Record numbers of Americans are unplugging their TV subscriptions
Last updated: August 14, 2015 11:15 pm
TV flickers as viewers find new screens
David Crow and Shannon Bond in New York
Record numbers of Americans are unplugging their
subscriptions
When 24m US
viewers tuned in to watch Donald Trump slug it out with his rivals for the
Republican presidential nomination, Fox News made television history, recording
record ratings for a non-sports cable broadcast.
However, those who followed the political jousting on
social networks had a common complaint: despite partnering with Facebook to
host the debate, Fox News had made it virtually impossible to watch the event
online.
Twitter users traded links with illicit livestreams and
lambasted the network’s failure to cater for “cord-cutters” or “cord-nevers” —
people who have either ditched their pay-TV subscription or have never signed
up for one.
The disconnect between the knockout ratings and the
incredulity of young, media-savvy viewers appeared to support the central
thesis of broadcasters and pay-TV providers: cord-cutting might be fashionable
for trendy elites, but it has yet to make a dent in “real” America’s love
affair with television.
That theory is coming under attack like never before. The
second quarter is always tough for the pay-TV industry, as families move home
and college students disconnect, but this time it was the worst on record for
net customer losses: an estimated 566,000 people cut the cord. With the
exception of Verizon, which is still rolling out its video service, all pay-TV
companies lost subscribers during the quarter.
Worse still, the poor performance comes against the
backdrop of improving macro trends that are usually positive for the industry,
including a rise in new household formation following several years of
stagnation.
With roughly 100m US pay-TV subscribers, the loss of
half a million customers does not equal Armageddon. The subscriber base shrunk
0.7 per cent year-on-year in the second quarter, its sharpest contraction on
record, but nowhere near as precipitous as the declines seen in other media
businesses such as newspapers and recorded music.
But after a decade of fretting about cord-cutting,
investors think it has finally arrived.
Concerns over younger customers’ changing viewing habits
led to a sharp sell-off in media stocks earlier this month. More than $50bn was
wiped from the market value of the S&P 500 Media Index, after Walt Disney
cut growth estimates for its cable networks and companies including Viacom, Fox
and CBS reported declining advertising revenue.
Among the companies who pipe pay-TV into customers’
homes, satellite groups have emerged as the biggest casualties of cord-cutting.
These groups amassed a huge subscriber base when they entered the market in the
1990s, with deep discounts to cable products and technology that could reach
rural homes — but now the disrupters are being disrupted.
Unlike cable operators, satellite companies cannot offer
a high-speed broadband connection — an essential for anyone wanting to watch
streaming services like Netflix or Hulu.
“We are witnessing the rapid erosion of satellite’s
competitiveness,” says Craig Moffett, an analyst at MoffettNathanson. “The
industry is no longer growing in the US and the dynamics have shifted in
favour of cable, and in favour of broadband.”
Analysts estimate Dish, one of the two big US satellite
groups, lost 151,000 subscribers in the second quarter, versus a loss of 44,000
a year ago. It reported narrower net customer losses of 85,000, but that figure
lumped in sales of Sling TV — a new slimmed-down streaming TV service for
cord-cutters that is delivered via an internet connection or “over-the-top”.
Charlie Ergen, Dish chief executive, has said he expects
its pay-TV business to come under pressure, and has tried to diversify by
launching Sling TV and by acquiring tens of billions of dollars of spectrum —
the airwaves needed to deliver wireless telecoms services.
Never one to shy away from rubbing salt into the wounds
of struggling broadcasters, Mr Ergen had a sharp message for content owners
earlier this month: “The biggest problem in the linear [TV] business today is
that viewership is going down. Advertising rates are going down. And everybody
wants to go to the street and say they’re still making the same amount of
money.”
DirecTV, the satellite group recently acquired by
AT&T for $49bn, also had its worst quarter ever, posting net customer
losses of 133,000, versus 34,000 in the same period of 2014. Investors in
AT&T appear to be nervous about the prospects for the new company, sending
its shares down as much as 3 per cent on Wednesday after an analyst day where
executives outlined their long-term strategy.
For cable operators, the picture is much better. As owner
of NBC, the broadcaster, Comcast got burnt in the recent media sell-off, but
its cable subscription business performed quite well, shedding 69,000
subscribers versus a loss of 144,000 a year ago. Time Warner Cable lost 43,000,
compared with a loss of 147,000 in the second quarter of 2014.
