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.
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.
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.
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.
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.
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.
“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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