The Industry

Erosion of Cable Subscribers

Old TVA lot has been written about the impact of cord cutting and there are varying estimates about how significant the phenomenon has become. But there is a different way to examine the effects on the cable industry, which is to count the number of US homes that are paying to subscribe to each cable channel.

Below I am comparing the numbers of subscribers from August 2013 to the same subscriber counts today for some of the more popular channels. It’s easy to see that almost across the board networks have lost a lot of customers. I chose August 2013 because somewhere around that date was the peak of the cable industry in terms of customers. Since then total customers (and also customers for each network) have dropped.

These drops can’t all be attributed to cord cutting – cord shaving (where customers downsize their cable packages) is also a factor in these drops. Some cable systems are also working hard to cut back on the number of channels they carry. To put this chart into perspective, there are currently about 136 million housing units in the US.

In (000)
Network August 2013 Current Change
Weather Channel 99,926 84,683 (15,243)
ESPN 97,736 87,859 (9,877)
Travel Channel 94,418 84,862 (9,556)
MTV 97,654 88,137 (9,517)
Nickelodeon 98,799 89,663 (9,136)
VH1 96,786 88,085 (8,701)
TV Land 96,282 87,901 (8,381)
Comedy Central 97,838 89,857 (7,981)
A&E 98,302 90,478 (7,824)
SYFY 97,447 89,854 (7,593)
TNT 98,139 90,586 (7,553)
CNN 99,292 91,794 (7,498)
Discovery Channel 98,891 91,829 (7,062)
HGTV 98,229 91,169 (7,060)
AMC 97,699 90,767 (6,932)
FX 97,157 90,389 (6,768)
E! Entertainment 96,472 89,887 (6,585)
Disney Channel 98,142 91,611 (6,531)
Bravo 94,129 87,620 (6,509)
Food Network 99,283 93,062 (6,221)
MSNBC 94,519 89,764 (4,755)
Oxygen 78,208 75,651 (2,557)
NFL Network 70,910 71,252 342
Showtime 28,094 29,014 920
HBO 32,445 34,369 1,924
Hallmark Channel 85,897 88,885 2,988
National Geographic 84,446 89,865 5,419

These numbers tell a different story than articles about cord cutting. Industry estimates of cord cutting during this same time frame vary between 2.5 and 4 million homes that have dropped cable altogether. But these figures show that most major networks have lost between 6 and 10 million paying subscribers in a little under three and a half years.

Obviously not every network is experiencing the same changes. For example, the 15 million households lost by The Weather Channel are due to many cable systems changing to a cheaper alternative. And you can see at the bottom of the chart that there are still networks that are growing. These networks are gaining customers by attracting more subscriptions, like the premium movie channels, or by getting added to additional cable systems that didn’t carry them in 2013.

But overall this is a sobering chart, and one that all of the programmers are well aware of. The various factors of cord cutting, cord shaving, and of cable companies trying to cut back their channels are all steadily eroding the number of households that get to watch the various networks.

The Industry

Video Trends for 2017

Following are the major trends in video going into 2017.

Skinny Bundles. Last year at this time the industry talk was all about cable companies offering skinny bundles to keep customers from bailing. But this never panned out. Dish Network has a true skinny bundle option but almost nobody else has done so. Comcast entered this market last month by adding Sling TV to their X1 settop box lineup. The big companies aren’t talking and it’s hard to know if this changed due to market research about customer desire for such products or if this was due to problems with programmers assembling the right packages. But for now skinny bundles offered over cable systems seems like a dying idea.

OTT Options Exploding. DirecTV Now joined Sling TV and Sony Vue as the three providers of online skinny bundles. Hulu, Amazon and YouTube are launching similar packages in 2017 and sources at programmers report there might be as many as a half dozen other companies getting ready to join the OTT fray. Additionally there are a number of programmers directly entering the market such as the CBS package that will feature the new Star Trek: Discovery starting in January and available only online. ESPN is rumored to soon be launching an a la carte offering. This is going to turn into a crazy year for online programming and it’s impossible to believe this many entrants can succeed.

