This story first appeared in the August 24 issue of The Hollywood Reporter magazine.
Reading press reports, one might think waves of Americans are canceling their pay TV subscriptions in favor of lower-cost options such as Netflix, YouTube and Hulu. The evidence, however, shows that "cord cutting" remains at minimal levels and pay TV subscribership remains stable, even in an environment of low household growth.
Consider the data: During the first half of 2012, the number of occupied homes without pay TV (i.e. those dreaded cord-cutters) grew by only 40,000. In a 100 million-customer U.S. pay TV market, this is minor. (Occupied homes are the true market for pay TV because people, not buildings, subscribe to a cable, satellite or telco service.) During the past year, pay TV penetration in occupied homes has dropped by about 0.3 percent, while subscribers essentially have stayed flat. Overall, pay TV penetration is at worst eroding very slightly, in line with long-term expectations that total subscribers in the U.S. will stay about flat as penetration gradually declines.
So, with Netflix offering an increasingly popular streaming service and Hulu serving up many TV shows online, what's keeping people from cutting the cord? The fact is, pay TV continues to provide customers with the content they want, a lot of which isn't available outside the traditional pay environment. Sports, for instance, remains key content that is difficult to obtain without pay TV as major events (like Monday Night Football) are not available via broadcast channels and over-the-top packages (like MLB.TV) typically black out local teams.
Another key reason for pay TV's resilience is that it has adapted to compete for customers who might defect to cheaper online alternatives. Distributors are doing this primarily by (a) Adding online and mobile content access, and (b) Launching pricing tiers designed to appeal to more cost-conscious consumers.
In particular, pay operators are expanding "TV Everywhere" offerings by obtaining mobile and online rights to their programming to ensure that people paying for TV can get content in the format they want, when they want. HBO's popular HBO Go service falls squarely in this category. It's now typical for contracts between programmers and distributors to include not only traditional linear rights but also extensive mobile and on-demand rights.
At the same time the TV Everywhere offerings are showing higher-end customers an increased value proposition, several TV distributors are launching value-oriented offerings designed to retain price-sensitive consumers. In particular, these packages often include fewer sports offerings -- a logical omission given that sports programming (national channels like ESPN and regional networks such as Fox Sports West in L.A. and YES Network in NYC) is the largest single driver of higher programming costs.
Distributors are limited in the extent of these offerings given that their deals with programmers typically have minimum carriage commitments. Still, these offerings likely will expand as distributors learn how better to appeal to customers who might otherwise pass up pay TV entirely while not cannibalizing higher-value customers who otherwise would buy a full pay package.
One way of maintaining the high-value proposition is restricting the availability of new content -- particularly on cable networks -- to customers who subscribe to pay TV, rather than making it widely available on platforms like Hulu. Programmers and distributors benefit when pay TV consumers can't see their favorite shows unless they maintain their subscriptions, and that alignment of interest is crucial in fending off digital competitors.
Another area of alignment is programming bundling, by which pay TV providers must take less appealing channels to get "must have" channels sold by a given content provider. If, for example, Time Warner chose to sell HBO online a la carte, it likely would make more per subscriber than it does now by selling the channel through its pay TV partners. The risk, however, is that customers, able to get HBO without a pay subscription, would cancel pay TV entirely and therefore cease to generate revenue for the range of other cable networks Time Warner offers, including TNT and CNN.
While online services clearly offer an attractive alternative for some consumers (particularly the most price-conscious), cord-cutting hasn't meaningfully impacted the traditional pay TV paradigm thus far. Given the tools pay operators have at their disposal to improve and expand offerings to appeal to price-conscious customers, they're well-positioned to keep cord-cutting in check.
James Ratcliffe is an analyst at Barclays Research who covers the U.S. pay television industry.
NO SPORTS, LOWER COSTS: Americans average $86 a month for basic and premium cable, according to an April study, but cheaper options omit sports
- DirecTV: Entertainment Package: $30 for first 12 months, $5 cheaper than previous entry-level package
- Comcast: MyTV Choice: Starts at $25 a month
- Time Warner Cable: TV Essentials: $40 a month in NYC, $30 a month elsewhere