Cable companies now under competitive threat, beginning to hemorrhage customers

The threat to cable companies that I mentioned in today’s “Internet and Journalism” is now in full effect. A new study just released by eMarketer projects that US cable companies will 33 million customers this year, up from a loss of 24.9 million a year ago. Some thoughts below

Data transfer speeds are driving the change

As I suggested in the previous post, all of this change is driven by data transfer speeds.

In the past, customers who consumed video content bought pre-packaged content en masse via VHS cassette and, later, DVD purchases. And they consumed live content according to the schedule of their content providers, sometimes with the assistance of analogue VHS cassettes and, later, DVRs.

The result was that the motion-picture industry enjoyed an additional high margin revenue stream and cable TV companies had captive customers for whom they could bundle content packages together to boost margins.

But now data transfer speeds are large enough to stream that data with only minor glitches. Moreover, cloud storage capacity is also cheap enough that streaming service providers can archive massive quantities of video data for on-demand retrieval. The result is that consumers no longer buy pre-packaged content. Nor do they watch content when and how cable companies dictate. Instead they stream content on-demand, paying a flat fee for the ability to do so. Even pay-per-view models of pre-packaged content, often employed by Amazon Prime Video, is under threat by the ability to stream content anytime and anywhere.

eMarketer says the losses are now enormous

The latest study on this trend sees almost 60 million customers cutting the cord in the US in the two years 2017-2018. The increase in cord cutting will be greatest in percentage terms this year.

Source: eMarketer

In addition, eMarketer says that 186.7 million adults in the US will use pay TV in 2018, a reduction of 3.8% over the previous year. That’s a bit higher even than the 3.4% drop-off in 2017. So the size of the audience is declining. And the size of the audience captured by incumbent cable, satellite and telco companies is declining much more rapidly.

Over-the-top services are eating Big Cable’s lunch

I know everyone is focused on Netflix here. But likely, the big losses are due to the increase in OTT (over-the-top) live-TV streaming services now available in the US, not Netflix. There are six major offerings now, Dish’s Sling, Sony’s PlayStation Vue, AT&T’s DirecTV Now, Google’s YouTube TV, Hulu Live TV, and FuboTV, as well as a few niche packages. Though packages for Live TV offerings often lack the variety of channels that cable services offer, a US household can get them for a mere $40 per month. Add in a broadband connection for $30 per month and you have a $70 monthly spend versus the previous $150-$200 one household might have spent.

Moreover, AT&T and Dish are the only content delivery providers with credible standalone OTT offerings. The likes of Comcast are building live TV services for their existing customers with Xfinity Beta Streaming. That may keep some customers from jumping ship. But they lack standalone revenue streams to attract new customers. And Comcast is still trying to get customers to pay a ‘console fee’ by charging for beta streaming access.

Here’s what eMarketer says:

The main factor fueling growth of on-demand streaming platforms is their original content. Consumers increasingly choose services on the strength of the programming they offer, and the platforms are stepping up with billions in spending on premium shows. Another factor driving the acceleration of cord-cutting is the availability of compelling and affordable live TV packages that are delivered via the internet without the need for installation fees or hardware.

–eMarketer analyst Paul Verna

I would stress the second half of that statement. Yes, Netflix has a huge slug of original content that makes it worthwhile for some to cut the cord. But existing cable customers are not going to leave behind a stable of 60-200 channels available through their set-top box to just watch what’s available on Netflix — or even Netflix, Amazon and Hulu.

Margins will go down and merger will go up at media companies

From a media company’s perspective, even if you are AT&T, losing an existing customer to your DirecTV Now offering, you’re doing so at a lower price point. So your topline revenue is going down. What’s more is the whole business of charging access fees per viewing screen i.e. console fees goes away.

How would that look? Before you offered a Double Play package for $69.99 as a lure to customers. Then you tacked on 12 per set-top box and $20 in hidden licensing fees. After the two-year term-commitment ended you moved the $69.99 price point up to, say $99.99, bringing your revenue to $99.99 + $36 for set-top boxes + $20 in licensing fees for a grand total of over $150, instead of the originally quoted $69.99.

Now you’re getting $49.99 for to act as a ‘dumb pipe’ Internet connection, with the TV money going to YouTube TV or Hulu. And all of the additional revenue goes poof. $50 is a lot less than $150. That’s going to crush margins at these companies.

Cable companies can fight back in two ways. The first is to merge to gain economies of scale and negotiating leverage regarding content delivery. Comcast has done so. But it is still looking for further growth opportunities via merger, purely for defensive purposes.

A second way to fight back in the US given that net neutrality has been struck down is to develop ‘pipeline fees’ by prioritizing data. The Netflixes and the YouTube TVs of the world will have to pay up if they want to eat up massive amounts of data on the network you built to stream your own data. They’re your customer, but their also your competitor. And given the relaxation in regulation in this area, this is one way to fight back.

My view here is that these maneuvers will only provide marginal relief. The Internet is a deflationary force. We have seen this with both written data and audio media industries. Now, the data rates are fast enough that we will see it with video media industries as well. Incumbent firms will not do well financially in this environment.