Cord Cutting Continues. But nobody knows how fast. The best I can tell from the numbers is that there is a lot more cord trimming with households paring back to less costly packages than actual cord cutting. You can find estimates of annual US cord cutters between 1 million and 4 million and only the cable companies know the right answer. But even if the number is at the bottom of the range, traditional cable companies are facing real problems. Eyeball time watching cable networks is way down and is expected to continue to drop in 2017 as people watch OTT content.

Some Networks in Trouble. It looks like ESPN will lose over 4 million customers in 2016. The same is happening to a number of other channels, but analysts track ESPN closely since it is the costliest network. Some of the more popular channels are making up for us losses by overseas sales, but sports, weather and other US-specific content has no market outside the country. By the end of 2017 I expect to hear rumors of smaller networks folding.

Continuing Rate Increases. All the big cable companies recently announced their rate hikes for 2017. Rate increases seem to be as large as recent years. But more of the rate increases are being buried in ancillary fees and equipment charges rather than as direct increases to cable packages.

No Break in Programming Cost Increases. And those rate increases are being fueled, in part, by the continued increases in the cost of programming. Many of those increases are baked into 3-5 year contracts, but even new programming programming contracts being approved in 2016 continue to include significant future cost increases.

Flood of New Content for OTT. The market is being flooded by new content at an unprecedented rate. Netflix is the king of new content and is producing most of the highly-rated alternatives to traditional cable. But there are dozens of companies now making content with the hope of grabbing a piece of the giant revenues earned by the most popular content.

New Bells and Whistles. Comcast is the industry leader in introducing new features for the home video product. Probably the best new one is the ability to talk to the settop box and eschew the remote. It’s hard for smaller companies to keep up with the numerous improvements.

Uncategorized What Customers Want

Does Cable Still Need to be in the Bundle?

I’ve read several things lately that make me wonder about the need to include cable TV in the bundle. I saw an article that blamed part of Google Fiber’s performance on the fact that Google’s cable TV is more expensive than the competition.

The first place to look for this answer is with nationwide surveys. There have been major surveys for the past five years that report that somewhere between 15% and 20% of homes say they are considering dropping cable in the next year. Yet they don’t do it. That demonstrates a lot of dissatisfaction among customers, but something about the cable product keeps people connected even though they are unhappy. We are probably on track to see about 1.5 million people drop cable this year. That may sound like a lot, but with the total number of cable homes just under 100 million, true cord-cutting is still a relatively minor phenomenon.

We also see clues that tell us that people are downgrading cable packages when they can. It’s been reported that ESPN has lost millions of customers more in the last few years than can be attributed to cord-cutting. The only way for that to happen is for a lot of households to be downgrading to packages that don’t include ESPN. And since ESPN is in the expanded basic package for most cable companies, that means that households must be downgrading to the smallest possible basic packages – that that have 20 channels or less. But cable companies don’t report these numbers, so we can only guess the extent of cord shaving.

There is also the issue of affordability. Certainly there are many homes that can no longer afford expensive cable TV packages. Affordability probably accounts for a significant portion of the 30% of households that don’t have a cable package. But since cable rates continue to increase faster than the rate of inflation there must be more homes each year that find they can no longer afford cable. We now know that affordability is the major factor that is capping broadband subscriptions nationwide in markets where broadband is available.

And my guess is that broadband is growing to become more valuable than cable to many households. There is enough entertainment available online that a household dropping cable is not isolated from video like they were just a few years ago. We certainly see a lot of homes subscribing to on-line video. A Nielsen survey from the first quarter of this year reported that more than half of all households are buying at least one online video service. Nielsen estimated that by June of this year that over 45 million homes will pay for Netflix. Hulu had over 12 million subscribers by the end of May of this year. We don’t know how many people watch Amazon Prime video, but the Prime shipping service has over 54 million customers.

Over the last year I know a half dozen smaller telcos that have dropped the cable product altogether and have directed their customers to one of the satellite services. Small companies all tell me that they are losing money on cable TV, and the numbers behind their decision are compelling. Larger companies can gain some economy of scale with cable TV, but only the largest dozen cable companies are actually making money with the product.

