Some hoops fans who signed up to get their live sports fix from DISH Network's (NASDAQ:DISH) new Sling TV streaming service were disappointed Saturday night when they couldn't view the NCAA Men's Basketball Semifinals because of shoddy service. Sling TV seemingly couldn't handle the number of viewers trying to watch the games, which points to one of the biggest obstacles facing streaming services: content distribution.
This isn't the first time a streaming service has had issues with large viewership. Last summer, ESPN struggled to keep up with demand on its WatchESPN app for coverage of the U.S. men's soccer team in the World Cup. And last spring, HBO Go viewers were unable to watch the season premiere of Game of Thrones due to a huge influx of traffic.
In the past, a few hiccups in a streaming service were no big deal and only somewhat noteworthy. But as households cut the cord in favor of services such as Sling TV or the upcoming HBO Now, streaming reliability is coming more into focus and could impact a consumer's decision on whether to ditch the cable company.
Providing a consistent live feed has proven difficult for streaming services, but it's the strength of traditional pay-TV operators. What's more, it's much less expensive for cable companies to deliver content at scale than for streaming services to do the same. Cable companies benefit from their origins as community antenna TV providers, which allowed them to leverage local governments' powers of eminent domain while maintaining control of the cable lines. That provided the companies with a strong distribution network, and the only expense is the cost to maintain the lines.
Comparatively, a streaming service relies on servers, content delivery networks, Internet service providers, and in-home equipment that is often beyond the control of the streaming provider to deliver content to subscribers' devices. There are many points at which a stream can break down. This also means the delivery costs of streaming can be much higher than delivery via cable -- especially if you want a reliable stream.
Cable shouldn't be scared
Not only do streaming services lack cable companies' extremely reliable and low-cost infrastructure, part of its delivery must go through an Internet service provider (which is often a cable operator). Controlling consumers' access to the Internet puts cable companies in a great position as compared to some streaming services. Some Internet service providers have charged streaming services like Netflix (NASDAQ:NFLX) interconnection fees.
The recent net neutrality ruling allows the FCC to hear complaints and address issues regarding interconnections -- where an ISP's network meets an edge network to deliver data the last mile. However, the ruling gives ISPs "reasonable network management," which leaves the door open for them to continue charging companies responsible for delivering large amounts of data.
That could put additional pressure on the margins of existing and future streaming services. Sling TV is already expected to have thin margins for its standard $20 per month service compared to DISH Network's satellite-delivered service. Combining content and marketing costs with higher delivery costs (to ensure a reliable stream from source to device) could make it near-impossible to profitably offer a true alternative to cable operators at an attractive price.
Meanwhile, cable operators can bundle their Internet and video services to make the incremental cost of buying video from the cable company almost the same as subscribing to an over-the-top service.
Not ready for prime time
Many believe streaming video is the future of TV. The costs associated with that, however, could be very high, as multiple streaming services have shown an inability to keep up with high demand on their servers. While streaming services might offer more flexibility in the way we view television, they won't necessarily cost less than a cable subscription.
The only companies truly capable of offering a streaming service that can compete with cable are the cable companies themselves. Until a service such as Sling TV or HBO Now can prove it is capable of handling cable company-level demands, they don't represent a huge threat for the incumbent pay-TV operators.
Adam Levy has no position in any stocks mentioned. The Motley Fool recommends Netflix. The Motley Fool owns shares of Netflix. 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.