Time and time again, the tech sector has proven that a brand-new technology needs to be much better and/or cheaper than a widely-adopted incumbent technology if it aims to replace the latter on a large scale. Something that's just incrementally better while still requiring consumers or businesses to make big changes in how they do things probably isn't going to fly.

Streaming services from the likes of Netflix Inc. (NFLX) , Amazon.com Inc.  (AMZN) and Hulu pass this test pretty well, since they provide on-demand, ad-free access to huge libraries of TV shows and movies for a fraction of the price of traditional pay-TV packages. However, the prospects for the online TV services that have launched over the last couple of years making the grade is much shakier.

Amazon, hardly averse to dipping its toes into new markets if it sees a big opportunity, seems to have figured this out. Reuters reports Jeff Bezos' company has cancelled plans to launch an online TV service "because it believes it cannot make enough money on such a service." It adds that Amazon has also (not too surprisingly) been unable to convince TV network owners to offer their channels on an à la carte basis via the Amazon Channels platform for Prime members.

The report comes about two years after Apple Inc. (AAPL)  reportedly shelved plans to launch its own online TV service due to stalled licensing talks with pay-TV providers. Meanwhile, Verizon Communications Inc.  (VZ) continues to take its time in launching its long-promised web TV offering. Judging by comments from Verizon execs, Big Red isn't motivated to launch a service as much by the value it thinks the service could deliver relative to alternatives, as it is by the potential to use ad tech assets acquired via AOL and Yahoo to deliver targeted video ads to subscribers.

Meanwhile, those online TV services that have launched have at best seen moderate success. Within the group, AT&T Inc.'s (T) DirecTV Now service appears to be posting the strongest subscriber growth this year. With the help of aggressive pricing -- AT&T charges just $35 per month for a 60-plus channel package that includes ESPN and broadcast networks and, thanks to a sweetheart deal with acquisition target Time Warner Inc. (TWX) , charges just $5 per month to add either HBO or Cinemax -- DirecTV Now added 296,000 subs in the third quarter and 152,000 in the second quarter.

No TV for Bezos?
No TV for Bezos?

But the service still only accounts for a fraction of a total AT&T pay-TV base of 25.1 million, never mind a total U.S. pay-TV base of about 95 million. And considering that AT&T's U-verse and satellite TV services collectively lost 736,000 subs over the last two quarters (cord-cutting is a culprit, but probably not the only one), it looks as if a decent portion of DirecTV Now's growth comes from cannibalizing AT&T's traditional pay-TV base.

Dish Network Inc.'s (DISH) Sling TV, which has been around since early 2015, had amassed just 1.3 million subs as of the first quarter. By comparison, Dish ended the third quarter with 13.2 million total pay-TV subs. The limited growth comes even though Sling TV's pricing is also fairly aggressive: The $20-per-month Sling Orange service provides ESPN, TNT and 28 other channels, while for $40 per month, users can also get Dish's Sling Blue service, which features another 40-plus channels, and a "Broadcast Extra" package containing ABC and Univision.

Subscriber numbers haven't been shared for Alphabet Inc.'s (GOOGL) YouTube TV service, Sony Inc.'s (SNE) PlayStation Vue nor Hulu's Live TV. In March, Discovery Communications Inc.  (DISCA) CEO David Zaslav indicated PlayStation Vue had over 400,000 subs.

There are a few different reasons why online TV services have failed to take off. Chief among them:

  • Missing channels. The much-hyped Sling Orange package doesn't feature any broadcast networks, and even the $40-per-month bundle is missing CBS. Meanwhile, YouTube TV is missing TNT, TBS and other Time Warner channels, as well as many other popular channels. For pay-TV subscribers who have come to take such channels for granted, that can be a deal-breaker.
  • Streaming and bandwidth limitations. Sling Orange only supports one stream at a time, and DirecTV Now just two. Sling Blue and YouTube TV support three. For homes with several TV sets in operation and/or users who like watching remotely, that can be a problem. Moreover, consumers lacking 10Mbps-plus Internet connections can see video quality suffer if they stream three channels at once to a home.
  • Interface differences. In the living room, online TV services are typically accessed via apps running on streaming devices such as Roku players, Amazon's Fire TV devices or Apple TV set-tops. For consumers used to hitting the power button on a remote and seeing a TV channel pop up, that can take some getting used to.
  • The services aren't necessarily that cheap. Pay-TV incumbents have gotten more aggressive about launching "skinny bundles" featuring a relatively limited number of channels, and have continued to offer TV/broadband/phone bundles that are much cheaper than getting TV and broadband subscriptions piecemeal. For example, Verizon charges $80 per month for FiOS Triple Play featuring 150Mbps web access and one of its Custom TV skinny bundles, and $95 per month for a bundle featuring its Preferred HD TV plan, which comes with 255-plus channels. For someone already paying $50 per month or more for a powerful broadband connection and wanting a pay-TV service, that's fairly competitive with online TV packages. Going forward, quad-play cable packages that also cover mobile services will become more common, as Comcast (CMCSA) , Altice (ATUS) and other cable providers begin offering mobile services via reseller deals.
  • TV Everywhere services have taken off. Although online TV service providers tout the ability to access their services wherever a user wants, that also holds true for many channels obtained via traditional pay-TV bundles, thanks to the spread of TV Everywhere apps. In addition, efforts by Comcast and others to launch apps that provide access to many of their live channels is removing the inconvenience of having to use a slew of different TV Everywhere apps.

In a nutshell, online TV services don't provide big feature or price advantages over traditional pay-TV plans, and often come with meaningful handicaps. And their shortcomings also keep them from being embraced in a large way by cord-cutters, many of whom are now signed up for two or more streaming services. Cord-cutters might respond more favorably to à la carte services that let them only pay for the channels they care about, but TV network owners clearly have no interest in putting their current business models at risk to offer them.

There is clearly a market for online TV services. But it's restricted to consumers willing to put up with channel/service limitations and a non-traditional interface to get something that's relatively cheap and comes with no annual contract. And the appeal is to those who aren't paying a whole lot for standalone broadband services.

That's ultimately a niche market, and that niche is already crowded. Amazon seems to have figured this out, and acted accordingly.

Jim Cramer and the AAP team hold positions in Apple, Alphabet and Comcast for their Action Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer buys or sells AAPL, GOOGL or CMCSA? Learn more now.

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