We know that when Google Fiber first launched service without a cable product they stumbled. They seem to have done a lot better after adding cable. But part of their problem also has to be the $70 gigabit product that a lot of homes can’t afford. I’m guessing that they’ll do better in Atlanta where they now offer a 100 Mbps product for a flat $50.

But still, even with those many trends acting against the cable product, somewhere around 70% of all homes in the country still buy cable from one of the cable providers – landline or satellite. It seems really hard to ignore a product that 70% of households are willing to buy. As a consultant I still have a difficult time telling companies to not offer cable TV in new markets.

One thing that is making it a bit easier is that the cable product is starting to finally move to the cloud. For example, Skitter TV now offers a cable product that can save a company from investing in a headend. And perhaps that is the long-term solution – for most cable providers to offer programming from the cloud to avoid the costs and issues of trying to go it alone.

What Customers Want

Naked Broadband

I suspect the word ‘naked’ got a few of you reading this far. Naked broadband refers to broadband that is sold as a standalone product and that does not require bundling with something else.

There has been some regulatory pressure in the past to require naked broadband. In the early 2000s several states like Florida, Georgia, Kentucky and Louisiana tried to force BellSouth to offer naked DSL. At that time BellSouth required that anybody who bought DSL also had to buy a landline telephone service.

BellSouth challenged the states’ ability to regulate broadband in that manner and in 2005 the FCC agreed with BellSouth and overturned the state rulings that required naked DSL. At that same time the FCC opened a Notice of Inquiry into the issue, but I don’t believe that docket was ever acted upon or closed.

Since then the market has reacted to what customers want and both AT&T and CenturyLink widely offer naked DSL. Verizon offers it in some places but charges a premium to buy naked DSL versus bundled DSL.

One of the main reasons that the FCC sided with BellSouth was that the agency didn’t really have the authority to regulate broadband in that manner. But with the FCC’s new Title II regulation of broadband they probably have this authority today. So I ask the question – should the FCC require cable companies and fiber providers to offer naked broadband?

This is a valid question considering that we are now seeing a lot of households trying to cut the cord. In my own situation, Comcast will sell me a standalone connection to their slowest broadband products, but in order to get a faster broadband connection I have to bundle the Internet with a cable TV product. In order to get 100 Mbps broadband I have elected to buy the smallest basic cable product available and I pay over $100 a month for the bundle. I have a settop box sitting in a closet somewhere since we don’t even have a TV. I thought I might finally have a use for this package during the Olympics, but the NBC Olympic web sites still wouldn’t give me access since I don’t subscribe to the USA Network.

I feel that I am paying an extra $30 a month for something I really don’t want. And Comcast counts me (and probably a whole lot of people like me) as cable customers when we are only reluctantly so. I wonder how bad the cord cutting statistics might be if people like me could drop a cable product we don’t want?

There are some providers that offer naked broadband. Verizon sells standalone Internet connectivity on their FiOS network. Google is glad to sell you a data-only connection. And a number of municipalities and fiber overbuilders also offer data as a standalone product. But there is no rule that makes any of these companies do this and tomorrow they could decide to force people into a bundle.

I know many smaller telcos and cable companies that also force a bundle. I fully understand the desire to do this – these companies are trying to preserve revenues at a time when telephone and cable subscriptions are dropping. But these companies really have to ask themselves if they want to force customers to buy products they don’t want. These kind of practices create resentment, and in the long run this is probably not the signal that should be sent to customers. This is a dilemma, and perhaps the right answer is to price naked broadband at a price that is required to sustain your business.

It is pretty easy to make an argument that it is anticompetitive for large cable companies to not sell naked broadband. In many markets they are the only ISP with fast broadband and failure to sell standalone broadband is a barrier for people to cut the cord for cable programming. After Comcast and the other big cable companies finish their DOCSIS 3.1 upgrades over the next few years they will have the vast majority of fast broadband connections in the country.

This issue is one of many that can now be raised since the FCC brought broadband under Title II regulation. I think that this new authority also lets them look at price caps and perhaps even at broadband pricing (although Chairman Wheeler promised Congress he would not do that). It will be interesting to see how the FCC uses the new authority it has claimed. I know there are a lot of households in the country that would love to just buy a fast standalone broadband connection and be done with the bundle.

