Measuring Consumer Preferences for Video Content Provision via Cord‐Cutting Behavior

• DOI: http://doi.org/10.1111/jems.12181
• Author: Jeffrey Prince,Shane Greenstein
• Date: 01 June 2017
• Published date: 01 June 2017

Measuring Consumer Preferences for Video Content

Provision via Cord-Cutting Behavior

JEFFREY PRINCE

Kelley School of Business, Department of Business Economics and Public Policy

Indiana University

Bloomington, IN 47405

jeffprin@indiana.edu

SHANE GREENSTEIN

Harvard University

Department Technologyand Operations Management

Harvard Business School

Boston, MA 02163

sgreenstein@hbs.edu

The television industry is undergoing a generational shift in structure; however, many demand-

side determinants are still not well understood. We model how consumers choose video content

provision among over-the-air (OTA),paid subscription to cable or satellite, and online streaming

(also known as over-the-top, or OTT). We apply our model to a U.S. data set encompassing

both the digital switchover for OTA and the emergence of OTT, along with a recession, and use

it to analyze cord-cutting behavior (i.e., dropping of cable/satellite subscriptions). We find high

levels of cord cutting during this time, and evidence that it became relatively more prevalent

among low-income and younger households—suggesting this group responded to changes in

OTA and streaming options. We find little evidence of households weighing relative content

offerings/quality when choosing their means of video provision during the timespan of our data.

This last finding has important ramifications for strategic interaction between content providers.

1. Introduction

Television is the single biggest use of leisure time (Wallsten, 2015), and all participants

widely acknowledge that it is undergoing a generational shift in structure as video con-

tent provision is converging. The demand-side determinants are not well understood,

but the recent U.S. boon in digital television offers an opportunity to cast light on those

determinants. Specifically, over the years 2008 and 2009, the telecommunications land-

scape experienced two major changes: (1) the digital switchover for over-the-air (OTA)

television and (2) a mass increase in network content available for online streaming (pri-

marily in the form of Hulu and Netflix), often labeled as over-the-top (OTT). At the same

time, the United States experienced the brunt of a very large recession. During this pe-

riod, we also observe a significant reduction of pay television subscriptions. Any or all of

the aforementioned changes could have generated the observed change in pay television

subscriptions. Further, the way in which households responded to these changes has

We thank Fernando Laguarda and seminar participants at the 41st Telecommunications Policy Research

Conference and the Kelley School Business Economics Brown Bag for helpful comments. Weare responsible

for all errors.

C2016 Wiley Periodicals, Inc.

Journal of Economics & Management Strategy, Volume26, Number 2, Summer 2017, 293–317

294 Journal of Economics & Management Strategy

important implications concerning consumer preferences and the competitive landscape

that may emerge.

In this paper, we measure key determinants of consumers’ choices across these

video provision options by analyzing cord-cutting behavior (i.e., the dropping of sub-

scription cable/satellite television services). In doing so, we determine which subgroups

of consumers are most likely to cord cut, whether there is a convergence to the general

population among the group that cord cuts, and the extent to which relative content

offerings/quality impacts households’ choices over content provision. To accomplish

this last task, we employ a well-known choice model, allowing households to choose

between OTA via digital antenna, paid subscription to cable or satellite, and OTT. To our

knowledge, this is the first paper to attempt to measure consumer preferences across

video provision methods that include online streaming.

Understanding how consumers choose across these options can provide key in-

sights into the evolution of the telecommunications landscape. In particular,we can track

whether demographic indicators of cord-cutting behavior are converging or diverging,

and thus determine whether or not cord cutting is heading toward the mainstream.

Further, knowing the role that content offerings play in consumers’ choice of content

provision sheds light on how competition across provision methods is evolving. More

concretely, if relative content is weighed heavily, then expansion of content availability

on OTT could be a key driver of future cord cutting; if not, then other changes to OTA

and OTT are likely important toward these options becoming more viable substitutes

for a paid subscription to cable or satellite.

Toperform our analyses, we employ a rich data set provided by Forrester Research.

The data consist of independent cross-sectional surveys of tens of thousands of American

households on an annual basis. These surveys collect information on technological

purchases and preferences, as well as a wide range of demographic information (income,

education, etc.) and location. We focus our analysis on the last few years of the survey

in our possession (2007–2009), when the aforementioned shifts in the video content

provision market occurred in the United States.

Our econometric analysis focuses on cord-cutting behavior, and how it was in-

fluenced by changes in the telecommunications landscape. We begin by developing a

simple choice model over video content provider options. A key feature of this model is

that it allows utility for each option to depend on individual-level content preferences

and relative content availability across options. This featureallows us to identify whether

consumers notably weigh relative content offerings (which changed with the emergence

of OTT) and/or relative content quality (which changed with the digital switchover).

We estimate this model utilizing methods suitable for repeated cross-sectional data (as

in Prince and Greenstein, 2014).

Our data indicate a significant increase in cord cutting between the years of 2008

and 2009. We do not find evidence that this shift can be explained by wealth shocks;

however, we do find evidence that households alreadyprone to cord cut (i.e., young and

low income) likely became even more prone to this behavior during this time. This latter

finding is suggestive of a response by this group to the change in OTA and emergence

of OTT. Lastly, we find no evidence that relative content availability/quality is a notable

driver of cord-cutting behavior. Specifically, households with preexisting preferences

for content that was either added to (in the case of OTT), or improved for (in the case

of OTA), alternative provider options did not demonstrate a notable difference in their

propensity to cord cut. This finding suggests changes along these dimensions were not

major factors behind the cord cutting we observed.