Unbundling Cable

Linear pay TV has received a lot of bad press this year in light of continuous streaming success stories for properties like Netflix, Amazon Prime and even Hulu. Most trade publications tout the unstoppable power of online streaming, and its ever-growing ability to attract subscribers and viewers away from the world of traditional, linear TV (broadcast and cable). These discussions are usually framed in terms of declining ratings for all linear TV, as well as the overall pay TV subscription universe. “Cord nevers” and “cord shavers” are increasingly considered the norm in a more price-conscious and on-demand world. However, don’t write off the cable companies, networks and content producers yet. There are ever-growing challenges in the landscape, but cable providers still hold the keys to the kingdom, and they intend to defend their future grip on U.S. TV homes.

Cable networks had a rocky 2015 as they adjusted ratings and revenue projections based on the new viewing landscape. Finding audiences through online and traditional channels, and monetizing both based on different viewing experiences has proven to be one of the greatest challenges the video world has ever faced. Demand for traditional television programming is greater than ever before, but navigating different pricing models for advertising, airing and licensing broadcast rights to multiple viewing platforms is no easy feat. The mid-year 2015 financial reports showed cable networks reporting cautious downgrades to their revenue projections and sent the entertainment market into a tailspin. Production giants like Viacom and Disney seemed to be acknowledging trouble ahead in the television marketplace. Viacom ended the year with declines over 2014, but Discovery Channel, AMC and FOX News all experienced year-over-year gains due in part to hit original programming within younger demographics and surprisingly popular live current-event shows like the Republican debates.   

It has been estimated that around 2 to 3 million TV homes (approximately 2 to 3 percent of all U.S. TV homes) have reduced the number of channels they receive or cut the cord completely since 2012. The overwhelming demand for cable still exists, but networks are preparing for a decline in subscriptions over the next five years. How fast that decline could accelerate in the next few years is up for debate, but it’s clear that pay TV providers need to evolve with consumer demand. Approximately 85 percent of U.S. households currently subscribe to traditional pay TV services. Financial services firm SNL Kagan has estimated that by 2020 this total will be down to 82 percent if current trends continue. Though this decline might not be defined as a “mass exodus,” it’s clear that general displeasure with cable companies and their services may drive viewership down further, and competition has opened the door to alternative content sources for disgruntled consumers.

The major cable multiple-system operators (MSOs) have spent the last two years aggressively addressing their weaknesses in an effort to retain their subscriber bases. According to Nielsen the average consumer receives 194 channels in their cable subscription, of which they regularly watch only 17. That number hasn’t changed despite the growing number of cable networks over the past two decades. The most popular channels have always been packaged with less popular networks, which over time has created consumer discomfort in the face of rising cable costs and “wasteful” channel lineups.

Cable bills have been steadily rising to a current average of $99 a month and roughly 40 percent of that cost has been added over the last five years alone. In light of these sharply increasing costs, and the plethora of online, free (or far less expensive) viewing alternatives, consumers are looking for adjustments while cable companies are attempting to evolve in a new, more competitive world.

To address cost sensitivity among consumers, cable MSOs have developed “skinny bundles,” or slightly smaller channel packages in order to maintain subscribers and appeal to unique channel preferences. Lower-cost subscription offerings from Verizon, Charter, Comcast and satellite providers hit the market in 2015 amidst lackluster reviews. Though priced lower, consumers responded with less interest than originally expected. Most packages do not offer true freedom of choice to subscribers due to standing network carriage agreements requiring cable providers to deliver contracted subscriber numbers. In fact, ESPN is currently suing Verizon for releasing arguably the most flexible skinny bundle on the market today because they say the offering directly violates Verizon’s agreement terms with the network. Verizon’s package allows customers to swap channels in and out of their bundle every month, presenting a risky proposition for a network like ESPN, which relies on consistent subscriber numbers to fund its extremely high-priced sports broadcasting rights.

