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Are Cord-Cutting's Days Numbered?

Alan Breznick
8/14/2017
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Just how bad will cord-cutting get?

Could be pretty bad, judging by the most recent figures gleaned from the pay-TV industry. In its latest "Cord-Cutting Monitor" report released last week, MoffettNathanson LLC calculated that traditional US pay-TV providers lost a whopping 941,000 subscribers in the second quarter, by far their worst quarterly showing ever. That's up from the industry's previous record loss of 809,000 subs in the first quarter and 709,000 in the same period a year ago.

As a result, the US cable, satellite and telecom industries have now lost more than a combined 1.7 million traditional pay-TV customers in just the first half of this year. Plus, the annual rate of subscriber losses for the industry accelerated to 2.7% in the spring quarter, up from 2.5% in the first quarter. Meanwhile, the rival OTT skinny bundle providers, or virtual multichannel video programming distributors (vMVPDs), fared well, gaining an estimated 469,000 paying customers, or about 50% of the cord-cutters fleeing the legacy pay-TV bundles.

"Did things get worse in Q2?" asked Craig Moffett, principal analyst for MoffettNathanson, in his note to investors last week. "Yes, at least for the traditional distributors."

With more OTT skinny bundle services hitting the video market in the US every season, the cord-cutting craze only promises to get worse, at least in the short term. Indeed, Moffett predicts that the annual cord-cutting rate will soon climb to around 3%, or over 2.7 million subscribers a year. And, as Moffett freely admits, that rate could well climb to 4%, 5% or even 6% per year in the future because the market is still so unsettled and unpredictable. "There is, unfortunately, no roadmap," he notes.

And yet, even with all the unknowns in the market out there, there's still hope that cord-cutting could abate at some point. For one thing, as bad as the second quarter numbers were, the quarterly rate of acceleration actually declined from the previous quarter. So, as Moffett puts it, things "got worse less slowly" in the spring despite some "worst-case scenario" market expectations that the cord-cutting rate might take off even more than it did.


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Further, with such major TV programmers as Walt Disney Co. (NYSE: DIS) and CBS Corp. (NYSE: CBS) planning to flood the market with even more OTT networks and more skinny bundle services spreading their wings, the video market could easily end up glutted with too many viewing alternatives. That could lead to the weaker streaming services closing their doors, as we already started to see last week with NBC Universal shuttering its two-year-old comedy OTT network, Seeso. (See Disney Joins OTT Bandwagon and CBS Streaming Service to Expand Globally.)

Plus, with no vMVPD or single-network OTT service likely to be able to duplicate the variety and diversity of offerings that traditional pay-TV bundles deliver, there could easily be a backlash against these rival services as consumers realize they're not getting everything they want. In turn, that could lead to a slow, gradual trickle of subscribers back to the much-derided "heavy" bundles that are shedding customers in bulk today.

One key thing to watch will be the churn rate of all these new streaming services. Will fickle consumers churn in and out of them because they turn out to be disappointing? Or will the new OTT services have greater staying power than the legacy pay-TV bundles?

Time will tell, of course. But don't count out the traditional pay-TV distributors just yet. The pendulum may just swing back their way.

— Alan Breznick, Cable/Video Practice Leader, Light Reading

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kq4ym
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kq4ym,
User Rank: Light Sabre
8/23/2017 | 5:23:37 PM
Re: Not Complicated...
It's always very difficult to predict the future, and how consumer will react to new technology or pricing changes. It will be interesting to watch the industry to see how consumers will continue cord cutting or revert back to the old habits.
KBode
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KBode,
User Rank: Light Sabre
8/21/2017 | 6:59:52 PM
Re: Not Complicated...
Most analysts have framed this as a slow but steady trend. And one million defections in a three month span still isn't exactly...nothing.

