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Will Hulu And Netflix Replace Cable?

Author: Jacob Jackson

The ease and accessibility of online video and streaming services poses a threat to the cable industry's standard model of television programming, making strategic competitors out of third-party broadband sites. Long-time cable customers are ditching their providers and turning to the internet for television content. But will the likes of Netflix (NFLX) and Hulu truly disrupt the market?

Waning Demand for Cable

If 2013 is any indicator of future success of the cable TV business, the industry may want to heed threats posed by online-video services. Providers of TV, broadband and phone communications saw 687,000 of its subscribers jump ship in a major third-quarter drop last year. It was the cable industry's worst twelve-month stretch ever.

With rising subscription costs, selective bundling packages and fiery network disputes, consumers are growing increasingly frustrated with cable and satellite TV providers – and TV ratings certainly reflect the frustration. Each year ratings are consistently falling and for the first time ever, the number of cable TV subscribers at major providers dropped below 40 million. Furthermore, the American Consumer Satisfaction Index has ranked cable television providers last in all consumer categories.

Customers are exploring alternatives to incumbent cable operators. Over-the-top (OTT) technology – systems that provide television content to viewers via broadband connections – is blurring the lines of traditional television business models. Third-party sites like Netflix, Hulu and Amazon (AMZN) bring content directly to any consumer with an internet connection, allowing viewers to watch television programming outside of the home and on their portable devices any time, on-the-go. For a mere fraction of the cost of a cable subscription, customers (especially those strapped for cash) see the incentive to shift to OTT.

In addition to open accessibility, OTT sites are creating more original, exclusive content in a bid to attract viewers. Netflix partners with well-established production companies to produce new programming and spent $100 million to make the first season of the hit show House of Cards. Hulu Plus, Hulu's paid-subscription service, announced plans this year to quadruple investment in original programming in the coming year. Amazon has committed to finance five new series through its Amazon Prime service.

Will OTT Systems Render Cable Obsolete?

The emergence of smart TVs – televisions with Internet connection – means consumers are able to stream online content via OTT systems to home televisions, which may increase the appeal of cord cutting. Nielsen reported that the average consumer watches 157 hours of live television a month. The volume and variety of programming that traditional cable provides is the industry's greatest advantage over OTT models: third-party sites have a dearth of new content and existing programming put forth by cable networks is delayed, appearing on OTT sites weeks or months after its original air date. Additionally, consumers turn to pay-TV for niche programming like sports, a market far too expensive for the likes of Netflix.

The demand for cable, though on the decline, is not likely to subside. As such, American cable companies are now actually looking to forge partnerships with OTT operators to integrate online programming into set-top-boxes as their international counterparts have done. For example, last year UK-based Virgin Media signed a deal with Netflix, as did Sweden's biggest cable television system, Com Hem, effectively rolling out the streaming service to their cable subscribers.

The Bottom Line

Since its inception, OTT technology has been a perceived threat to the cable industry. That said, the demand for cable may not be as low as some pundits believe, and customers will continue to pay for premium service. Demand for both OTT and cable services is on the rise but the two are learning their services are perhaps best served together rather than separately as competitors.

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