TV RE-PACKAGED: HOW VIEWERS SEE THE FUTURE OF THE MEDIUM

October 23, 2013

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THE CURRENT TV INDUSTRY CONVERSATION FOCUS...

WHAT is Cord-Cutting?

Is Cord-Cutting REAL?

WHO is Winning the Cord-Cutting Battle?

When will Cord-Cutting Reach Critical Mass?

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OUR THESIS, ON THE OTHER HAND...

TV VIEWERSHIP IS EVOLVING – CORD CUTTING IS HAPPENING BUT JUST AS PART OF LARGER SHIFT IN HOW VIEWERS CONSUME ENTERTAINMENT

‘ONE SIZE FITS ALL’ DOESN’T FIT ANYONE – CHOICE IN FEATURES AND CONTENT WILL CONTINUE TO DRIVE TV VIEWING APPROACHES

COST STILL MATTERS BUT PERCEIVED VALUE MATTERS INSTEAD

DISRUPTION IS EVERYWHERE AND CONSUMERS ARE OPEN TO CHANGE

TECHNOLOGY IS STEERING THE SHIP – MAKING THE UNTHINKABLE A REALITY

CORD CUTTING IS JUST A FOOTNOTE IN A MUCH LARGER CONVERSATION

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GOAL #1: IDENTIFY KEY FEATURES OF IDEAL TV SERVICE PACKAGE

WHAT ARE MUST-HAVES AND WHAT DO CONSUMER NOT CARE ABOUT? WHAT ARE THE CORE TV PACKAGES THAT CONSUMERS WANT MOST? WHAT FEATURES DRIVE INTEREST MOST/LEAST?

GOAL #2: SEGMENT CONSUMERS BY WHAT THEY WANT WHAT IS THE DEMO/PSYCHO PROFILE OF THE CONSUMER BASE FOR EACH OF THE CORE TV VIEWING PACKAGES? WHAT ROLE DO DIFFERENT TV CONSUMER TYPES (CORD CUTTERS, CORD NEVERS, CORD CONSIDERERS, AND CORD KEEPERS) HAVE IN EMBRACING OR DISCARDING SPECIFIC FEATURES? WHAT ARE THE FEATURE-SET PRIORITIES FOR DIFFERENT TV CONSUMER TYPES (CORD CUTTERS, CORD NEVERS, CORD CONSIDERS, CORD KEEPERS)?

GOAL #3: PROFILE THE FUTURE OF TV WHAT DO DIFFERENT TV VIEWER TYPES BELIEVE ABOUT THE FUTURE OF TV? HOW DO CONSUMERS REACT TO SOME OF THE MOST DISCUSSED AND POTENTIALLY DISRUPTIVE CHANGES TO THE TV LANDSCAPE (E.G. UNBUNDLING, HBO GO, AND AEREO)?

WHAT WE SET OUT TO DO

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WHO WE TALKED TO

TV VIEWER TYPES

CORD NEVERS

CORD CUTTERS

CORD CONSIDERERS

CORD KEEPERS

1,200 U.S. TV Watchers 18-49 Years Old; 300 per TV Viewer Group (Weighted to Study Incidence) Census Balanced by Age, Gender, Region, and Race; Online Survey Margin of Error 3.0% Overall; 6.0% Within TV Viewer Groups

±

Have never paid to subscribe to cable,

satellite, or fiber optic TV service

Do not currently subscribe to cable,

satellite , or fiber optic TV service but have

paid for such a service in the past

Currently subscribe to a cable, satellite, or

fiber optic TV service but say they are

extremely/somewhat likely to cancel service

Currently subscribe to a cable, satellite, or

fiber optic TV service and are unlikely to

cancel their TV service

7%* 10%* 40%* 44%*

*Subgroup incidence in U.S. as determined by this study. Note: Male subgroup characters do not represent a gender skew.

We Spoke to Four Groups Who Represent the Continuum of TV Consumer Types.

