- Pay-TV providers are losing subscribers as economic uncertainty looms and live sports — TV’s biggest viewership draw — remain off the air.
- The industry lost a record 1.8 million net subscribers in the first quarter, by MoffettNathanson’s tally, and analysts are expecting a worse second quarter.
- The wave of subscriber losses is widening the rift between sports fans, who are mostly still tied to traditional TV, and entertainment viewers, who are turning to streaming services.
- It’s rough for pay-TV providers, but experts say it’s even worse for media networks that rely on the basic-cable bundle to make their economics work.
- Analysts say the pay-TV bundle is headed into a “death spiral.”
- Visit Business Insider’s homepage for more stories.
People are watching more TV during lockdown, but they’re abandoning traditional pay-TV services in greater numbers. And, unlike social distancing, those losses will be likely be permanent.
Industry experts, including Craig Moffett at MoffettNathanson, told Business Insider that the rise in pay TV losses is sending the pay-TV bundle into a “death spiral” that’s pushing a key segment of entertainment-driven TV viewers further away.
The first quarter of 2020 is pacing toward the fastest rate of subscriber declines the pay-TV industry has seen yet.
UBS estimates that pay-TV subscribers declined at a 6% annual rate during the first quarter, across traditional services like Comcast and DirecTV and streaming-TV alternatives like Sling TV. The pace is up from about 5% during the prior quarter, and ahead of the firm’s earlier estimates.
And, where subscriber declines in 2019 were mostly led by a single major player, AT&T, 2020’s acceleration seems to be hitting the industry as a whole.
Consider these stats:
- The traditional US pay-TV industry lost a record 1.8 million net subscribers in the first quarter, by MoffettNathanson’s tally.
- Cable providers including Comcast and Altice, as well as satellite operator AT&T, reported heavier net subscriber losses than they had a year earlier.
- Virtual streaming-TV services Sling TV and AT&T TV Now lost subscribers, and Hulu Live, the only service to report growth during the quarter, added just 100,000 subscribers. (Alphabet doesn’t release subscriber figures for YouTube TV.)
- The four biggest distributors — AT&T, Charter, Comcast, and Dish — said higher subscriber declines would likely continue, or pick up, in the second quarter.
In other words, pay TV’s subscriber losses are bad and getting worse.
Since March, the coronavirus outbreak has kept most people in their homes, and pushed US unemployment claims to 33 million in recent weeks. Against that backdrop, people who are spending more time at home are also becoming more budget conscious. And with most live sports forced off the air, those who might not otherwise have cut the cord are starting to consider alternatives.
“If there’s anything the outbreak has done, it’s accelerated the digitalization of society,” John Hodulik, an analyst at UBS, told Business Insider. “‘Stay at home’ plus the lack of sports is conditioning people to look at direct-to-consumer first, and look outside of traditional TV for anything outside of news. These customers, once they’re gone, they don’t come back.”
There’s no shortage of entertainment-focused streaming services for people to turn to. Both Netflix and Disney Plus reported huge subscriber growth during the first quarter. And streaming-media company Roku reported that its active accounts rose 38%, while citing Nielsen data that primetime linear-TV viewership among 18 to 34-year-olds had fallen 18% during from mid-March to mid-April.
The crisis is accelerating the shift of entertainment-focused viewers away from traditional-TV services and toward cheaper streaming options.
It’s rough for pay-TV providers, but experts say it’s worse for media networks like ESPN that rely on the basic-cable bundle to make their economics work.
“Crises like these tend not to change tech trends, but they certainly accelerate them,” said Moffett at MoffettNathanson. “The real story is that we’re seeing the separation of sports and entertainment … This was a trend well under way before COVID came along, and COVID is giving it a good hard shove it in the same direction.”
Options trading Price hikes and sports hiatuses are driving cord-cutting, which could worsen amid higher unemployment and economic uncertainty
We’re just starting to see the effects of the coronavirus pandemic on the US pay-TV industry.
The outbreak came to a head in the US during the last three weeks of March. And major sports leagues only started suspending or canceling games on March 11, beginning with the NBA.
Experts said the severe losses from the first quarter stemmed from price hikes at a bunch providers, including Comcast, Charter, Altice, Sling TV, and Hulu, as well as the loss of live sports toward the end of the period.
“The acceleration has less to do with the outbreak than a lot of people think … which is what frankly worries me,” Hodulik at UBS said. “We’re just getting started here.”
The price hikes were part of a larger industry shift in the last year or so to focus on TV subscribers who providers can profit off, rather than waving money-losing discounts at people who probably won’t stick around when they have to pay full price. That strategy has helped pay-TV revenue grow at many major cable companies, including Comcast and Dish Network, even as subscribers shrank.
Still, the sticker shock can prompt certain customers who had been frustrated with their pay-TV bills to cancel, which is even more likely when people are worried about where their next paychecks will come from.
The looming economic uncertainty, combined with the lack of live sports that drive huge TV audiences, are part of why pay-TV operators are warning of similar or worsening subscribers losses next quarter.
“We could see a similar year-over-year increase in the number of video customer net losses in the second quarter,” Mike Cavanagh, Comcast’s chief financial officer, said on the company’s earnings call, “likely still a reflection of our beginning-of-year rate increase as well as changing consumer preferences and economic stress.”
It may also get harder to attract the elusive profitable viewer, who is key to pay TV’s growth strategies.
Past quarters suggest that people are signing up for pay-TV services at slower rates than in the past, based largely on data from Dish TV, which breaks out the gross additions baked into its net subscribers losses, and management commentary.