That said, I think a few minor price reductions would nip this in the bud pretty quickly. 
mendyk
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mendyk,
User Rank: Light Sabre
8/15/2017 | 2:42:10 PM
Re: Not Complicated...
Headline writers use words like "fleeing" or "plummeting" to describe low-single-digit changes. The irony with this particular story is that the staying power of cord-cutting is now being questioned because the rate of cutting slowed down a bit in a single three-month period.
KBode
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KBode,
User Rank: Light Sabre
8/15/2017 | 2:31:54 PM
Re: Not Complicated...
"You can certainly reduce this development to the "sick and tired of spending big bucks on big crappy content buckets," but it's a little more complex than that. And we aren't even talking (yet) about the other and possibly larger perceived attraction of owning the content distribution chain, which is owning the customer data."

I see them as distinct issues.

Consumers are fleeing cable because of high prices, poor customer service (well documented) and low-value bloated bundles.

But that to me is distinct from the problem that arises when you have multiple streaming vendors offering numerous exclusive in various silos, which is happening with our without Netflix's help. I think that's it's own problen in that consumers looking for particular content of interest will get tired having to hunt and peck for its silo'd location (or paying yet another monthly fee for service) and will revert to piracy.

Which is a shame given all the progress made on driving users toward legitimate services.
mendyk
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mendyk,
User Rank: Light Sabre
8/15/2017 | 2:11:55 PM
Re: Not Complicated...
Right -- and it's exactly why periods of disruption have a manic/depressive quality (rise too high, fall too low). The problem that institutional investors have is that there are fewer nondisrupted sectors right now. And they'll get hammered if they stick to delivering safe mid single digit returns. So more money gets caught up in the disruption, which makes the inevitable dip steeper. But it's not like we've never seen this before.
brooks7
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brooks7,
User Rank: Light Sabre
8/15/2017 | 2:01:54 PM
Re: Not Complicated...
For Large Established Content providers, yes they are handled primarily by institutions.  And that is my point, startup providers will have other value to investors.

Let's use the Disney/Netflix example.  Netflix has already become motivated to become a great studio for itself.  In the future, it might be bought for content reasons not for distribution reasons.

I think what I am failing at saying badly is that there is a class of investor who should stay away from those markets in turmoil.  This tend to be the analytical kind who want to be able to predict the future by analyzing things.

The problem is with a market in disruption that analysis is interesting but probably is not the right way of thinking about it.  That kind of market is a visioning exercise.  Of course, that kind of analysis can not be completely backed up by facts and figures,  Who knows?  Maybe Disney gets too unweildy and has to be broken up and Netflix becomes the largest content company?

seven

 

 
mendyk
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mendyk,
User Rank: Light Sabre
8/15/2017 | 1:44:50 PM
Re: Not Complicated...
It's the basic premise of the original post -- that content providers are fragmenting the delivery model by bypassing aggregators and selling their content independently. The apparent early success with this approach is leading to further fragmentation -- witness Disney's decision to let its distribution deal with Netflix expire so that it can sell its own content direct to subscribers. You can certainly reduce this development to the "sick and tired of spending big bucks on big crappy content buckets," but it's a little more complex than that. And we aren't even talking (yet) about the other and possibly larger perceived attraction of owning the content distribution chain, which is owning the customer data.
KBode
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KBode,
User Rank: Light Sabre
8/15/2017 | 12:41:51 PM
Re: Not Complicated...
Can you clarify what you mean further by Netflix "balkanizing the sector"?

I'm not sure how what Netflix is doing changes the reality that many of these users are fleeing because they feel the value proposition of paying $130 for 500 channels they barely watch is fading fast.
mendyk
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mendyk,
User Rank: Light Sabre
8/15/2017 | 12:20:16 PM
Re: Not Complicated...
That doesn't take into account the fact that emerging content providers like Netflix are balkanizing the sector by staying away from big-bucket pay TV services.
KBode
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KBode,
User Rank: Light Sabre
8/15/2017 | 11:51:50 AM
Not Complicated...
This isn't really complicated. Cord cutting continues until cable companies truly compete on price and package flexibility. Keep paying lip service to those subjectes (and quality customer service) and the exodus will continue. 
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