± ±

THE IDEAL TV PACKAGE: WHAT VIEWERS WANT

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18 TV PACKAGE FEATURES TESTED

FEATURES THAT LEAN TO STATUS QUO

DVR FUNCTIONALITY

ABILITY TO WATCH ON MY BIG TV

A GOOD ON-SCREEN NAVIGATION SYSTEM

HAS A HARD-WIRED TELEVISION CONNECTION

CONTENT OPTIONS

FULL CONTENT LIBRARY

BIG-FOUR NETWORK ACCESS

PREMIUM CHANNEL CONTENT

LIVE SPORTS

ECONOMIC CONSIDERATIONS LOW MONTHLY SUBSCRIPTION COST

A LA CARTE CHANNEL SELECTION

NO MULTIPLE SUBSCRIPTIONS

GOOD CUSTOMER SERVICE

BUNDLED WITH MY OTHER SERVICES

FEATURES THAT LEAN TO THE FUTURE TIME-SHIFTING

PLACE SHIFTING

CLOUD-BASED DVR

NO WIRES/BOXES/HARDWARE

INTERNET-BASED (WIRELESS)

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WHAT TV VIEWERS WANT FROM A TV PACKAGE*

*Scores Represent Averaged MAXDIFF Values Across All Items in Category. Size of Box Represents Size of Consumer Preference Relative to Overall.

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WHAT TV VIEWERS WANT FROM A TV PACKAGE*

*Scores Represent Averaged MAXDIFF Values Across All Items in Category. Size of Box Represents Size of Consumer Preference Relative to Overall.

40%

24%

TWO-THIRDS OF CONSUMER PREFERENCE IS DRIVEN BY ECONOMIC

AND CONTENT CONSIDERATIONS

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WHAT TV VIEWERS WANT FROM A TV PACKAGE*

*Scores Represent Averaged MAXDIFF Values Across All Items in Category. Size of Box Represents Size of Consumer Preference Relative to Overall.

40%

24%

18% REMAINING ONE-THIRD DRIVEN EQUALLY BY TRADITIONAL VALUE

PROPOSITIONS AND FUTURE LEANING SERVICES (EG. TIME/PLACE SHIFTING)

18%

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WHAT TV VIEWERS WANT FROM A TV PACKAGE

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ECONOMIC CONSIDERATIONS ARE THE STARTING POINT

ECONOMICS DOMINATES THE

CONVERSATION WITH LOW MONTHLY

SERVICE COST AS THE MAIN DESIRE

BUNDLED SERVICE STANDS APART AND REFLECTS MORE OF A SPECIFIC

SUBGROUP DESIRE THAN A BROADER CONSUMER WANT.

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SHIFTING: RIGHT TIME, WRONG PLACE

.

TV ANYTIME IS NEARLY TWICE AS IMPORTANT AS TV ANYWHERE.

MAKING TV MORE MOBILE WORKS BETTER WHEN CONSUMERS SEE IT AS ANYTIME RATHER THAN ANYWHERE.

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CONTENT OPTIONS OVER SPECIFICITY

BREADTH MATTERS MORE THAN SPECIFICS…EXCEPT FOR THE PEOPLE FOR WHOM THE SPECIFICS ARE EVERYTHING. FULL CONTENT LIBRARIES AND ACCESS

TO THE BIG FOUR NETWORKS ARE HYGIENE ISSUES (LIKE CLEAN TOWELS IN

A HOTEL) WHILE PREMIUM CONTENT/SPORTS ARE IMPORTANT FOR

PAMPERING SPECIFIC CONSUMERS.

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LEANING TOWARD THE STATUS QUO

…BUT THESE PACKAGE PIECES ARE MOSTLY HYGIENE ISSUES TOO – AREAS THAT DON’T MOVE THE NEEDLE

MUCH ON CONSUMER TV PACKAGE PREFERENCE.

