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Cable's Lost Generation

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They called it the "Battle Royale" of media and entertainment. This year's CES pitted Internet video upstarts like Hulu, Roku, and Boxee in a cage match against industry stalwarts such as Comcast and Time Warner. At stake: the hearts and minds of millions.

It was spun as a victor-versus-vanquished battle. It was either going to be Internet video's David hoisting aloft the head of the Goliath that is cable TV, or cable mowing down Hulu and the others like so much other Internet roadkill.

At first glance, it appears that David is a stone's throw from victory. The ever-crucial 18- to 24-year-old viewer, who spends $11 billion a year on entertainment, no longer watches TV as we know it. They are Cable's Lost Generation. However, it turns out that they may not be as lost as we think.

Growth in Pay-TV, which includes cable, DBS such as DirecTV, and IPTV like Verizon FiOS, has slowed to its lowest rate on record, according to Sanford C. Bernstein & Co. Wall Street analysts are looking for evidence of cord cutting among cable subscribers in favor of Internet television, but have not found a clear trend. In fact, it seems that Pay-TV subscribers are a loyal lot who would rather give up dry cleaning and imported beer than go without their Mad Men episodes.

So it is not cord cutting that cable has to worry about. Lost in all the hype over the battle for the living room is the simple fact that young, new subscribers are not replacing older subscribers. As they leave college or their parents' homes to start their own households, the only subscription they want is broadband. Cable's Lost Generation is the first to be raised on the Internet, and they are more than happy to entertain themselves with a high-def Blu-Ray, a PS3, Apple's Jesus tablet, or with a fuzzy desktop video pulled off a torrent site. The opportunity for brands and content owners, therefore, rests with access that is not fixed to a particular network, device, or context, but encourages multiple points of consumption, be they fixed or mobile.

According to Boxee CEO, Avner Ronen, the average Boxee user is not someone who canceled his or her cable subscription to move to over-the-top television (OTT) -- it is someone who has never had cable in the first place. Ronen says that there is a growing legion of recent college graduates who have never had cable, do not see the need to pay for it, and are perfectly adept at finding what they want to see through alternative channels. The Nielsen numbers back up Ronen. For at least the past five years, the young male demographic has virtually dropped off the map of television, and initial speculation was that they were too busy playing video games to watch TV. Now we know the truth -- these young householders are consuming vast amount s of TV content, just not in the traditional sense.

The inviolable cable industry has good reason to be concerned. These Internet Natives are a desirable bunch for marketers; they represent over 30 million people in the US who spend $230 billion a year. Advertisers such as Sony, Xbox, and Anheuser-Busch have found this missing demographic using multiple platforms, and other established content owners are also moving in the same direction. For example, Scripps Networks, the parent company of the Food Network and HGTV, recently launched Food2 as an OTT video network aimed directly at the young and content hungry consumer.

And they are not the only ones. Marketers who study the Nielsen ratings are looking past cable and broadcast TV to find that hard-to-reach demographic, and they are carefully watching OTT video brands like Revision3's popular Diggnation show. The old world was built around a handful of media players profiting from limited choice. In a world that now demands unlimited choice, the vast availability of real time content from numerous providers, next generation media, and a multitude of platforms have obfuscated the landscape. For marketers who want to reach that 18 - 24 audience, 30-second spots on TV are no longer a safe bet. However, this presents a huge opportunity for the savvy brand owner who knows how to optimize their use of these alternative channels to attract distinct audiences with different expectations.

While they downplay the competitive threat, even cable executives admit a very large hole is developing in the 18 - 24 demographic: "The reality is, we're starting to see...young people saying all I need is broadband," said Time Warner Cable CEO Glenn Brit. And it is only going to get more complex. The 8- to 18-year-olds who are next in line to enter the market are even more digitally inclined. But Big Cable is already on the offensive. For example Comcast, which already owns TV Everywhere (TVE) leader Fancast, will soon also own a large stake in OTT leader Hulu.

In a new report by category analyst Colin Dixon, entitled "TVE vs. OTT - Are You Ready for a Throwdown?" Dixon and his colleagues heralded CES as the beginning of the battle between OTT and TVE, but also emphasized that consumers are avidly interested in both options and are willing to vote with their wallets.

A significant number of Pay-TV subscribers are telling us they want TV services over their broadband connections," Dixon told us when we caught up with him at CES. "They're willing to pay for mobility and if they can't get it from their Pay-TV provider, they will certainly look elsewhere.

When Time Warner Cable announced its TVE initiative, offering Pay-TV subscribers full-episode content on computers, phones, and even TVs through IP cloud services, it was a reaction to the sudden availability of premium full-episode content on new services such as Hulu, Roku, and Boxee.

Category buster Boxee has led the way to OTT. In line with a recent study by Bain & Co. that showed the most recommended company in any given category grows 2.5 times the category average, Boxee users are fanatical about the service and advocate it, which makes it the most likely service to be used as a true cable replacement. Mostly for a younger, early-adopter demographic, the majority of its members are true Internet Natives who have never had cable. Meanwhile, "grown-up" organizations like the BBC and PBS are offering full episode TV over the top via the iPlayer and the PBS Video Portal, respectively.

We predict that there is an emergent market to curate, distribute, and monetize content and that it is wide open for game changing innovations that deliver these new streams across multiple platforms. For the entire industry, at stake is the future of TV, advertising, and literally billions of dollars in revenue.

Either way, consumers win big, because whichever side they choose they are going to get greater convenience, more content, and better experiences. Most advertisers and industry players will likely attempt to reach consumers through both TVE and OTT services. The twin factors of choice and competition will reward consumers with improved convenience, abundance, and quality experiences, giving them what they want, wherever they want it.

The opportunities are too many to enumerate. For brands, it is not so much about picking the winning pony, but finding those missing kids. The young, Internet-savvy demographic is highly sought after, and when you cannot reach them with 30-second spots, it becomes that much trickier to get their attention. The good news is that we now know where Nielsen's missing demographic went. The kids are all right -- for now, they are just going over the top.

For a version of this post that includes charts and graphics, download here.