With pay TV subscribership on the decline, content kings are cutting the cord a bit themselves, trying to win over children on the 'second screen.'
This year is shaping up to be one of the worst customer retention years in the history of pay TV. Cable, satellite and phone companies that offer video services lost 113,000 customers in the third quarter, according to a report by MoffettNathanson.
So what are cable and satellite companies' frenemies -- the broadcast partners and content kings -- doing to ensure that the television status quo continues into the next generation of viewers?
They're cutting the cord themselves, to a degree. Networks with a strong mobile presence are using the basics of cord-cutting against the next generation's would-be cord cutters, roping children into the existing ecosystem in a roundabout way.
Disney (DIS), for example, is trying to embrace the second screen and win children over at an earlier age. It introduced a new animated series, "Sheriff Callie's Wild West," Nov. 24 as part of its Disney Junior brand, but instead of launching on the TV network, the first nine episodes are available through the Watch Disney Junior app and a related website. The show won't make it to traditional broadcast until next year.
Here's the hook: As with Time Warner's (TWX) HBO GO or Disney's WatchESPN, kids who want to view "Sheriff Callie's Wild West" will first have to verify a subscription to a cable or satellite provider.
Viacom's (VIA.B) Nickelodeon, which recently won an interactive media Emmy Award for its app and will release one for Nick Jr. in the spring, uses a similar method, requiring users to authenticate subscriptions to get the most from its mobile offerings.
"Younger viewers have the expectation that the content they want is accessible across all of these various screens," said Greg Ireland, an analyst with IDC. "That's where individual programmers, like Disney and HBO with their different apps, are attempting to address that consumer desire, but within the business rules of pay-TV distribution. It's a way to win on both sides. It can satisfy increasing consumer desire for consumption across many screens, but done in a way that reinforces the existing business model that these big media companies depend upon."
Networks rely on carriage fees from pay-TV operators for a sizable percentage of their income, and those amounts rise 5 percent to 6 percent a year, according to Jeff Kagan, an independent technology industry analyst.
The MoffettNathanson study noted that most cancellations are due to the rising cost of pay-TV services rather than technological alternatives.
Albert Cheng, executive vice president and chief product officer of digital media, Disney/ABC Television Group, told CNBC that Disney is not concerned about the risk of contributing to a permanent cord-cutting mentality.
"Our research shows that people choose the best screen available to them," he said. "So if they're at home, they'll watch on a TV set. If the TV set is being used by another member of the household, or they are on the go, they'll access the shows via a mobile screen. . . . Ultimately, this gives consumers more and better choices, which adds clear value to their subscription services."
Focusing these efforts on a young, app-friendly audience might seem like a Joe Camel-esque strategy, but it's one that's not hard to understand.
Children use technology very young these days. A Common Sense Media study found that nearly 40 percent of those under 2 years old have used smartphones and tablets -- up from 10 percent two years ago. Roughly 75 percent of kids under 8 have used such devices, double the figure in 2011.
"Interacting with smartphones and tablets is second nature to kids today," Cheng said in a recent Disney release. The company's research shows tablets are among the fastest-growing devices ever -- more than half of households with kids own a tablet, a gain of over 40 percent from last year.
The influx of new screens has created a schism between viewing audiences. Older adults are content with their living room sets, but younger customers often prefer other options. In its sixth "State of the Media Democracy" report earlier this year, Deloitte said that 9 percent of those it surveyed had cut the cord and 11 percent said they were considering it.
"The cable television industry is hanging onto customers because that's what those customers are familiar with," said Kagan, the consultant. "The younger audience doesn't watch the same way their parents do. They watch on their tablets. They watch on their laptops. . . . There's definitely a digital divide."
Whether the preemptive cord-cutting strategy will work long term remains to be seen, but Ireland at IDC said it's a good start.
"There's more of a near-term evolution of the business model going on than a revolution," he said. "Arguably, you could say it's a stopgap measure -- but it's not a bad stopgap measure."
Those now most interested in "TV anywhere" ultimately may evolve into a traditional audience: As young, on-the-go viewers who want to access their favorite shows remotely get older and have families, there's a good chance they'll become typical homebodies, analysts said. And if their cable and satellite companies have been able to fulfill their mobile needs, there's no reason to think they'll cut the cord.
"There are a lot of different ways of getting content, and they're all going to thrive," Kagan said. "The question is which are going to lead and which are going to follow?"
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