What Customers Want

Why Cord Cutting Will Grow

I have been thinking a lot about cord cutting and about my own TV habits. I know my habits have changed a lot over time, and everything I read and hear tells me this is happening everywhere. I’m starting to conclude that if the cable companies can’t find a way to provide content in the way people want to watch it that cord cutting is going to accelerate a lot faster than they are expecting.

I just saw a projection from SNL Kagan and that predicts that cable company video will remain a profitable business for a long time. They predict that by 2026 residential cable revenues will rise 8.6% to $117.7 billion. That assumption obviously assumes a continued loss of customers to cord cutting, with those losses offset by rate increases. But that kind of assumption assumes there is not going to be a fundamental change in the way that people watch video.

I’m a baby boomer, and so I grew up with the traditional TV experience. There was usually more than one person watching TV in our home, so once you started to watch a show you watched it to the end. You rarely channel surfed because we only had four channels growing up and somebody had to sit by the TV to manually turn the tuner. You sat through all of the commercials and the TV held your attention.

The first big change in my viewing habits came years later when I got a TV with a remote control. That’s the day I stopped watching anything other than sporting events end to end. I don’t know if this is more of a male habit, but I would surf every time I watched TV. I can remember many times when somebody asked me if I had seen a certain show or movie and my answer was always, “part of it”.

I eventually realized that surfing took most of the pleasure out of watching TV. There is nothing worthwhile about watching portions of sitcoms, old cop shows and infomercials. And so I eventually ditched my TV subscription. I had lost my desire to watch linear TV.

Now OTT has brought me a whole new world of video options. Our household has subscriptions to Netflix, Amazon Prime, Hulu, Starz, and HBO Go. During the winter last year I subscribed to Sling TV to catch football on ESPN. And, since I am interested in the OTT market I spend some time looking at as many OTT packages as I can. I’m still not a huge TV watcher and spend somewhere between 10 and 15 hours per week watching video.

I have developed new TV habits that I think are going to be problematic to the TV industry as a whole. Amazon Prime and Netflix bring me curated television. On the first day I used those services I went searching for things I wanted to watch. And both of those services then suggested other similar shows and movies based upon my tastes. I now have a backlog of things I want to watch that will probably last for the next year.

I have also grown totally resistant to commercials and am willing to pay to not have them. I know a lot of people binge watch – but I’ve never been in a hurry to get to the end of a series and so I skip between episodes of a dozen different series as my mood dictates. I love that Netflix keeps track of where I’ve been and I’m growing intolerant of any platform that doesn’t do the same thing.

For example, I don’t really care that much for HBO Go just because it’s not as easy to use as Netflix. HBO doesn’t keep track of what I’ve been watching and it’s up to me to try to remember the last episode of something I watched. HBO has some great content, but the lack of this one feature makes it much harder to navigate, particularly if I haven’t watched a particular show in a while.

I think there are a lot of people picking up these same new habits. Cable TV can’t satisfy me in the same way as Netflix and other OTT. I know that you can use a DVR and record cable shows to get a similar experience. I used TIVO for many years, which is even easier than most Cable company DVRs and it was still not as easy to use as Netflix. The DVR experience still makes a viewer spend far too much time leafing through the channel guides.

I just can’t imagine ever taking the time to scroll through a channel guide again. I wouldn’t watch cable TV if I had it for free. And I never want to channel surf again – that was always a colossal waste of time. I instead use my limited TV time to watch want I want in the order I want to watch it. I don’t think it can get any better than that. My gut says that if the cable companies can’t somehow duplicate this same experience they are going to lose a lot more customers than analysts are predicting. Younger viewers are already largely abandoning the traditional cable model, and now a lot of us older folks are doing the same. Analysts often speculate about why people drop cable. For people like me it’s not the price – it’s the cable experience that no longer interests me.

The Industry

Trends in Cord Cutting

For the last year I’ve been trying to track cord cutting and it can drive you crazy. Within the last month I have seen articles that say that cord cutting is growing rapidly and other articles denying that it’s a real phenomenon. Part of the reason for this is that the industry statistics are confusing. It seems like every quarter there are different companies gaining or losing cable customers. It’s impossible to predict the winners and losers from quarter to quarter or to predict the overall trend.

