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According to new research from analyst firm MoffettNathanson, 40% of current pay-TV subscribers could join the millions of households that have already cut the cord this year. Sports viewers are “the most entrenched” among those who continue to pay for traditional TV subscriptions, making them “the potential floor for the pay TV ecosystem, as long as the major sports leagues’ rights remain exclusive to the pay TV bundle… that leaves 40% of today’s Pay TV universe at risk” over the next five years.
The declining cable business is nothing new and cord-cutting seems to only be intensifying as time goes on.
Estimates vary for the total amount of pay TV subscriber losses during the third quarter, but all fingers are pointing toward AT&T as the primary culprit. They drove the vast majority of the video subscriber losses for both for traditional and virtual MVPDs, losing approximately 1.16 million premium video subscribers (DirecTV and U-verse) and lost another 195,000 AT&T TV subscribers for a total of about 1.358 million during the quarter. Comcast lost 238,000 TV customers during the third quarter this year.
However, it is worth noting that Comcast did manage to replace those cord-cutters with more profitable high-speed internet customers, signing up 379,000 during the quarter. Dish Network Corp., owned by AT&T, has also managed to pick up slack left behind by cord-cutting. Dish posted a surprise customer gain in the third quarter, as its internet-TV business (Sling TV) overshadowed accounts lost on the satellite side.
UBS predicts that the U.S. pay TV industry will lose another 6.2 million video subscribers in 2020, down slightly from the 6.4 million the analyst firm predicts will be lost in total this year. If that loss comes to bear it will represent a 6.7% rate of decline, ahead of 6.2% in 2019 and well ahead of 1.2% in 2018 when video subscriber losses totaled 1.2 million.
While streaming has been criticized for rising prices, cable prices are rising as well, just not as transparently. Fortune notes that Comcast, for example, has confirmed that its “Broadcast TV” fee ― a mandatory charge that Comcast doesn’t factor into its advertised pricing ― will rise from $10 per month to $15 per month on December 18. Comcast is also raising the rate of its Basic TV service for local channels from $30 per month to $35 per month, and it will charge a dollar more per month for modem and voice equipment rental fees.
A recent KPMG survey of more than 2,000 consumers found that price-sensitive consumers are still willing to spend much more to watch movies and shows online. On average, streaming customers pay $22 per month for video streaming subscriptions and are willing to pay $11, or 50% more, for additional services.
While the KPMG survey showed price was still the most important factor in choosing a certain streaming service across the entire spectrum, content was the number 2 priority for the age 25-60 demographic, and 3rd behind ad-free programing for ages 18-24.
This is good news for streaming platforms like Netflix, AppleTV+, and Disney+, who have started to pour capital into internal development of original series and films.
Per Bloomberg, Wells Fargo wrote that between November 17-23, “The Mandalorian,” a series from Disney+ set in the “Star Wars” universe, was the “most in-demand show in OTT and overall on a linear + OTT basis.” OTT stands for “over the top” content, which bypasses cable boxes. Linear TV airs at set times, as opposed to being on-demand, as with streaming.
Although producing a number 1 hit TV show is no doubt a huge draw to the company’s brand new streaming service, the reported cost per episode is nearly $15 million. To put this budget in perspective, that’s more than 2.5x the $6 million cost per episode the final season of Game of Thrones racked up for only half of the runtime; GoT’s 6 final episodes had an average runtime of 80 minutes, while the episodes of The Mandalorian is just 40 minutes long.
But that might be where the honeymoon ends for streaming.
A “content bubble”, which MRP highlighted way back in May 2018, continues to be inflated by streaming platforms that want to create their own exclusive content, driving up stiff competition for subscriptions and the costs associated with production. Broadcasting and Cable reports that 2018 saw the genesis of 495 scripted original series, 85% more than in 2011. The Mandalorian is not alone in its excessive budget. According to the Washington Post, “The Morning Show”, exclusively on Apple TV Plus, reportedly also costs $15 million an episode. Amazon Prime’s hit original series The Man in the High Castle worked out to nearly $11 million per episode in its second season. Netflix executives have expressed sticker shock at quickly rising costs for top content. Ted Sarandos, the company’s chief content officer, told analysts on an October conference call that new bidders were driving up prices for “elite” content. “On a very competitive show, there has probably been 30% price escalation since last year”.
Undoubtedly, Disney is going all in on The Mandalorian to play catch up with Netflix and other competition. While Disney already owns a huge streaming subscriber base in Hulu and ESPN+, they need to get eyes on their new mainline Disney+ offering. A cut-rate $6.99 per month subscription price, undercutting Netflix’s monthly rate by 86%, also demonstrates that Disney is gearing up to put competitiveness above profitability… but that can’t go on forever.
$650 billion has been invested in video content over the last 5 years, over $100 billion this year alone. Dent Research, cited by FXStreet, notes that about $500 billion of that funding was debt. If firms want to push out 8-figure per episode price tags on their content, the worst-case scenario would be something like a price war cutting into profit margins. But that isn’t exactly out of the questions.
Kill The Cable Bill blog recently teamed up with an unaffiliated third-party data analytics blog to take a pulse on the folks who have been recently cancelling Netflix. Nearly half – 49.4% – of those polled cited this year’s price increase (from $7.99 to $12.99) as a key factor for cancellation; the hike was named more often than any other reason. After 2 consecutive misses on quarterly subscriber growth, price cuts seem more likely than ever before.
Pay-TV is still heavily in decline, but cable companies have managed to find other ways to remain profitable in the face of cord-cutting. At this stage of the industry’s development, streaming may end up as more of a threat to itself if intensifying competition and the growing content bubble start cutting down on margins in coming months and years.
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