Cord-cutting: How Serious? What Does it Mean for Channels and Producers?

Are U.S. multichannel subscribers cutting the cord in such numbers that programmers and producers should be concerned for the long term?

Analysts of our sector were recently whipped into a bit of a frenzy by the release of two studies:

• SNL Kagan reported that the U.S. industry lost 119,000 subscribers in the 3^rd quarter 2010, versus a gain of 346,000 in 3Q 2009
  • Cable operators lost 741,000 basic video customers, “the single largest quarterly dip for cable since SNL Kagan began compiling data for the segment in 1980”!!
  • Satellite and Telco gains partially offset these defections
  • Kagan estimates that since April 2010, the sector has lost 2.3% of its subscriber base.
• An  ESPN study confirmed that 121,000 multichannel households cut the cord in 3Q 2010

There are approximately 100 million multichannel U.S. homes.  So what’s the big deal about losing 230,000 subscribers?

• The concern is that the multichannel video industry has peaked after decades of quarter-by-quarter growth
• Many fear that the sector has raced past its ‘mature’ phase and is speeding into the ‘sunset’ stage that characterizes the newspaper or CD-based music industries

It’s Painful Being Mature

Characteristics of mature industries include:

• Fierce competition for a zero growth customer base
• Reduced opportunities to distinguish the product and create a competitive advantage
• A constant search for cost efficiencies
  • ‘Overhead-phobia,’ leading to rolling layoffs like the recent wave at Discovery Networks U.S.
  • Even tougher deals with suppliers
  • Vendor concentration – meaning that fewer suppliers get a bigger slice of the pie
  • Check out our August 2010 post Preferred Vendors: Multiple Commissions / Multiple Networks. Why?

These trends have become painfully familiar to participants in the U.S. cable/satellite industry.

True Believers … and Skeptics

But is the industry heading off into the sunset?

Time Warner CEO Jeff Bewkes is the leading industry proponent of the view that American Pay TV consumers will stick with ‘Gold Standard’ packages that offer a comprehensive choice of channels, including premium programming

• For a helpful statement of Bewkes’ case and a forceful pushback, read Will Richmond in his highly recommended VideoNuze newsletter
• Richmond predicts that more and more Americans will settle for ‘good enough’ packages offered by lower cost delivery platforms like Netflix
  • The ‘good enough’ consumers will drain revenues from cable and satellite operators, thereby eroding the funding for producers

 But There’s Plenty of Good News

Factual-based channels enjoy a far lower cost structure than channels offering premium entertainment, including movies, scripted TV programs and Premium Sports

• Wall to Wall’s Alex Graham made the case on our panel at Sheffield that substitution of Factual for Scripted programs creates valuable opportunities for established producers
• Networks that are far from fully-distributed still have the potential to expand their audiences
  • Examples are ID: Investigation Discovery, Style, Bio, Smithsonian Channel and Nat Geo Channel
  • Check out our recent posts:
    • U.S. Cable Networks: Which Ones Commission Factual? How Many Homes Do They Reach?
    • U.S. Factual Networks: Who’s Hot? Who’s Not!

Outside the U.S., Canada and a handful of other mature markets, there is significant room for growth in the Pay TV market

• Factual channels in expanding markets are reaching the scale where they can afford to commission original programs
• China’s optimistic delegation at this month’s WCSFP Conference reminded us of a recent Paley Center panel where U.S. publishers were agonizing over the global death of print-based media. India’s delegate countered that more than 40 million Indians come into literacy each year, and that India’s newspaper industry is booming.

And Don’t Forget that Other Revenue Stream: Advertising

Surprisingly, television advertising is leading the recovery in media spending for 2012 and beyond:

• TV continues to gain market share from print media
• Many analysts no longer fear cannibalization of the TV audience by mobile and other digital platforms
  • As reported earlier this week in The New York Times, Steve King, CEO of ZenithOptimedia says: “Consumers’ embrace of technologies like digital TV, HDTV and DVRs helps keep them watching, which helps keep marketers buying commercial time.”

Takeaways

• Cord-cutting data and its analysis are unsettled
• However, fully-distributed channels have passed into the ‘mature’ phase, and they will experience more of the cost-cutting and vendor concentration behaviors that we outlined
• For now, there is no killer application – the equivalent of Craig’s List and newspaper classified advertising  — that will drive multichannel television into the sunset
• Watch this space for more discussion of cord-cutting and its implications for channels and producers