Poised to create more challenges in the linear pay TV landscape are over-the-top (OTT) facilitators who intend to capitalize on cable providers’ contractual issues and expand their services. As networks and cable providers fight it out in court, trend-setting OTT players like Apple TV, Sony PlayStation Vue and Netflix are preparing to release more well-rounded services that include subscription video-on-demand (SVOD), as well as live streaming from major stations like ABC, FOX, FX, ESPN, HBO and more. Sony PlayStation Vue has rolled out packages ranging from 50 to 85 channels and will be positioned as an alternative option to cable subscription, touting an excellent overall user experience.

So how can cable providers compete in an increasingly fragmented world with the limitations created by network subscriber requirements? One way is through maximizing pay TV video-on-demand usage. Upgrading set-top box (STB) technology and the user experience through recommendation menu interfaces and more sophisticated guides help consumers find what’s airing and experience a more smooth viewing experience in a linear world. At the same time, these new menus offer suggestions for VOD programming, which helps keep viewers on the pay TV platform. Cable providers can flaunt an extremely deep library of content due to their access to network programming via carriage deals. Most importantly, VOD content is ad-supported, making the cable and broadcast networks happy to supply the additional viewing platform with nearly unlimited programming.

Nielsen recently found that pay TV VOD is currently available in about 62 percent of U.S. households and offers far greater variety of viewing titles than Netflix, Hulu or Amazon. In fact, as of 2014, SNL Kagan reported that 33,875 VOD movie and TV programming titles were available to the average pay TV subscriber versus Amazon’s 17,309. As the deepest library in the SVOD landscape, Amazon came nowhere near pay TV VOD offerings.   

According to 2015 studies conducted by DigitalSmiths and Ericcson ConsumerLab, the three major issues cable providers face in the current complex video marketplace are price, customer service and over-abundance of choice. Consumers cite rising pay TV costs as the number one reason they consider thinning or cutting the pay TV cord. Depending on the study, 30 to 50 percent of those considering cutting the cord say it is primarily or secondarily due to poor response time, old technology or inconvenient calls provided by their cable service. And more choice hasn’t exactly been a good thing. Consumers still say that too many channel options within a rigid linear schedule makes for an inconvenient viewing experience. A recent study by Ericsson Consumer Lab found that about 50 percent of consumers watching linear TV say they can’t find anything to watch at least once a day. That number rises to 62 percent for consumers 25 to 34 years old. A DigitalSmiths 2015 study found similar complaints from consumers struggling to find content. Among households considering cutting the pay TV cord, 44 percent said they would consider keeping pay TV if their provider released new functionality that made it easier to find something to watch.

As pay TV VOD provides user interface upgrades and greater content libraries, time spent with their platform increases and viewers get younger. In third quarter of 2015, Nielsen reported that pay TV VOD users are primarily 18 to 49 years old and their share of audience exceeds that of traditional TV. Pay TV VOD enjoys a nearly 30 percent share of 18- to 34-year-olds as compared to the 13 percent traditional TV captures. HUB Entertainment Research found that only 29 percent of millennials watch time-shifted TV in order to skip ads and instead cited convenience and “catch-up TV” as their primary reasons for delayed viewing. These findings would seem to indicate that the platform isn’t necessarily the driver for time shifting. If given the choice between an ad-free viewing experience on Netflix and a forced ad-viewing experience on most pay TV VOD platforms, this audience will follow the content and a convenient user experience. This is certainly good news for advertisers trying to find time-shifted audiences increasingly fleeing the traditional TV space.

Even more important though, are the data applications of the pay TV VOD space. Cable operators have a wealth of STB data on every household in the U.S. and taking these viewership learnings and applying them to VOD content can enhance the overall effectiveness of pay TV advertising. Unlike Netflix’s proprietary user information that can only be applied to future streaming rights purchases, pay TV is taking steps to publish and capitalize on viewer behaviors from a marketing standpoint. New technology built into the user interface can recommend VOD programming (similar to Netflix), as well as live TV and will likely be further enriched by product placement and video advertising based on household information. Expect pay TV VOD to attempt to catch up to the technology touted by OTT landscape over the next 12 months. Advertisers will rejoice, but only time will tell whether it’s too little too late to justify the high cost of pay TV subscriptions.