Analysts say cable companies are faring better because
those customers who still want pay-TV services also want high-speed broadband,
which can be delivered by a cable but not by a satellite dish.
And even if the cable industry experiences some immediate
pain from cord-cutting, some predict a win-win situation in the long term. When
customers ditch their pay-TV subscriptions and flock to Netflix, HBO Now and
other online services, they will still need a high-speed internet connection.
“As subscribers cut the cord they are more reliant on faster
broadband, which favours cable,” says Jonathan Chaplin, an analyst at New
Street Research, who points out that many smaller cable companies make no
profit from video services, while larger groups, like Comcast, make very
little.
Cable One, a small Arizona-based operator, has lost 20
per cent of its video subscriber base in a year, while increasing earnings and
cash flow. “Smaller operators have already crossed the Rubicon,” says Mr
Moffett. “Eventually it will come to that for all.”
In the second quarter, Comcast crossed a Rubicon of its
own: it now has more broadband subscribers than video ones.
Still, Rich Greenfield, an analyst at BTIG Research,
thinks the likes of Comcast and Time Warner Cable will be less sanguine about
losing video customers. “They still make money in video, which makes it harder
to abandon. They charge more than it costs them [to pay affiliate fees to
broadcasters]. If they are only in broadband, they have to accept lower
revenues or raise their prices.”
Perhaps the biggest risk for cable companies is that
regulators block them from hiking broadband prices to account for lost pay-TV
profits. Currently, the economics of pay-TV are quite simple: a customer pays,
for argument’s sake, $80 a month. Roughly half goes to the broadcasters for
content, while the other $40 goes to the pay-TV company transporting the
content.
In the Netflix world, Comcast et al still deliver the
content, but they need to find a new way of getting paid. The Federal
Communication Commission’s recent net neutrality ruling closed down at least
one avenue, banning cable operators and telecoms groups from charging Netflix
and others for a “fast lane” to access their viewers.
That means sharp price increases for consumers, though
that too could face opposition. In vast swaths of the US, customers
have only one choice of cable provider. If companies were to start using their
monopolies to extract more cash from customers, regulators could step in with
utility-style price caps.
“The real question is whether they can charge for
delivery when the same video is delivered over the same network, but is being
sent by Netflix,” says Mr Moffett.
As investors and executives grapple with accelerating
changes in media consumption habits, they are nervously eyeing one group in
particular: today’s kids, who they worry may not grow up into tomorrow’s pay-TV
customers.
The worst-hit stock in the sector’s recent sell-off was
Viacom. The home of Nickelodeon, MTV and Comedy Central dropped 20 per cent
over two days as it missed revenue estimates and reported a 9 per cent decline
in US advertising sales.
Once powerhouses of programming aimed at children,
teenagers and young adults, Viacom’s channels have suffered sharp ratings
declines as young audiences shift to watching programmes on demand on their
digital devices, often without advertising. Viewership across its networks was
down 18 per cent in the second quarter, according to Bernstein Research.
“Viacom still boasts some attractive programming, but it
appeals mainly to a younger demographic that is more likely to abandon
traditional TV viewing,” said Dave Novosel, analyst at Gimme Credit.
Viacom has countered that the Nielsen ratings that
underpin the $70bn US TV advertising market do not capture its digital reach.
It is taking steps to lessen its reliance on the research firm’s measurements,
including launching a subscription online streaming service aimed at
preschoolers.
But traditional TV networks also face competition from
online-only programmers including Netflix and Amazon, which are investing in
original children’s content and licensing popular programming from Walt Disney,
DreamWorks Animation and Viacom’s own Nickelodeon, which runs commercial-free,
an appealing fact for many parents. This week, HBO struck a five-year deal to
carry Sesame Street
on its premium channel and digital platforms.
A study this week from PwC, the consultancy, found more
than half of eight to 18-year-olds said streaming TV was their favourite media
content, ahead of cable and network TV shows, games and short videos.
Their reported viewing habits told a different story,
however. Those surveyed spend an average 7.8 hours a week watching traditional
network TV, compared with 6.2 hours watching cable TV, 6.1 hours streaming
shows and movies on a laptop, smartphone or tablet and 7.2 hours watching
YouTube videos.
Still, the risk remains for the TV industry that this
generation of children growing up with iPhones and the ad-free offerings of
Netflix is developing a very different notion of what exactly constitutes
“television”.
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