Several stories around the theme of cord-cutting came together over the past couple of weeks, presenting a somewhat confusing picture of what’s really going on and what needs to be done about it. First off, the Wall Street Journal reported on October 29th that the major US cable companies were reporting better subscriber retention, which was leading some to believe that cord-cutting might be easing.
Then, as many of the major content companies reported earnings last week, the reporting (including from the Wall Street Journal again) tended to emphasize fears that cord-cutting was getting worse. What’s really going on, and more to the point, what can be done about it?
Cord-cutting is continuing as before
The reality is there was no let up in cord-cutting in Q3 and, in fact, it accelerated for the fifth straight quarter. With the vast majority of pay TV providers now having reported, we have seen almost half a million subscriber losses year on year, worse than the quarter million losses in Q2, and the second quarter in a row of real year-on-year losses for the market. What about those cable provider numbers? Well, what’s happened is the telecoms providers (such as AT&T and Verizon) have taken their foot off the gas quite a bit in the last couple of quarters when it comes to promoting their TV services. As such, those cable company improvements merely partially offset slower gains from the telecom companies:
The net effect of all this, especially taken together with mediocre performance from the major satellite providers, is subscriber losses for the market as a whole.
A personal experience
As a personal aside, I’ve been an on again, off again cord-cutter over the last couple of years. We’ve moved twice and, on both occasions, I initially chose not to have a pay TV subscription, only to relent later and sign up for one after all. The first time around, it was because Google Fiber became available in the neighborhood where I lived and I was intrigued to try it out. The second time was because I was constantly frustrated by my inability to watch certain live sports even with a Sling TV subscription and I went with Comcast, my local cable company. The online order failed to go through the first time around, with no indication this was the case and every indication it had succeeded, except no set-top box ever arrived and my online account showed no sign of the TV service being added after the fact. The second time around, the order did indeed go through and a few days later a 13-pound box arrived at my door, containing a set-top-box that looks essentially unchanged from any such box you might have received in the last 15 years and with an interface to match. Comcast does have newer boxes, but apparently reserves those for customers who also buy phone service (for no logical reason I can discern since the set top box only provides TV service, not telephony).
Having said all that, I still haven’t set up the set-top box, which I’ve had for about six weeks at this point, partly because it’s a little complex (our house is new and there’s some fiddly wiring stuff I need to do to get it set up) but partly because I’m able to use a variety of other apps to access almost the same content just by authenticating myself as a Comcast subscriber. My phone, tablet, computer, and various TV-connected boxes each have ways to watch this content without having to use the Comcast STB at all. The one exception is live content other than sports, most of which you still can’t easily get through apps. The other problem is there’s a lot of hunting around for which app has the content I want to watch and, for each new app, I have to authenticate myself all over again. In some cases, I have to re-authenticate myself every time I use the same app.
Interestingly, Netflix CEO Reed Hastings was interviewed this past week at the New York Times DealBook conference and it was exactly this “TV Everywhere” experience he said presented the biggest threat to his company, albeit only in theory, because the execution was so poor. Given my own personal experience, I’m inclined to agree with that. TV Everywhere isn’t the panacea for cord-cutting, but an optimized TVE experience would go a heck of a long way to assuaging some of the impetus behind it.
Conflicting priorities
So what’s stopping the pay TV industry from getting it right? One of the biggest problems is competing priorities. Pay TV operators want to avoid disruption to two aspects of their businesses: reduction in spending by their customers as a result of taking fewer channels or canceling service entirely, and lost revenue (and massive margins) from renting equipment like my 13-pound set top box. Content owners, on the other hand, just want to make sure customers keep their channels, and may even be happy to see other channels dropped. At the same time, they don’t care whether the cable company gets to rent you a box or not, and have every incentive to make sure you can watch their content on the device of your choosing, providing you are paying for it and/or can be shown ads, and the performance of those ads can be tracked. They’d also increasingly like to brand their content experiences rather than have them buried in a cable company programming guide.
All of this has led to the current TV Everywhere scenario where, yes, it is generally possible to watch most of the content from your TV subscription on other boxes and devices, but largely within the confines of a scattered archipelago of apps — each of them with its own user interface and authentication process. Setting up my new Apple TV a week ago was a great reminder of this – every major TV network has its own channel on the new Apple TV (many of them carryovers from the old Apple TV). But each of those apps is its own little world, with its own UI, its content inaccessible from the universal search function, and each with its own similar but separate authentication process (all managed by Adobe’s system, as far as I can make out). There’s a simple solution to all this, of course – the pay TV providers could have their own apps on these various boxes as they do on mobile devices, but they’ve so far largely rejected that approach. Time Warner Cable is testing a Roku-based managed streaming service in New York City, but that’s about as far as this has gone. The reason is those set-top box rental fees generate so much margin.
Disrupt or be disrupted
The big question at this point is at what point these companies will recognize their continued resistance to disruption may end up handing a huge opportunity to newer pay TV providers that are mobile- and smart-TV-native. In other words, if DISH (through Sling TV), Sony, or Apple is able to replicate the best parts of the cable bundle but deliver them through a unified, integrated, 21st-century user interface on the devices consumers choose to use, that will be more compelling than today’s fragmented TV Everywhere experience. If customers choose these services, of course, cable companies will lose not just the set-top box rental revenue, but their entire TV subscription revenue too. If they move quickly enough to recognize this threat and respond to it, they may just be able to head it off at the pass. But if they continue to resist all changes to their current business model, they may well end up ceding significant chunks of the market to newer, and/or nimbler players.
Comcast has already invested huge amounts in creating more modern interfaces on its own set-top boxes and has, to some extent, extended the same innovation to some of its apps. Verizon and AT&T have also done some work to abstract the core elements of their interfaces from their set-top boxes in preparation for porting those experiences to other devices such as gaming consoles. But this hasn’t been a huge focus for any of these companies. And yet, by taking the experiences they’ve already crafted, along with the content rights they’ve secured, each of these companies could potentially create national services within the US, operating as managed delivery over their own broadband networks and as over-the-top services elsewhere in the country. In that way, the more forward-looking among these companies could start to open up huge new opportunities beyond their traditional footprints as a way to offset losses within them. They could, in turn, become disruptors to others rather than the disrupted.