To some extent this makes sense because the industry tracks net customer gains or losses and there are a whole lot of things happening underneath that net number. Consider Comcast. For the latest quarter they only lost 4,000 customers, their best number in years. But that number is the net of a whole lot of different things going on. Recently Comcast launched their new OTT product Xfinity Stream which bundles HBO and the major networks for $15 per month online. While they don’t report the number of customers for this OTT product, they have said that it is doing well, and so it’s likely that they have gained new customers for a web-only product that are included in their overall numbers.

Another factor that affects the numbers are new households. In 2016 it looks like there will be more than 1.5 new homes and apartments added in the country. With the average cable subscription rate of 70%, this means that means that there ought to be over one million net new cable customers added if the industry was just standing still. One would expect Comcast to be seeing at least 100,000 new homes per quarter, so when customer counts don’t grow, I see them as actually having lost 100,000 customers.

There was an article in FierceCable a few days ago that predicts that the second quarter of this year will be worse overall than the second quarter of last year that sent cable stock prices tumbling. Last year the estimates were that the industry lost 625,000 customers in the second quarter, and that doesn’t include accounting for new housing units, which I think makes the real loss nearly one million cable customers.

Not everyone has reported second quarter results, but pay TV companies already have reported a loss of 375,000 customers for the quarter. Additionally, Dish TV alone lost 281,000 customers for the second quarter, even including the gains made by Sling TV.

But I think the press and Wall Street are concentrating on cord cutting but missing the bigger picture. As I discussed in a recent blog, there seems to be a large amount of cord shaving – or customer downsizing going on. For instance, it was reported that ESPN lost over 1.5 million customers just between February and May of this year. That loss is significantly greater than the net customer loss for the whole industry, and the difference can only come from people downsizing to packages that don’t include ESPN.

The cable companies don’t report customers by the size of package they buy and so there is no way to see the downsizing numbers other than by looking at the subscribers for networks like ESPN that are included in most expanded basic packages (the first tier of 50 – 80 channels in most systems).

What looks to be happening is that a lot of customers are cutting back the cable package to the lowest tier and buying the least expensive cable product possible. This is due in part to the fact that people want to still get the major TV networks. But it’s also due to pricing policies that punish customers if they want to drop cable and still keep broadband. Customers are often better off keeping a minimal TV package instead of dropping TV altogether. As I’ve reported, Comcast has told me repeatedly that they won’t even sell me the 100 Mbps connection I have without some TV tier.

The bottom line of all of this is that cord cutting is real but it’s not yet significantly large. The cable companies can weather a few million lost customers per year for many years, and if cord cutting continues at the today’s pace there will still be 80 million cable customers a decade from now. The more important shift looks to be that customers are downsizing to smaller packages. They are probably doing this to be able to afford the OTT options like Netflix or Amazon Prime. But it’s obvious that fewer and fewer people are interested in the gigantic cable packages any more.

The Industry

Cord Cutting is Getting Harder


One thing that cable operators might have going for them is that the OTT market is changing in ways that make it a little less attractive to cord cutters. It turns out that it’s getting harder to be a cord cutter, and certainly more expensive.

For a while it looked like Netflix and Hulu would offer a real alternative to cable TV, and for many people they still do. But the things we used to like about those two services are changing rapidly. Hulu is a great example. Around 2011 they made a deal with over 20 sources of content like NBC, ABC, USA, Syfy, Fox, and many others. But those were 5-year deals that are now coming to an end and Hulu is about to lose a lot of the content that attracted people.

Hulu is being hit from all sides. NBC is pulling most of its content and has launched its own OTT product that is hinging on the popularity of the new Star Trek to draw customers. BBC has pulled the very popular Doctor Who and other programming in favor of its own OTT product. Even CW is pulling shows like the Flash, Arrow, Vampire Diaries, and Jane the Virgin and has launched its own OTT service.

