Media Content Consumption – frogs Are Cutting the Cord

At frog, we are often asked to think about the future. Clients come to us and ask us to think about “the future of X,” and we have developed a series of methods and techniques to study possible futures. One method to understand possible futures is to look at “lead users.” The assumption here is eloquently summed by writer William Gibson, “The future is already here — it's just not very evenly distributed.”  That insight, combined with Everett Rogers’s classic diffusion of innovation framework created in the 1960s and popularized in high tech by Geoffrey Moore in the 90s, and we arrive at the notion that some things that lead users do will become mainstream down the road.

Which got me thinking – could my frog colleagues be indicators of things to come? Wandering around our various frog studios, you would certainly think so. Our interdisciplinary approach brings together engineers, technologists, strategists, designers, and program managers from every corner of the globe and many walks of life, but we all share a passion for the new, new thing.

I decided to test this out with an experiment to see how frog compares to the normal distribution in the Innovation Adoption Lifecycle. Compared to the population as a whole, we skew towards early adoption of technologies, trends, and cultural norms. 90% of frogs are in the early adopter or early majority segments. We are indeed an early adopter community.

What we can learn from frog employees as a community of lead users about the future of media content consumption? If the media consumption of frogs is a harbinger of things to come, what are the implications for cable, satellite and media streaming companies?

Several studies* have shown that 7-8% of the US population are claiming to have cancelled their cable/satellite subscriptions, and another 17% or so are waiting in the wings, willing to cut the cord. Some analysts have dismissed this as fringe behavior.

So what did our Frog Sample tell us?

44% of our frog sample is no longer contributing any money at all to the traditional content distribution companies (cable/satellite). 27% of frogs have cut the cord and an additional 17% get the bulk of their content through a browser on a screen other than a TV. 15% of our frog sample get the bulk of their content from cable/satellite subscriptions, and 38% have cable/satellite augmented by a Roku + Netflix/Amazon/Hulu subscription.
The economics are stark. Those with cable subscriptions pay an average of $92/month, those with cable subscriptions augmented with Roku pay an average of $113 per month. The 44% who have cut cable have a much lower spend on content - $26 for the cord cutters and $23 for those who get the bulk of their content via browsers.

N=140, US frog studio survey, October 2011

What does it mean?

Weber’s Law of Just Noticeable Difference posits that there is a threshold by which a product has to be different from another product for consumers to notice that there is a difference. This is the boundary that cereal makers skirt (but hope not to cross) when they shrink the size of the granola box to cut costs while keeping the price the same. On the flip side, a company bringing a new product to market has to make their product substantially better, or a lot cheaper, in order to get noticed. For most consumer products we have studied at frog, this barrier is about 30-40%, calculated by relative benefit / relative price.

Apply Weber’s Law to media content consumption, and we can see that the relative price is dramatically lower – just 1/4 of the cable price. This means that the non-cable offerings can be four times worse than cable and still be on parity in their value to consumers. In this study we didn’t quantify the utility of the relative experiences (although we often do this for frog projects), but it is fair to assume that for many people, cable is not four times better than streaming Netflix or Amazon. If we assume that cable is perhaps twice as good as streaming, because it has a better selection of content, easier user experience, easy to get content on TV, and so on, than cable companies can retain customers by lowering their prices to the $44-50/month range. Of course if the streaming experience improves, the gap narrows.

What can make Cable 4X Better than Internet Streaming?

Sports. Those who don’t watch sports spend an average of $44 on content per month; those who watch sports on television at home spend an average of $100. Sports fans are somewhat less likely to time-shift their viewing – reporting that they time-shifted 67% of content viewed last month compared to 76% for those who don’t watch sports – making them more valuable to advertisers.
Another possibility for cable/satellite companies is to make their products 4x better. A quick scan of the incumbents shows a lively mix of new products and experiences, moving well beyond the standard TV offerings of the past. Of course Boxee, Roku, Amazon and Netflix are not standing still either, so we will see an escalation in relative value / relative price.

The Upshot
-We will see an increase in people opting to get their content a la carte from Netflix, Amazon and Hulu and a reduction in people buying cable/satellite packages. The early majority at frog is already there, so this trend has crossed the chasm; it is just a matter of time.
-Expect to see price actions as cable/satellite companies defend their customer base. I suspect we will seem some cable packages halve in price, and cable companies segment their customer base with finer cuts. The days of subsidizing sports for everyone are over.
-The price drops and/or cable defections will accelerate if streaming alternatives become simpler and better. Conversely, defections will slow if cable/satellite innovate with new services. Expect to see innovations and improvements in both!
-Sports packages from cable will retain their pricing power, although there is room for sports leagues to seek to extract more value from their products, or to try to keep a larger share of the economic value they create by trying direct delivery models.

Image from hartman045, posted on flickr