The Future Is Already Here (It's Just Not Very Evenly Distributed)
By Brian Wieser, CFA, Senior Research Analyst, Pivotal Research Group

9-14-12

Brian Wieser, CFAWe wrote an extensive piece on viewing trends of kids this week, highlighting the notion that there is no sufficiently high-quality data to support any assertion that the rise of online video and Netflix is related to declining TV viewing among kids. In authoring this piece, our primary purpose was to highlight that ratings problems (at Viacom's Nickelodeon in particular) are network-specific and not secular in nature. However, we heard a lot of push-back on this topic. Many among our readership are adamant that their observations within their own households and among their friends confirm the secular trend thesis. With all due respect to those perspectives, any assessment of underlying first-hand observations around streaming video must account for several sources of bi as.

First, self-reported media consumption is unreliable when compared against monitored consumption. The most detailed work that we are aware of on this topic comes from the Council for Research Excellence (a consortium of researchers primarily at agencies and media owners). In a 2009 ethnographic study of media consumption, this group found that the study's subjects estimated that they spent approximately 4 hours today using television, when in fact the average was closer to 6 hours. The same group self-reported nearly an hour of daily online video use, but monitored use among them was closer to 10 minutes.

Second, points of reference among friends and professional acquaintances are self-referential by nature given our concentration of interactions towards people with similar profiles. How is the information we receive from acquaintances self-referential? Th ere are many key differences between investors and media industry professionals and the rest of the country. They disproportionately live in New York, are relatively media-savvy (or at least media aware), they generally have higher incomes and education levels, etc. The people they interact with are likely to have similar characteristics.

Third, only a small share of the population accounts for the vast majority of online video streaming. While it is possible that our self-assessments and those of our friends and acquaintances are correct with respect to online video consumption, we can further assert minority status on those who claim a high degree of online video substitution. Nielsen's newest "Cross-Platform" report was released this week and indicated that during the first quarter of 2012, approximately 10% of the population (or 28 million people) account for 85% of online video consumption activity. I n the same report, Nielsen identified that this cohort still watches more than 4 hours of TV per day, 90% of the average levels of TV viewing across the whole population.

These points are critical in understanding how the media industry is evolving. Author William Gibson once wrote that "the future is already here - It's just not very evenly distributed." Heavy levels of online video viewing may be the future, but they are not common among the population-at-large at present. Even with the procession of time, younger cohorts who disproportionately consume online video will account for an increasing share of the population, but even then it won't be enough to meaningfully change today's dynamic. It seems unreasonable to assume that over any plausible investment horizon that online video has a meaningful negative effect on traditional TV. Even the age-cohort that is the heaviest consumer of online video - adults ages 18-24 - only view 4.5% of their traditional TV consumption via online video, but still consume more than 3.5 hours of TV a day, much more than for any other medium. The adults 25-34 cohort probably provides a better read on trends at 3.7% of traditional TV consumption occurring via online video (and another 0.6% on a mobile phone), which equates to well over 4 hours per day.

Traditional TV continues to dominate because consumers of all ages use TV in an ambient manner (i.e. leaving it on while doing other things) and because the proliferation of screens in households makes viewing of all forms all the easier. An expansion of high quality content niches on traditional TV further contributes to this dominance. Taking everything into account, and assessing the entire population, streamers and non-streamers, young and old, it's hard to imagine anything other than that traditional live-only t elevision will continue to account for the dominant share of view viewing until much further into the future than any investor should likely be concerned with.

Brian Wieser, CFA
Senior Research Analyst
Pivotal Research Group
brian@pvtl.com


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