That problem could worsen if people grow leery of letting technicians in their homes during the pandemic. To prevent this, Dish said it had trained its employees on new safety practices during installation, and Verizon said its technicians were avoiding entering homes where possible.
“The numbers this quarter are profound,” said Bruce Leichtman, at Leichtman Research Group. “But when you listen to the earnings calls, they’re talking about a slowdown in connects.”
Options trading Most of the people who are canceling pay TV during the crisis probably won’t be back, even when sports return
Most of the people who are canceling pay TV during the crisis probably won’t be back, even when sports return, the experts said.
“Price increases plus employment disruption/recession plus growing OTT options plus no sports equals more cord-cutting going forward,” analysts at Wall Street research firm Bernstein wrote in a May 5 note. “We believe many/most lost subs will not come back.”
Some people will continue paying a premium for one of the few aspects to TV entertainment that’s still best enjoyed live: sports. Avid sports fans who may have canceled their services to save cash until their favorite teams are back on the air will likely return to TV in some form, either through conventional bundles or streaming-TV packages like YouTube TV that they can turn on and off more easily throughout the year.
But the majority of defectors during this new wave of cord-cutting are going to be non-sports fans, the experts said. They put up with their bloated TV bills when sports were still on the air, even if they didn’t watch ESPN, but the economic strain is pushing some of those people to a breaking point.
Here’s the rub:
Sports rights cost a ton and networks like ESPN pay the leagues fixed fees for the privilege of airing their games. The networks can afford the sky-high rights costs because pay-TV providers are paying them per subscriber to carry those channels.
Sports channels are the most expensive programming in the pay-TV bundle, with carriage fees averaging $20.82 per subscriber per month in 2020, according to Kagan, a media-research arm within S&P Global Market Intelligence. ESPN alone costs $7.89 per month in fees.
Each time the sports networks renegotiate their carriage deals, there are fewer pay-TV subscribers, but the networks’ expenses are the same or higher. So, the networks raise their rates per subscriber, which the pay-TV providers pass onto customers, some of whom cancel, driving rates higher the next cycle around, and so on.
“All this creates a vicious cycle that is at this point unstoppable,” said Moffett, at MoffettNathanson, who explained this phenomenon. “It’s this death spiral now where the price of sports is parabolic and squeezing non-sports customers out of ecosystem. And non-sports customers are landing in a comfortable place.”
Indeed, subscriber growth spiked at Netflix and Disney Plus during the first quarter. And Roku posted strong user growth and viewership. People also have more time to explore streaming alternatives than they did before.
Entertainment channels have also seen the writing on the wall for the pay-TV bundle and started shifting more content to their own streaming services, which gives cord-cutters more options beyond cable.
Disney is pushing FX shows on Hulu. NBCUniversal is bringing series from networks like NBC and Bravo to its Peacock platform. ViacomCBS is releasing more content on CBS All Access and its free streaming-TV service, Pluto TV. And WarnerMedia is readying HBO Max, which will house programming from HBO and its Turner channels.
As this “death spiral” continues, there’s a not too distant future where sports, and news, become the crux of the cable bundle, and entertainment programming thrives primarily on streaming video.
“Sports channels were never willing to accept being on a tier because their economics didn’t work that way,” Moffett said. “But it’s becoming a sports tier anyway. It’s getting there through the back door by entertainment networks leaving.”
Options trading Cord cutting is bad for pay-TV providers, but worse for media networks
While pay-TV providers are bearing the brunt of subscriber losses now, it’s the media networks — whether they air sports or not — that will hurt most in the long run, the experts said.
Pay-TV providers are generating more of their revenue by broadband services these days. Around 38% of Comcast’s $58 billion in “cable-communications” revenue in 2019 came from video customers, while roughly one-third came from internet customers, 9% more than the previous year.
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“They’re broadband companies that do video,” Hodulik at UBS said. “The media companies, on the other hand, TV still drives a vast majority of the economics.”
By comparison, broadcast and cable TV drove around 64% of the $34 billion in revenue at Comcast’s entertainment subsidiary, NBCUniversal. And Disney, ESPN’s parent company, derived 36% of its $70 million revenue and 50% of its $15 million in operating income from media networks during the year.
It might take time for TV networks to feel the squeeze from higher subscriber losses, because affiliate fees are locked in over a set period of time. But some are also seeing declines driven by the economic uncertainty in TV advertising revenue, which is the other main way their channels make money.
AMC Networks, which has no sports channels, reported an 11% drop in advertising at its US networks during the first quarter. Its overall revenue was down 6% year over year at $734 million.
The softening advertising market, and secular subscriber declines, are putting more pressure on media networks to profit sooner from their nascent streaming services, like Disney Plus, which is less than six months old.
Disney hadn’t been expecting the service to be profitable until 2024, but with its subscribers outpacing the company’s projections, analysts have been asking on the company’s earnings calls when the platform could reach profitability.
“We’re not really prepared to update our guidance and certainly wouldn’t give any projections in terms of when we would reach profitability,” Bob Chapek, Disney’s CEO, said on the latest earnings call when asked the question.
If pay-TV trends continue on this trajectory, media companies, especially the entertainment networks whose audiences are being pushed out the cable bundle, will need to find ways to ween themselves off traditional TV dollars more quickly.
“Sports remains a service that is best delivered live,” Moffett said. “Entertainment simply isn’t. Entertainment is best delivered on demand. And the entertainment customers are leaving traditional TV.”
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