TRADITIONAL CABLE COMPANIES SPEND A LOT OF THEIR TIME SELLING AND PERFECTING “STATUS QUO”

FEATURES LIKE DVR FUNCTIONALITY AND ON-SCREEN NAVIGATION…

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“THE SIGNAL” IS JUST NOISE

CORD CUTTING ISN’T ABOUT CUTTING A CORD PER SE BUT RATHER ABOUT CONSUMERS MIGRATING TOWARD A

PRODUCT THAT BETTER SATISFIES THEIR CORE DESIRES/NEEDS.

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CONSUMERS WANT TO HAVE THEIR CAKE & EAT IT TOO

A LA CARTE PACKAGE MODEL IS IN HIGH DEMAND – TV CONSUMERS

WANT TO PAY ONLY FOR WHAT THEY WATCH…

ALL TV VIEWERS

OF CORD CUTTERS/NEVERS SAY “YOU END UP PAYING FOR CHANNELS YOU DON’T WATCH” AS A TOP REASON FOR WHY THEY DON’T SUBSCRIBE

TO A TRADITIONAL TV SERVICE…

…BUT ACCESS TO CONTENT IS THE BIGGEST FRUSTRATION FOR UNPLUGGED TV CONSUMERS AND THE BIGGEST HOLDBACK FOR WHY CONNECTED CONSUMERS DON’T CANCEL THEIR SERVICE

THE DISCONNECT OPENS THE DOOR FOR DISRUPTION.

…BUT THEY DON'T WANT TO DISAGGREGATE IN ORDER TO GET

THERE.

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LOW COST MOST IMPORTANT, BUT FOUR DISTINCT GROUPS*

*Big Four Packages Developed By Running Cluster Analysis on MAXDIFF results and Segmenting Respondents into 4 Unique Groups **Top Non-Low Cost Responses OPEN END: What is the single most important thing that you must have when it comes to your television

watching?

CHANNEL AVAILABILITY/VARIETY

MATTERS MOST**

MOST COST CONSCIOUS

LEAN MUCH MORE TOWARD STATUS QUO

FEATURES THAN TOWARD THE FUTURE

THE BUNDLERS (29%)

TIME/PLACE SHIFTING MATTERS MOST

MORE LIKELY TO LEAN TO THE FUTURE THAN LEAN

TO THE STATUS QUO

CONTENT OPTIONS ARE LESS IMPORTANT THAN

MOBILITY

ON-DEMANDERS (29%)

LIVE SPORTS MATTER MOST

ONLY GROUP WHERE

CONTENT (READ: SPORTS) TRUMPS ECONOMICS

SPORTS FANS (18%)

DVR FEATURES MATTER MOST

TIME SHIFTING AND LOW

COST ARE EQUALLY IMPORTANT

BIG FOUR NETWORK

ACCESS IS PARAMOUNT

NETWORK SHIFTERS (24%)

FOR NO GROUP DID SIGNAL CONSIDERATIONS (HARDWIRED CONNECTION VS. INTERNET-BASED/NO WIRES/BOXES) MAKE IT INTO THE TOP-10, LET ALONE THE TOP-5.

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WHERE DO SPORTS FANS FIT? SPORTS FANS’ NEED FOR LIVE SPORTS CONTENT MAKES THEM MORE DEPENDENT ON

THE CORD AND THEY ARE AN ANOMALY IN THE PROGRESSION.

SPORTS GUYS WILL FOLLOW WHEREVER LIVE SPORTS PROGRAMMING GOES – SPORTS IS BOTH THEIR MODUS OPERANDI AND THEIR TETHER TO TRADITIONAL

CABLE SERVICES

THREE STAGES OF CORD WITHERING

CORD WITHERING PROGRESSION

TOTAL CORD ALLEGIANCE

THE BUNDLERS

NETWORK SHIFTERS

ON-DEMANDERS

TOTAL CORD FREEDOM

APPOINTMENT TV NETWORK TV, BUT ON MY SCHEDULE FREEDOM OF PLACE AND TIME

BUNDLED SERVICE BIG FOUR NETWORKS HATE MULTIPLE SUBSCRIPTIONS (EVEN THOUGH THEY LOVE THE IDEA OF A LA CARTE)

