2017 was a terrible year for traditional pay-TV services in the US. They started the year with 97.9 million pay-TV subscribers and ended it with fewer than 94 million. This net loss of almost 4 million subscribers means that more than 4% of the entire subscriber base exited in just one year.
With US pay TV having endured its worst year in its history, thoughts inevitably turn to the future. Does the decline now possess an unstoppable momentum that will present an existential threat to the sector? Ovum, while recognizing the serious challenges facing the business, thinks not. But the likelihood remains that the immediate future will remain highly uncomfortable for everyone except the scaled multinational digital platforms.
The news from 2017 was not, quite, all bad for pay-TV operators. Subscription linear OTT services (SLINs) launched by them – such as AT&T's DirecTV Now and Dish's Sling TV – are adding subscribers quickly. DirecTV Now added almost 900,000 subscribers during the year to reach 1.1 million subscribers, while Sling TV now tops 2.2 million subscribers.
These low-cost, skinny alternatives to traditional pay TV are good for demonstrating that the operators are responding to consumer demand for new types of service and viewing. But the reality is that they are not growing nearly fast enough to offset declines in the traditional subscriber base. And, by its very nature, SLIN ARPU is much lower than pay-TV ARPU, so the bottom line is significantly impacted by pay-TV households churning to SLIN. So, while SLIN has some role to play in keeping subscribers within the pay-TV operator sphere, Ovum believes it is just one of several areas that traditional operators need to focus on. The others include:
The rise of OTT video services has given rise to consumer self-bundling, whereby several different OTT video services are subscribed to in order to create a viewing experience similar to that provided by classic pay TV. The inconvenience of organizing multiple subscriptions creates an opportunity for traditional pay-TV operators to carve out a key role as a trusted aggregator, leveraging their currently-held advantage of dominating broadband and mobile customer bases. By creating an environment where they can partner with streaming services to create an all-in-one, easily navigable destination via a single platform or app, they could potentially host all levels of subscriber – including the much sought after younger, cord-never, mobile-first generation.
With OTT operators thriving by using a strategy of low price points, coupled with heavy investment in original programming, traditional pay TV needs to react by investing in major improvements to customer experience through improved interfaces. Good steps have been taken by Comcast through its X1 platform and Altice via Altice One. These offer sophisticated advanced pay-TV capability, Wi-Fi gateways, and 4K and cloud DVR capability, among other capabilities. These early initiatives need to be built upon to create a compelling entertainment proposition that seamlessly offers traditional pay TV alongside OTT video and so offer an attractive alternative to standalone OTT video services.
There has been consumer antipathy for decades over the high price of traditional pay TV in the US. The public resented a business model that required them to pay very high prices for hundreds of TV channels that they never watched. The swift rise of Netflix et al. is one result of this resentment, with high prices the number one factor driving cord-cutting.
After a chastening 2017, one may have thought an air of caution would prevail. But in late 2017 and early 2018 almost all of the major US pay-TV operators reported big price increases for their packages – a move driven by a need to offset increases in programming and network infrastructure costs. But the decision to double down in the face of a major subscriber exodus seems somewhat reckless. A more realistic approach should be employed. It needs to be accepted that the golden years of massive profits from traditional pay TV are over and a more level-headed approach to pricing needs to be employed, to ensure as many traditional TV subscribers as possible are kept onboard.
The pay-TV business needs to continue to restructure so it can better face the competitive threats posed by the FAANG (Facebook, Amazon, Apple, Google, and Netflix) grouping which is investing billions of dollars in original content. The Comcast/NBCUniversal and AT&T/DirecTV merger deals have been steps in the right direction, as is an attempt (if political opposition can be overcome) to add Time Warner to the AT&T portfolio. The sector needs to push for even greater integration that promotes more efficient acquisition, creation, and delivery of content, thereby enabling the ability to offer a range of pricing models customized for different budgets, viewing habits, and territorial preferences.
Ovum's assumption is that the US pay-TV market will continue to reinvent itself based upon the factors detailed above. By the end of 2022, we forecast the US will have 88 million traditional pay-TV subscribers, representing 74% of TV households. That is down noticeably from 93.9 million and 80% penetration at end-2017. So, even assuming action is taken, ongoing decline is expected. But we continue to anticipate this will fall well short of an apocalyptic meltdown.
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