The same has happened to Netflix. Long-time subscribers complain that there is half the content on Netflix as there was years ago, and it’s true. Content providers have slowly been withdrawing content and making it harder for Netflix to obtain both TV shows and movies. Netflix makes up for this with original content, but that content isn’t for everybody.

With the plethora of OTT options, it’s getting expensive to be a cord cutter. A cord cutter probably can’t pick only Netflix and/or Hulu and be happy – or at least not as happy as they were a few years ago. To get a wide variety of OTT programming, a cord cutter is going to have to subscribe to multiple OTT products, and at the end of that process might easily be spending as much for programming as they did with the cable company.

Consider Sling TV as an example. Sling launched with a very simple set of options. They launched with a basic package of 15 channels for $20 per month – these were channels that people miss when they cut the cord – ESPN, the Travel Channel, the Food Network, TBS, and the Disney Channel. They had an add-on package for $5 to add more sports channels.

But Sling TV has morphed to become a lot more complicated and a lot more expensive. They now have two basic packages each priced at $25 per month. One called Sling Blue is sports-oriented including Fox Sports and NBC (for the Olympics). The original package has been renamed Sling Orange and has also been bumped to $25. Both together are $40, and there are now several $5 add-on packages such as news and sports. Sling is looking at adding more content, but in doing so, they are now at or above the price that this same content can be received on satellite. But with satellite cable you get a lot more channels than Sling. The new Sling TV prices are starting to feel like a programming alternative, not a cord cutting savings option.

Hulu also has more expensive options now. They will soon be offering a package that includes live network programming starting at $35 per month. For $50 per month customers can store up to 20 hours of Hulu content in cloud DVRs.

Cord cutters now have much harder choices than even just six months ago. If they cobble together a half dozen OTT sources they can easily be paying more than they were with cable. If they limit themselves to one or two sources of content like Netflix or Hulu they will see their content choices shrinking and their monthly fees increasing.  This all has to be good news to the cable companies – a lot of homes are going to like the OTT options less than they did a year ago.

The Industry

Video and Cable TV Trends

From time to time I make a list of the current trends in the various industry segments. It’s really interesting to read the old ones from time to time, and in the cable world trends from a decade ago seem almost quaint in today’s topsy-turvy cable market. There are few industries anywhere that are seeing as much disruption as cable TV. Here are what I see as the current trends:

Live Viewing is Fading. The amount of time watching live TV as it is broadcast is dropping dramatically. Nielsen reported that in the fourth quarter of last year that the percentage of people watching TV live had dropped nearly 12% over earlier last year. People are watching other content like Netflix, or are watching television on a delayed basis using TV Anywhere, DVRs or a service like Hulu. This is playing havoc with figuring out ratings, but is of even more concern to TV advertisers who are losing viewers in droves.

Migration to Skinny Packages. A very recent trend is skinny bundles – a much smaller lineup of the most popular channels that people want to watch. This got started last year by Sling TV, but every major television provider is jumping on the bandwagon. Verizon FiOS reported that a majority of the customers they signed up in the fourth quarter of 2015 chose the skinny bundle over the larger traditional bundles. Comcast is also trialing a skinny bundle and everybody is scrambling to get one. These bundles are of huge concern to the programmers because it means that cable companies and customers only want to watch and pay for the most popular channels and not for the other hundreds of channels in the typical big cable bundle.

Original Content is Exploding. It seems that almost anybody even marginally related to the content industry is now producing original content. It’s almost getting easier to list who isn’t making content than it is to list the many that are. Original content is being created for several reasons. First are the obvious financial gains and it’s easy to see how original content benefited Netflix and AMC. But secondly, this is part of the race to survive and be relevant in the future. The general wisdom is that original content is what will attract viewers and keep people coming to a given platform.

Popularity of OTT Content. We were all amazed a decade ago to watch the wild popularity of the iPod and how Apple had captured the music market. But OTT providers like Netflix, Hulu, Amazon Prime have done even better and it’s been reported that over 60% of households now buy a monthly subscription to at least one of these OTT services. I can’t remember this being on anybody’s list of predictions ten years ago. If OTT grows much more there will be more OTT subscribers than cable subscribers.