MODUS OPERANDI

CORD TETHER

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SPORTS PROGRAMMING COST DISPROPORTIONATELY SHARED

AS A STANDALONE FEATURE, LIVE SPORTS ACCESS IS A MAJOR CONSIDERATION FOR ONLY 20% OF TV VIEWERS WHEN THEY THINK ABOUT THEIR IDEAL TV PACKAGE BUT THE COST OF SPORTS PROGRAMMING IS BEING DISPROPORTIONATELY SHARED BY ALL TV VIEWERS OPPOSITE OF THE AIRLINE INDUSTRY WHERE BUSINESS CLASS/FIRST CLASS TICKETS SUBSIDIZE COACH TRAVEL

24 16 39

241

The BundlersOn-DemandersNetwork ShiftersSport Fans

LIVE SPORTS PREFERENCE SCORE COMPARISON

ACCOUNTS FOR 82% OF TV VIEWERS BUT SPORTS FANS MAY BE SUBSIDIZING TOO…

NON SPORTS FANS SUBSIDIZE SPORTS PROGRAMMING EVERY BIT AS MUCH AS SPORTS FANS ARE SUBSIDIZING OTHER PEOPLES’ VIEWING HABITS TV IS A “SOCIALIST” ECOSYSTEM BUT CONSUMERS DON’T REALLY SEE THE BENEFITS OF THE CURRENT MODEL DISAGGREGATING MIGHT HURT SOME CHANNELS BUT CONSUMERS DON’T REALLY MAKE THAT CONNECTION

THE FUTURE OF THE CORD

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CORD CUTTERS ARE A VANGUARD GROUP, NOT CHEAP

Cord Nevers 30+ Have Much

Higher Consumption

than Cord Nevers <30

86

132

104

100 102

*Total Consumption Score = Sum of the Mean of All Consumption Types **Past 6 Months Activity Annualized

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FUTURE OF THE CORD: INTERNET-POWERED TV

FOR LESS THAN $100 PER YEAR, YOU ARE ALLOWED TO RENT A SMALL ANTENNA FROM A NEW COMPANY THAT ALLOWS YOU TO USE YOUR OWN HOME INTERNET SERVICE TO ACCESS THE PUBLIC AIRWAVES IN ORDER TO STREAM BROADCAST TV OVER THE INTERNET. THERE ARE NO CORDS, CABLE BOXES, OR EQUIPMENT OF ANY KIND. ALL YOU NEED IS AN INTERNET-ENABLED TELEVISION. THIS SERVICE ALLOWS YOU TO LEGALLY WATCH BROADCAST TV IN HD QUALITY ON ANY DEVICE YOU OWN AND EVEN ALLOWS YOU TO RECORD PROGRAMMING THROUGH AN INTERNET-

BASED DVR THAT IS STORED IN THE CLOUD.

13% 24% 15% 19% 16% 19% 15% 22%

19%

37%

29% 21% 25% 29%

26% 29%

Cord Keepers CordConsiderers

Cord Cutters Cord Nevers The Bundlers Sports Fans Network Shifters On-Demanders

Definitely would subscribe Probably would subscribe

LIKELIHOOD TO SUBSCRIBE TO NEW SERVICE

61%

32% 45% 40% 41%

48% 41%

51%

HAVING THIS KIND OF ACCESS COULD SWAY CONSIDERERS BUT ONLY ADDRESSES PROGRAMMING ACCESS HOLDBACK; STILL ONLY 1 IN 4 SAY THEY WOULD CANCEL

THEIR EXISTING SERVICE TO SUBSCRIBE TO THIS SERVICE INSTEAD NETWORK SHIFTERS HAVE LOW INTENT DESPITE THE NEW SERVICE MEETING

MOST OF THEIR MUST-HAVES

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PREMIUM AS STAND-ALONE SERVICE

A STAND-ALONE PREMIUM CONTENT SERVICE COULD ENTICE CORD CONSIDERERS AND ON-DEMANDERS WHO STILL SUBSCRIBE TO DROP THEIR EXISTING CABLE SERVICE BUT OTHER GROUPS REMAIN MORE RESERVED. A NEW STAND-ALONE SUBSCRIPTION SERVICE UNLIKELY TO HAVE MUCH IMPACT IN ADDING DISCONNECTED TV CONSUMERS – ONLY 1 IN 10 CUTTERS & NEVERS SAY THEY WOULD SUBSCRIBE.

