In the past six months, we have seen an aggressive acceleration in the amount of streaming content available via the Internet, otherwise known as “over-the-top” content. We believe this is part of a broader paradigm shift in the way people consume video content. More people are viewing streaming content on TV’s, computers, tablets or smartphones. Historically, people watched television using cable subscriptions, which increased in popularity in the late 1970’s as cable operators started investing in original programming to boost subscriptions.

The 1990’s saw the rise of satellite television. The 1992 Cable Act, which allowed broadcasters to charge distributors to carry their signals, precipitated an explosion in the number of channels available. Despite pay TV providers offering hundreds of channels to their customers, the average subscriber typically only watches about 17 channels regularly. In the mid-2000’s, Netflix started offering streaming video in addition to its mail-order DVD rental service. At first, the Netflix streaming library was very limited and hardly a replacement for a full pay TV package. But Netflix began striking deals with content owners to license popular TV shows and movies, in addition to creating original programming. Hulu increased its number of network partners in order to offer new content from providers such as Disney and BBC. In the past year, Sony, CBS, and Time Warner’s HBO all announced plans to debut an online video service without the need for a traditional cable or satellite subscription.

With much of the popular content now available via some sort of streaming option, canceling one’s $189/month pay TV subscription (or “cutting the cord”) has finally become an enticing option. In fact, this trend has begun to show up in recent data. In the past year, according to Nielsen, US households have increased subscriptions to video-on-demand services, while US pay TV subscribers have decreased and people spend less time watching traditional live television. “Millennials,” as the 18-34-year-old age group is called, have begun cutting the cord at a particularly impressive rate. Traditional TV usage by this group had been falling about 4% per year since 2012. This trend has accelerated sharply. Between September 2014 and January of 2015, TV usage by millennials fell a whopping 10.6%.

Subscribers hesitant to cut the cord cite the main reason for their reluctance as the ability to watch live sporting events or news. While a TV episode or movie can be watched at any time after the premiere without losing much value, a live event is almost “worthless” once time has passed since the initial broadcast. Nevertheless, we believe it is just a matter a time before streaming becomes the norm for these live programs as well.

As more video programming goes online and consumers become more price-sensitive, we think the original content providers such as Disney will retain pricing power. Viewers do not care whether they watch their favorite shows via cable or streaming, as long as they have access to their preferred content.

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