With the advent of numerous over the top (OTT) platforms, which bring online video directly into the living room, pay-TV operators face new competition — competition from hot startups like Hulu, Netflix, and Roku.

In way, OTT video represents the first real threat to the traditional pay-TV model. But in many more ways, it’s also the traditional TV industry’s biggest opportunity yet.

Multi-channel pay-TV rose to prominence in the 1980s and has grown steadily all over the world. The business model of a fixed monthly fee for a tiered package of TV channels has proven more resilient than anyone could have imagined.

Over the years, providers of multi-channel TV have become very profitable companies, enjoying almost the same kind of monopoly as telecom operators enjoyed in the past. It is clear that most pay-TV operators would like the industry to remain in the comfortable state of the last 20 years, with steady growth and healthy profits.

But with high speed broadband Internet finally available for most consumers, there are more options than ever to find content.

Consumers download movies and TV shows from the Internet, legally or illegally, while new OTT video on demand (VOD) offerings like Netflix and Amazon have grown their subscriber base significantly. It is these alternatives to pay-TV that have caused analysts to predict doom for operators due to consumer so-called cord cutting.

Yet despite the proliferation of these alternative services, over the past 10 years cord cutting has barely made a dent in major operators’ top line revenues.

Cord shaving rather than cord cutting

The real risk for operators is not that the mass market will cut the cord entirely, but rather that they will downgrade to a lower priced tier, thereby reducing operator profit margins.

This trend of declining average revenue per user (ARPU) will be the main driver of innovation over the next couple of years, both for the networks and the operators.

By seeing consumers slowly but surely consuming more of the content via alternative distributors, operators feel threatened even if the changes so far have been small. Consumers see the value with more choice, better availability, and high usability. As long as the operators cannot offer something similar, the gradual loss of revenues will continue.

The transformation of the TV industry will be slow

The television industry is a cautious industry. Technology shifts have traditionally happened on time scales of 10-15 years rather than the 1-2 years that we have become accustomed to with Internet and mobile.

The immense capital expenditures from replacing and deploying new set-top boxes is a gaiting factor to operator innovation. Operators are reluctant to spend capital on rolling out next generation boxes, which are needed to provide a significantly new consumer experience.

Also, operators are wary of making risky upgrades to a legacy technology solution that has worked for many years.

Furthermore, consumers keep TV equipment in use for a longer period of time than they do with PCs and mobile equipment. Consumers also tend to be more loyal to TV channels than they are to Internet websites. The entire value chain from advertisers and content providers to networks and operators are happy with the current structure and are not in a hurry to roll out new changes.

And finally, content distribution agreements are typically 4-5 years, which slows the rollout of new innovative offerings.

Over the next couple years, operators and networks will focus on innovation using complementing services that take advantage of OTT infrastructure. Complementing applications will offer consumers access to content and features, which enhance value, but will not replace the standard multi-channel tiered package, consumers get today.

These applications improve loyalty and retain the current business structure rather than complete disruption, and this is the area where the pay-TV industry will invest over the next few years.

International case studies: Telstra and Viasat

Two of our pay-TV customers have fully embraced the OTT opportunity and have launched attractive services to their customers on their respective markets with slightly different strategies.

Telstra is the leading telco in Australia. It has launched a pay-TV offering via the T-Box. To give additional value to its broadband Internet subscribers, it has launched a multi-channel pay-TV (Big Pond TV) and full VOD offering (Big Pond Movies) across Australia.

By using OTT devices such as tablets, Smart TVs, and game consoles, Telstra has managed to reach its entire consumer base without the need for an additional set-top box. This will build loyalty for the broadband Internet customers and also create natural upsell possibilities for additional services.

Viasat is the leading pay-TV operator in Scandinavia, historically mainly with a direct-to-home satellite dish offering. In 2011, Viasat relaunched its Viaplay offering across a number of OTT devices.

The real innovation is that consumers can subscribe to the OTT offering without having a standard set-top box, pay-TV subscription.

This will be slightly cannibalizing, but it opens up a new market which cannot be reached with a direct-to-home offering. Viastat is now competing head-to-head with cable operators and telcos in parts of the market where they have never been able to compete before.

OTT is an opportunity for operators

Pay-TV operators, with their strong subscriber relationships, technology infrastructure ,and content portfolio, will benefit from distribution via OTT devices.

With the big brand names and ample cash flow, they can easily equip themselves with the most innovative OTT offerings and create loyalty among existing subscribers and potentially an efficient way to acquire new subscribers. The opportunity for pay-TV operators to take the lead in the OTT market is huge.

Michael Lantz is CEO an co-founder of Accedo, a provider of enabling platforms for apps and app stores for IPTV and Smart TV. David Adams is Accedo’s vice president for corporate development.

Image courtesy of Yuri Arcurs