Internet TV

Internet TV is growing, but there's a catch

March 14, 2014: 1:57 PM ET

Demand for streaming television and movies continues to rise. But the target of this disruption -- cable companies -- stands to benefit.

By Peter Suciu

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FORTUNE -- Tens of thousands of viewers who tried to tune in for Sunday's season finale of the HBO (TWX) hit crime drama True Detective may have been left without a resolution to the complex plotline.

It wasn't because of a cable outage. It wasn't because of a blackout sparked by a cable services feud with a pay-TV channel. Rather, it was the result of so many people trying to watch the finale on HBO Go -- the cable channel's streaming service.

"Due to overwhelming interest in the season finale of True Detective, HBO Go was hit with an excessive amount of traffic soon after 9 p.m. ET last night. The issue has since been rectified and the service is now back to normal," HBO said in a statement on Monday.

Streaming media -- or "over the top" (OTT) as it's called by those in the industry -- has long been seen as having the potential to seriously disrupt the status quo of the cable television business. But HBO's recent failure shows that the drama isn't limited to just what viewers are watching on the screen. Even Netflix, which successfully transitioned from a DVD-by-mail service to a streaming provider, has had problems ensuring quality of service. Many viewers who expected Blu-ray or at least DVD-quality video were left with a picture of much lower resolution, especially during peak hours where demand was high.

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"It is an inherent problem with OTT," said Greg Ireland, research manager in the consumer markets for video program at research firm IDC. "If we expect the OTT market to develop and supplant traditional paid TV, then reliability and quality becomes so much more important."

Netflix (NFLX), which is now producing original programming such as the critically acclaimed and award-winning series House of Cards, recently agreed to a deal with Comcast (CMCSA) so that its subscribers using Comcast's service would see improved picture quality, rather than the lesser quality picture resulting from throttled bandwidth. Netflix reported that speeds to Comcast customers were up 11% in February from the month prior, following four straight months of declines.

In other words, Netflix -- the Internet company seen as competing with traditional cable channels such as HBO and Showtime -- must pay the cable company to ensure quality of its streaming service. The fates of the disruptor and disrupted are intertwined.

"The economics of this are complicated," Greg Scoblete, set top box and OTT analyst for Digital Tech Consulting, told Fortune. "Netflix already pays third parties for bandwidth -- which is why they have been building their own content delivery network to sidestep these charges. They won't necessarily have to pay an ISP [Internet Service Provider --Ed.] more, but they do have to pay for bandwidth in some capacity."

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OTT providers including Netflix have gotten more adept at managing bandwidth on their end Schoblete said. This is accomplished through compression and the use of content delivery networks that move their streaming libraries closer to end-users. "In fact, with the introduction of the new HEVC video codec, which offers almost double the compression of the current AVC codec used by OTT providers, they'll be able to squeeze even more video on our crowded pipes," Schoblete said. "Once HEVC hardware penetrates the market, bandwidth should be even less of an issue for HD content."

The question then becomes what happens as 4K, or Ultra-HD, televisions become more popular. These sets can display resolution that is four times that of current 1080p (or "full HD") TV, but where that content will come from remains a stumbling block. OTT could be the solution -- but the issue remains of whether those "crowded pipes" can handle the increased data that comes with the higher resolution content.

One solution could likely be the content delivery network, in essence a large distributed system of servers deployed in multiple data centers. The goal of a CDN is to serve content to end-users at high speed and of high quality. EdgeCast Networks, which was recently acquired by Verizon, provides such services, and it could offer a solution to the quality issue.

"What we're seeing is that the pattern of media consumption in regards to OTT has changed from sitting in front of a computer to a constant stream of content on a plethora of devices," said James Segil, chief marketing officer for Verizon Digital Media Services and former CEO and co-founder of EdgeCast. "Moreover, the expectation of quality is not even set at this point. It is a moving target, and the content coming from the Internet side of things continues to push the envelope."

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Segil added: "This could provide caching and storing of content that is being used and consumed. This is content that is stored locally in servers and made available for users to download. This allows it to travel a much shorter distance from end to end. The concept of caching is also tremendous in making the Internet more efficient."

This strategy was used during the production of the 2014 Olympic Winter Games in Sochi, Russia. Akamai Technologies provided online video streaming delivery of events to NBC Olympics, a division of the NBC Sports Group. Akamai will stream 4K content to multiple TV panel displays at the upcoming National Association of Broadcasters trade show in Las Vegas.

"We have 150,000 servers deployed throughout the world," said Kurt Michel, director of product marketing for digital media at Akamai. "For what it's worth we aren't doing anything special, so delivery quality video is not impossible. It isn't even super-hard to provide 4K streaming. You merely need the architecture and the infrastructure in place. Most people don't even know this, but we see it as this is the business-to-business 'secret sauce' behind the scenes."

In short, because OTT now relies so much on this infrastructure -- and is likely only to rely on it more in the future -- it is difficult to imagine how a streaming service could truly replace the traditional cable TV provider.

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"There is the tenacity to view everything that is happening in black and white, and there has been this view that OTT could dominate and cable would go away," IDC's Ireland told Fortune. "Instead this is very much an evolution in shades of gray. OTT could be for one person a replacement, as $10 a month for Netflix is cheaper than $80 for cable. In other cases it is supplementary and could provide a way to view binge viewing of content, so it becomes more supplementary -- and it is clearly this for those with fast broadband."

In other words, the future of streaming is to augment, not replace, conventional cable TV.

"Netflix has frequently said that they don't view themselves as a cable replacement and there's a very significant overlap between its 30-plus million subscribers and the 100-million or so U.S. pay TV households," Scoblete said. "It's more accurate to view Netflix as an HBO or Showtime than a root-and-branch cable TV replacement."

Not that there aren't people who are trying. "That said, there's evidence that 'cord-cutting' has begun to impact subscriptions for cable," Scoblete said. "So there is a little replacement occurring among the tech savvy who can live on Netflix and YouTube alone."

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