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Let's Call It: The Cord Cutting Era Has Officially Arrived

First Posted: Dec 08, 2015 04:47 PM EST
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Three stories hit the news on Monday in separate publications, concerning three different but interrelated subjects -- advertising, entertainment, and the IT backbone of the Internet. Taken together, they represent a tipping point in a trend we've seen building for a decade. Welcome to the era of cord cutting.

Cord cutting, in the strictest sense, is the phenomenon of consumers canceling their cable or satellite TV subscription and opting solely for online streaming options instead. In a looser sense, it's about traditional pay TV losing clout while Internet-based alternatives rise in popularity. In this sense, consumers may not technically "cut the cord," especially if cable is their only option for broadband, but they're cutting back -- and paying less attention to traditional entertainment options.

Cable subscription figures only track the strict definition of cord cutting, while developments elsewhere tell the larger story:

This week, Re/code reported that streaming services now account for 70 percent of peak Internet traffic for home broadband Internet in the U.S. The same day, TV industry journal Broadcasting & Cable reported that Netflix is planning on doubling the amount of original programming it produces next year. Finally, The New York Times reported Monday that the total amount of digital ad spending is on track to overtake television advertising within a year or two.

Though "cord cutting" has been in the public consciousness for years as a minor but growing phenomenon, it appears the media and entertainment landscape, as a whole, is now listing away from the status quo and into the era where streaming TV dominates.

Everybody Streams

As the latest report from web analytics company Sandvine shows, streaming services are big with consumers, including those who may still subscribe to some kind of pay TV. Put together, streaming services made up over 70 percent of peak broadband traffic this year.

Five of the top 10 sources of downstream broadband traffic were streaming services. Netflix was number one at 37.05 percent, followed by YouTube (17.85 percent). Amazon Video hit fourth place with 3.11 percent, and iTunes and Hulu listed further down the ranking. Facebook, in eight place, could possibly count as a half-streaming service after its big video push this year.

Even on mobile, where data is traditionally scarcer for consumers, streaming services hit over 40 percent of peak traffic, the largest category of mobile broadband and nearly double that of the second place, social networking (at 22 percent).

To give you a sense of scale: Five years ago, audio and video streaming, in general, only accounted for about 35 percent of peak broadband traffic, according to Sandvine. Netflix, alone, now accounts for more than that share of broadband traffic on any given evening.

King Netflix, Expanding Its Domain

It probably comes as no surprise that Netflix takes up such a huge amount of primetime bandwidth. The company got into streaming early, and has established itself as the go-to alternative to traditional TV. Then it began making its own original programming.

Now it's going to double down on that strategy. As Broadcasting & Cable first reported, Netflix chief content officer Ted Sarandos announced in a speech on Monday that the company's original content catalogue would total 31 different TV shows over the course of next year.

This year, Netflix produced and aired 16 original scripted shows, some of which, like its TV collaborations with Marvel, were huge hits with critics and fans. Netflix also aired over a half-dozen original documentaries, 11 stand-up specials, and hours worth of kids shows, comedy shows, and its first feature film, Beasts of No Nation, this year.

For 2016 and beyond, the company will continue expanding its original content into a wide variety of formats and genres, including 30 kids shows, 12 documentaries, 10 stand-up comedy specials, and 10 feature films.

Besides expanding the company's content catalogue, Sarandos also hinted at Netflix's geographical ambitions for expansion. "We're aspiring to take Netflix fully global," said Sarandos, adding that in 2015 the company began offering service in Spain, Italy, Australia, Portugal and Japan.

Where the Money Is Going

For all traditional TV media cares, Netflix could expand its reach across the world and produce thousands of original titles, as long as advertisers are still paying them.

That's literally the bottom line, after all. And that has been the case, regardless of the rise of Netflix (which is subscription-based with no ads, anyway) and smaller streaming services behind it.

But in a year or two, the overall balance of ad spending is predicted to shift away from television, as digital media continues its rise. According to the Times' report, industry experts from different media analysis companies are beginning to forecast the same thing: slow or no growth of traditional television and an increasing flow of ad dollars into online video, along with social media and mobile.

"TV global growth is diminishing," said Magna Global's head of global forecasting, Vincent Letang, to the Times. "In most major developed markets, TV growth is slowing and in some cases stagnating."

Head of forecasting at ZenithOptimedia Jonathan Barnard added that this is not just a case of advertisers spending more on digital, but that digital media is actually beginning to steal dollars away from its old media rival.

"Over the last year or so, that's really been the first time we've seen money specifically coming out of TV and going into digital," said Barnard. "We've been hearing about the loss of revenue from TV to digital for a long time, but the last year has been when it's been fairly visible."

By the end of this year, digital ad spending is expected to grow 17.2 percent to almost $160 billion. Meanwhile, traditional TV will still hold on to over $190 billion in ad dollars this year, globally.

But next year and beyond, that grip is expected to continue declining, while digital ad spending is expected to continue its double-digit rate of growth. By the end of 2017, digital media will likely be the biggest advertising venue, overtaking television.

It's the massive shift in ad dollars -- more than streaming services' content production or bandwidth use -- that portends the end of traditional TV's cultural dominance and the new era of the cord cutter.

Don't expect traditional TV, or the industries whose bottom lines have depended on it, to go quietly into the night though: no wonder Comcast, for one, is looking for new revenue streams by expanding the carrot-and-stick of "unlimited data plans" for those who pay extra and data caps for everyone else.

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