Lately, it seems we’ve seen one report after another of various TV network owners taking their content direct to consumers through over-the-top streaming services. Indeed, my column last week talked about who might begin to re-aggregate some of these offerings on behalf of consumers tiring of the fragmentation. But today, I wanted to step back a bit and focus instead on some numbers that help explain why that direct-to-consumer push is happening in the first place.
Cord Cutting Continues to Accelerate
One of the single biggest reasons why cable networks in particular are going direct to consumer is ongoing cord cutting. Though the US pay-TV market saw sustained growth over decades, that growth began to slow in 2014 and turned negative in 2015. Now, two years later, the rate of cord cutting is clearly accelerating, especially if you focus exclusively on the traditional pay-TV offerings and exclude streaming alternatives like Sling TV. I track the 17 largest public pay-TV providers in the US (making up over 95% of total pay-TV subscribers) and the trend has become very clear, as shown in the chart below:
The red part of the chart represents the Sling TV subscribers which are reported in DISH’s results but who aren’t traditional pay-TV subscribers. If you include those as reported by DISH, the losses of pay-TV subscribers amounts to a million a year now, up from half a million a year earlier and growth a year before that. But if you exclude them, as we should, the decline has reached over 1.5 million per year. In and of itself, that’s a substantial decline, especially in the context of a growing US population and number of households. The penetration rate of households is actually declining even more quickly, dropping from around 84% at its peak in 2014 to around 79% at the end of 2016.
Cord Shaving another Major Factor
However, cord cutting by itself doesn’t entirely explain the decline we’re seeing in the total number of cable network subscribers. Nielsen tracks these numbers and publishes its estimates for the penetration of individual cable networks and those numbers are falling more rapidly than cord cutting alone would suggest.
Back in July 2011, the cable network that reached the most households was TBS, with 101.2 million, followed closely by CNN, with 101.1 million. 15 networks having a reach of over 100 million. However, just five and a half years later, in February 2017, the network with the broadest reach (The Food Network) had 93.1 million subscribers, with only 18 networks having over 90 million. In just the last two years, the top 30 networks have lost an average of four million subscribers, or two million per year, well above the level accounted for by cord cutting alone. Some networks have dropped even more quickly, with the two major ESPN networks both losing over 6.5 million over two years and the Weather Channel losing over 12.5 million.
The reason for this decline? An increase in so-called skinny bundles, which provide smaller packages of channels for those users tired of paying $100 per month for dozens of channels they don’t watch. Verizon in particular was sued for creating packages which didn’t include all the ESPN channels it was obligated to under its contract with Disney but has managed to keep selling these packages, which have been its most popular during that period. The streaming services – Sling TV, Playstation Vue, DirecTV Now, and now YouTube TV – also offer a subset of the traditional big channel bundle, reducing the reach of these networks further.
Cable Networks Lose Control
The reality is it’s getting harder and harder for the cable network owners to control where their channels end up, as pay-TV providers create skinny bundles against their wishes and, in some cases, drop channels from their lineups entirely. The drop at the Weather Channel was precipitated by several pay-TV providers deciding they simply didn’t want to carry it anymore. As a result, it has dropped from 101 million subscribers in July 2011 to just 84 million in March 2017. More channels are facing the same fate, as some pay-TV providers decide not to renew contracts with Viacom for some or all of its channels, for example. We’ll see more of the secondary channels owned by the conglomerates squeezed out entirely or pushed into premium packages.
There’s a long way still to go: though we’ve seen this cord shaving activity for several years now, the top 45 channels all reach 90% or more of the households the top channel reaches. In other words, there’s still a ton of bundling of these channels into monolithic packages. That’s served the cable network owners well, as their rights agreements have forced this kind of packaging, but as soon as those packages begin to crumble, we’ll see a rapid decline in the distribution of at least some of them.
Direct to Consumer Reaches a Tipping Point
The channels in the best position to manage this change are those which have the strongest brands and the longest history of charging for their content. As such, it’s the premium channels like HBO, Starz, and Showtime which have been among the pioneers of direct to consumer offerings. Cannibalization of the old model matters little as long as they get adequately compensated for their new models. In many cases, they’ll get far more direct control over their relationships with end users and often more data too.
Conversely, the channels in the weakest position are those which have never created strong brands around their content and whose shows are watched on DVRs and through services like Hulu which provide little direct branding of the channel or its owner. Comcast is said to be planning a service which would bundle up content from NBC and the NBCU cable networks but, without a strong tie between those properties, it’s hard to see why consumers would pay up, especially with much of the content already available through Hulu or VoD services.
We are, though, starting to see a tipping point where even broadcasters like NBC and CBS see the need to start planning a future separate from the big pay-TV providers. That means these efforts are only going to accelerate, increasing the fragmentation in the market but, also importantly, highlighting the winners and losers among the existing channels. The strongest brands and content libraries will do OK and may even thrive in this transition as customers vote with their wallets. The weakest will get thinned out pretty quickly and their owners will struggle.
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