Can the Paid Video Market Keep Growing?

With cable companies including Comcast , Time Warner Cable , Cablevision , and Cox leading the way, and streaming services including Netflix and Hulu rising quickly, Americans are spending more money on video than ever.

The overall U.S. video entertainment market -- which consists of cable and satellite TV, movie box office, packaged home video, video-on-demand, subscription-based digital streaming services, and paid online video -- reached $120 billion in 2013. That's a 2% increase from 2012. The market is on track to peak at $123 billion in 2015, according to the latest report from Futuresource Consulting.

"At $120 billion, this approximates to an average of $1,000 being spent on video entertainment by every U.S. household," said Futuresource Senior Market Analyst David Sidebottom. "This is by far the highest in the world, and significantly higher than any European country."

Unlike the music business, which was decimated by the Internet, video has prospered. Despite there being more free video than ever before, demand for paid content has not slowed. People might be switching how they buy video and being more selective in their choices, but being able to get exactly what you want has increased spending.

Change is happening

Pay television represents a huge chunk of overall video spending in the U.S., though it is in slight decline. Cable and satellite account for more than $90 billion, around 75% of the total consumer spending. That number may dwindle as people ditch traditional cable or satellite service for online alternatives.

"Although cord-cutting is generally over-hyped, the minority of snippers and shavers is having an impact on the bottom line," Sidebottom said.

The number of Americans who pay for TV through cable, satellite, or fiber services fell by more than a quarter of a million in 2013, the first time the total has dropped for a full year, according to research firm SNL Kagan.

Part of the reason the decline is slow is that it's being driven not by cord-cutters but by people who have never had a cord in the first place, what IHS calls "cord-nevers."

People who are opposed to paying for or can't afford TV are still consuming video and, in many cases, are paying for it. It's not so much paying for programming that people object to, it's paying for channels they don't watch. The rise of Netflix and other digital and online offerings has made paying for only what you want more possible.

That possibility will increase, as channels such as Walt Disney 's ESPN and HBO become available without a cable subscription. Disney has already made deals with Dish Network and DirecTV for its channels to be included on offerings from the satellite companies that will be purely digital. HBO currently offers its streaming service only to customers who also have a pay-TV subscription, but rumors have been prevalent that it will someday break the cable tether and take on Netflix.

There's lots of opportunity for new services, emerging technologies, Internet video, and focused streaming offerings like the WWE Network or Major League Baseball's MLB.TV package to grab a piece of the pie while pay-TV slowly declines.

It's not all good news, but mostly

While pay-TV has been steady, fewer people are willing to pay to permanently own video. Even there, the news is not that bad.

The packaged video market will still exceed $10 billion in retail value at the end of 2014, taking second place behind subscription television, according to Futuresource. By 2015, digital video and box office will both surpass packaged video spending for the first time. They'll extend that lead out to 2018 and beyond.

"As in many other markets, packaged video is becoming increasingly driven by new release product, with catalog suffering due to market saturation, declining retail space and the growth in video consumption on SVoD services," Sidebottom said.

The only real wild card in the video consumption mix is movie box office, which rises and falls based on the films being released. Last year was steady, but numbers are down for 2014 due to a soft summer that had relatively few blockbusters -- though a late surge from Guardians of the Galaxy has made up some of the loss. Strong releases set for 2015 should push box-office revenue to a record $10 billion.

At some point, improvements in home viewing and the ready availability of content should damage box-office returns. That, however, has been predicted for years, and theaters have proven resilient.

Is there a downside?

Video, like music, remains vulnerable to piracy, which has gotten worse as technology improves. In 2004, the Motion Picture Association of America, or MPAA, commissioned a study on the impact of piracy. It showed that in 2005, the major U.S. motion picture studios lost $6.1 billion to piracy. Some $4.8 billion, or 80%, came from piracy in other countries, while the remaining $1.3 billion came from the U.S. The study showed that $3.8 billion was lost to hard goods piracy (selling bootlegged movies), while $2.3 billion was lost to Internet piracy. That's relatively small potatoes in a $120 billion market, but the numbers have likely grown as technology has made stealing easier.

The MPAA no longer tracks piracy by dollars, but the group believes it remains a large problem.

Not a repeat of music

The challenge for video remains keeping customers paying despite the preponderance of legal and illegal free options. It's not difficult to steal a television show or movie if you have even a small amount of digital savvy. That has not happened. Unlike the music industry, which waited until stealing had become so prevalent that it was impossible to close the floodgates, the video world has been constantly adapting.

Keeping customers spending money means continually evolving. People pay for Netflix rather than pirating its content because it offers high value for a low price. Pay-TV does not, and that segment of the market must start to evolve faster, or people will find ways to not pay.

Your cable company is scared, but you can get rich

You know cable's going away. But do you know how to profit? There's $2.2 trillion out there to be had. Currently, cable grabs a big piece of it. That won't last. And when cable falters, three companies are poised to benefit. Click here for their names. Hint: They're not Netflix, Google, and Apple.

The article Can the Paid Video Market Keep Growing? originally appeared on

Daniel Kline has no position in any stocks mentioned. The Motley Fool recommends Netflix and Walt Disney. The Motley Fool owns shares of Netflix and Walt Disney. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

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