Is Cable's Model Poised for a Comeback?

SMITH BRAIN TRUST – Cutting the cord with your cable company was supposed to make your life simpler – and a little cheaper.

No longer would you be paying for loads of channels you never watch. You would have all the entertainment you could ever want from a single streaming service: Netflix. Or maybe two: Amazon Prime. Or three: Hulu. Or four: Because you can’t not have HBO.

If the proliferation of new streaming video services is any indication, that number could climb even higher. Just this month, there was news about new online video services from WarnerMedia, Viacom, Disney, Apple, Walmart, Costco and Jeffrey Katzenberg, who is launching a short-form video platform he’s calling QuiBi. Niche options are popping up as well, from WWE to College Humor. And it could lead to the resurgence of a model that has appeared to be at death’s door: The cable model.

With services priced between roughly $6 and $15 per month, many customers are already forced to make choices, says P.K. Kannan, the Dean’s Chair in Marketing Science at the University of Maryland’s Robert H. Smith School of Business. “Those who can afford can sign up for many streaming services, others may have to live with a few,” he says.

As the move toward streaming encourages an “unbundling of services,” he says, consumers are choosing to pay for only a few services – those that carry the content they care most about. Under the traditional cable model, companies would bundle content – the popular and the niche – as a way of subsidizing channels that drew a smaller, but more ardent number of supporters. Now some of those smaller channels – for example, Discovery or SciFi – may be in danger, as the cable-cutting trend threatens the traditional cable model. The question, Kannan says, is whether those niche networks can draw enough audience to support a streaming service at a reasonable cost.

The answer, for many networks, will hinge on the strength of the original programming. For HBO and CBS, the answer so far has been yes. Both services reached 5 million subscribers this year with their over-the-top video on demand services. “When the content has a significant following, like HBO and CBS TV shows do, they can go direct, instead of or in addition to cable, and be successful,” Kannan says. “And with subscribers moving away from traditional cable, it’s probably a good move.”

That’s why Disney is launching a streaming service, he says, leveraging the strength of its brand and its following among kids and families.

Walmart and Costco, meanwhile, are looking to follow in Amazon's footsteps with channels of their own, a move Kannan says could be riskier. “The two brands aren’t known for content per se. So, unless they create their own content, like Netflix and Amazon do, the chances are that they may not be very successful.”

That’s because in an era when everyone is looking to stream, content won’t come cheaply. 

“There will be a shakeout and some of these streaming services will not be successful,” he says. 

After that shakeout, Kannan says, what might emerge is the resurgence of the cable model. 

“I predict that with so many streaming channels, and with each customer having to use different setups and buttons to access them, aggregators will emerge in the online space to aggregate these streaming services for customers,” he says. 

The aggregators, he adds, might also come up with a bundled price to make overall entertainment package more affordable and to give customers more options. And at that point, he says, “We will go back to the cable model.”

“And who will be in the best position  to be the aggregators? AT&T, Xfinity, Netflix, Amazon – basically the same old players probably with new names.”

But it will be cheaper, right? Because isn’t that why so many people cut the cord to begin with? Not so fast, says Kannan. 

“Prices for content will generally increase. That’s because there will be more fragmentation of tastes leading to many different types of programs. And given that each program will cost money to make and has to be extracted over a smaller niche customer base, prices will be higher.”