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Access to films and TV programming through internet-connected computers, gaming consoles and mobile devices (iPhone, iPad) is creating alternatives to pay TV service from players like Comcast (NASDAQ:CMCSA), Time Warner Cable (NYSE:TWC), Dish Network (NASDAQ:DISH) and DirecTV (NASDAQ:DTV).

Gaming consoles (Xbox, PlayStation, Wii) are some of the most prevalent devices that make alternative TV access viable for many households. Netflix (NASDAQ:NFLX) is streaming its video through Wii, and Sony (SNE) will be adding HBO on-demand to its PlayStation 3.

Gaming consoles can cannibalize some of the TV services revenues from traditional pay TV service providers if consumers increasingly opt to use their internet connections to access film and TV programming. However, pay TV providers are responding by making their service more flexible in order to retain subscribers.

More Than 50% of US Pay TV Households Have Gaming Consoles

We estimate that pay TV penetration in the US was around 90% in 2009, which is close to 104 million pay TV households. With an estimated 60 million gaming consoles in use in the US, more than 50% of these households have access to these consoles.

Gaming consoles represent a huge addressable market, which if tapped properly, can yield significant revenues via pay-per-view and subscription video-on-demand [VoD] channels delivered over the internet.

According to research conducted by The Diffusion group, revenue from the alternative TV viewing channels that essentially include delivery of internet video to TV will increase from $1 billion in 2009 to $5.7 billion in 2014. Although this is small in comparison to the TV service revenues generated by cable and satellite companies, we expect the alternative TV access market to grow over time.

Pay TV Service Providers Continue To Strengthen VoD Services, Threat from Gaming Consoles Limited

Pay TV service providers are strengthening their video-on-demand offerings to increase viewing flexibility and prevent customer migration to alternative services. The TV Everywhere initiative by cable providers is an attempt to retain subscribers by offering a choice of free on-demand viewing over the internet on the condition of subscription to their pay TV services.

Providers are also enhancing their on-demand menu and including interactive features like video games. For example, Comcast’s VoD service continues to expand, and we estimate that its on-demand views have increased from 1.4 billion in 2005 to 4.1 billion in 2009.

We expect studios to maximize their content monetizing potential through alternative mediums (other than traditional pay TV) like gaming consoles. However, as traditional pay TV service providers leverage their established relationships with studios to enrich their VoD and pay-per-view content, we expect that they can successfully combat emerging threats from gaming consoles.

You can see our complete models here for Comcast, Time Warner Cable, DirecTV and Dish Network’s stock.

Disclosure: No positions

Source: Can Pay TV Providers Combat Threats From Gaming Consoles?