2017 “YouTube Has 1.5 Billion Logged-In Monthly Users Watching a Ton of Mobile Video”

4. CNBC, Alex Sherman, January 22, 2018 “In Their Battle Against Big Cable, YouTube TV and Hulu with Live TV Have Signed Up Hundreds of Thousands of Subscribers”

5. Zack’s Equity Research, December 6, 2017 “AT&T’s DIRECTV Now Exceeds 1 Million Subscribers, OTT a Boon”

6. Deadline Hollywood, By Dade Hayes, January 9, 2018 “Hulu Reaches 17 Million U.S. Subscribers; Library of 75,000 TV Episodes More Than Double Those of Netflix and Amazon”

7. comScore Blog, By Adam Lella, July 12, 2017 “How Important is the OTT Device Market if ‘Future of TV is Apps’”

8. USA Today, By Mike Snider, June 2, 2015 “Netflix CEO:  No Advertising Coming to the Streaming Service”

9. comScore, State of OTT Report, 2017

10. Multichannel News, By Jeff Baumgartner, January 31, 2018 “AT&T Adds 368,000 DIRECTV Now Subs in Q4”