18% 7%

27% 14% 12% 14%

29%

24%

13%

35%

13% 28% 29%

28%

All CordConnectedPremiumChannel

Subscribers

Cord Keepers Cord Considerers The Bundlers Sports Fans Network Shifters On-Demanders

Definitely would subscribe Probably would subscribe

LIKELIHOOD TO CANCEL CABLE AND SUBSCRIBE TO A STAND-ALONE SERVICE INSTEAD (AMONG HBO OR SHOWTIME SUBSCRIBERS)

42%

20%

62%

27% 40% 43%

57%

*Among Cord Keepers, Cord Considerers, Bundlers, Sports Fans, Network Shifters, and On-Demanders, percentages reflect likelihood to cancel existing cable TV service AND subscribe to a premium stand-alone service. Among Cord Cutters and Cord Nevers, percentages reflect likelihood to subscribe to service.

11% 12%

19% 23%

Cord Nevers Cord Cutters

Probably would subscribeDefinitely would subscribe

30% 35%

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WHAT THIS ALL MEANS… CONSUMERS DO SEE AN END IN SIGHT FOR THE TRADITIONAL MULTICHANNEL SUBSCRIPTION MODEL

CONSUMERS ARE OPEN TO CHANGE, TECHNOLOGY IS HERALDING THAT CHANGE, AND THERE ARE A LOT MORE PLAYERS CONSUMERS SEE AN INEVITABILITY TO CORD CUTTING THAT IS DRIVEN BY TECHNOLOGY – SMALLER, THINNER, LESS OBTRUSIVE TRADITIONAL CABLE/SATELLITE COMPANIES NEED TO ADAPT AND EXPERIMENT AGGRESSIVELY TO FULLY LEVERAGE THEIR INCUMBENT ADVANTAGE

SOLVING THE DISCONNECT BETWEEN A DESIRE FOR A LA CARTE AND ONE-STOP SHOPPING WILL BE KEY

CONTENT SCAVENGER HUNTS FRUSTRATE CONSUMERS AND LIMIT APPEAL OF ONLINE TV SERVICES – CONSUMERS WANT THE MAGICAL UNIVERSAL REMOTE AND THEY WANT IT SOONER RATHER THAN LATER

CONSUMERS DON’T SEE THE BENEFITS TO A “SOCIALIST” TELEVISION ECOSYSTEM AND THINK A LA CARTE SHOULD BE JUST AS SIMPLE AS (JUST CHEAPER THAN) THE CURRENT ONE-STOP SHOP THEY PAY FOR NOW

THE CORD—CONNECTED OR DISCONNECTED—IS IRRELEVANT

WINNERS WILL BE DECIDED NOT BY THE RATIO OF CORD CUTTERS TO KEEPERS BUT BY WHO PROVIDES THE MOST COST-EFFECTIVE, STREAMLINED ACCESS TO THE MOST CONTENT AND NEWEST TECHNOLOGY FEATURES FROM WHICH CONSUMERS CAN PICK AND CHOOSE

…BUT CORD CUTTERS/NEVERS WORTH THE CHASE FOR BIG MEDIA

THESE AUDIENCES ARE WILLING TO SPEND, ESPECIALLY ON TV, AND THEY ARE WILLING TO SACRIFICE CONVENIENCE – MOBILITY AND A LA CARTE ARE WORTH MORE TO THEM THAN ONE-STOP SHOPPING