Are Cord-Cutting's Days Numbered?

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.

Want to know more about video and TV market trends? Check out our dedicated video services content channel here on Light Reading.

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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mendyk 8/15/2017 | 10:37:09 AM
Re: Long term? Most investment money comes from institutional investors. As a group, they like to see the graph lines going steadily and predictably uphill. Instability or disruption (which to me equates to destroying an old model with no plan for a new one) is not a good environment for those folk. And really, what we have going on in the content sector is a rearranging of deck chairs. It will not surprise me if, once all this plays out, the net result will be an overall shrinkage in value on the content side.
brooks7 8/15/2017 | 10:28:36 AM
Re: Long term? Dennis,


I think you should change "Investors" to "Analysts".  

Market instability (what I call Market Disruption) is a time where business models and market shares can be dramatically altered.  There is plenty of good investing to be had there, but it can not be solved by analysis.  Disruption is inherently non-linear and high risk investing (see VCs) thrives in this soup.  Value Investing fails miserably through its use of analytical methods.

The challenge is that predicting the winners is very hard.  And thus, there is a LOT of money lost as well.



Edit:  If you go back about 15 years, you would find a post from a VC named Drew Lanza that described the lack of disruptive technologies in telecom.  This was his reasoning to exit the market for telecom equipment and services.  It was quite a good post.

mendyk 8/15/2017 | 9:32:54 AM
Re: Long term? Agree that this is more a forced change in the delivery model than an abandonment of "pay TV." The current trend suggests further balkanization of content, which means more instability all around. But it's nothing but good news for broadband providers because all content requires that conduit, whether fixed or mobile. As for content providers, they are in for a greater level of uncertainty, which is not something "investors" like very much.
tyrellcorp 8/15/2017 | 8:06:40 AM
Re: Long term? As OTT industry matures with similar features there will be more who shift to it long term.  But OTT really isn't 'cord cutting', it's just a different delivery model of mosty same content.  What OTT provides is not 'cord cutting' but rather competition for more PayTV providers.  If someone only had Comcast as a PayTV option and now has 5 OTT options, that competition should distrubute users across more providers and thus pressure competitive pricing in some form.

But there will also be true cord cutting from PayTV as more and more people (like me) lose interest in traditionally produced content (especially serial TV) or are satisfied with free ad-driven content (Pluto, Crackle, TubiTV, etc).  And then you have the tweens who are more interested in personallly produced content than studio produced content.  It could end up similiar to how indie/private produced content changed the music industry.
242ak 8/15/2017 | 5:08:27 AM
Long term? The long term evolution of OTT is probably the most interesting topic in this sector. Comcast is still confident that most consumers will stick with full-fat pay-TV, while conventional wisdom seems to be that the shift to OTT and skinny bundles will be relentless and irreversible. In a sense it's a bit like fixed-line voice in the early 2000s.

And people still have fixed-line voice services today. So it's going to be a long slow fade...if it is indeed a fade. 
Michelle 8/14/2017 | 1:24:33 PM
the shift It's taken cable operators a very long time to get to this point. There are so many services available that cord-cutting can easily become more expensive than a traditional cable service. I can see it shifting downward as consumers begin to tally the real cost of avoiding the cable company. 
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