Continuing Programming Rate Increases. Programmers keep increasing rates at a torrid pace, even as it’s becoming obvious that price is one of the primary drivers of cord cutting and cord shaving. Many of my clients report annual cost increases of 12% or more, and in recent years this has averaged over 9% per year. Interestingly, a lot of the programmers don’t seem to care how this affects the US market because many of them are selling massive amounts of new content overseas. But any network that is US-centric (like ESPN) has to be worried since they are now losing customers.

Video Going Mobile. There is a huge amount of content being shown on smartphones, including a lot of content created just for the medium. This is causing all sorts of disruptions. Cell companies are having a hard time keeping up with broadband demands at busy cell sites. Cellular providers have devised zero-ratings plans to excuse some video content from rate caps, which is sure to be challenged as a violation of net neutrality. And while customer data use is increasing, AT&T and Verizon don’t seem to have any plans to loosen the existing tight data caps.

Viewer Age Really Matters. There is a growing and significant disparity between the viewing habits of the various generations. The younger a viewer the more likely it is that they have eschewed traditional cable packages and conventional ways of viewing content. This is of major concern for advertisers, but also for content providers. For example, the average age of a viewer of various network TV programs keeps climbing and it appears that the age of the average viewer of network TV is sixty years old, or older.

Cord Cutting Not as Bad as Advertised. Last year it was impossible to read about the industry without seeing a mention of cord cutters. But the best estimates are that this is about 6% of viewers, and – while growing – it is not nearly the threat that was advertised. It seems more likely that cord shaving (downsizing the size of cable packages or migrating to skinny bundles) is much more of a trend, but big cable companies are remaining mute about the changing nature of their customer base.

The Industry

Sports Will be the First Victim of Cord Cutting

The common industry wisdom is that sports programming is the most powerful weapon of the cable companies since it provides content that cannot be found anywhere else. But from what I have been reading lately, I think perhaps that sports programming might be the first victim of cord cutting and skinny bundles.

There is no doubt that there are a lot of rabid sports fans in the country. And to satisfy this base the programmers have come up with a slew of sports networks. Not only is there the ESPN suite of channels, but we have channels that specialize in golf, tennis, and a number of other sports. And there are local sports networks in every major market.

But except for NFL football, which is in a universe of its own, there are a lot fewer sports fans than you might imagine. In a recent poll that asked people what channels they would most like to have on an a la carte basis, no sports network including ESPN registered as even a 30% choice. Sports fans find having sports programming to be a necessity, but the fact is that a large majority of people would gladly do without sports networks if that lowered their cable bills.

And now along comes cord cutting and skinny bundles. Cord cutters are those that abandon all big cable packages in favor of either no programming, or programming offered on-line. Skinny bundles are slimmed-down channel line-ups being offered by telecom providers as an alternative to their bigger channel alternatives. Add this to people who are down-sizing from large line-ups to smaller packages and there is a lot of change going on in the cable industry.

In looking at both of these alternatives today there is a dearth of sports programming offered on-line. Sling TV has the ESPN suite of channels. But most other on-line packages have little or no sports programming. The people abandoning cable are obviously not the sports fanatics.

There are many industry experts that want to pretend that cord cutting is not real. And for most of the networks that sell content, it really much doesn’t if it is real. In the US there are still around 100 million people buying some sort of cable package and sales of content from most programmers is booming worldwide as the US market ebbs.

But the same isn’t true for sports. ESPN has almost no appeal overseas and, like most US sports, the network is very much an American product made for Americans. I think that looking at ESPN is probably the best measure of the change in the industry. It’s been reported that ESPN has lost 7 million customers over the last few years, which is significant – and they aren’t going to make that up by selling their content anywhere else.

And so it looks like US sports networks, or the sports they support, might be the first real casualty of the changes in the industry. Every time somebody cuts the cord or flips to a skinny bundle the sports networks are going to lose a customer. And these customers are almost impossible to replace. Take ESPN: they charge nearly $6 per household per month to the cable companies to carry their programming. But if only 25% of households would actually value them enough to subscribe to their programming, then on an a la carte basis they would have to charge $24. But the big catch is that probably only a very tiny fraction of that 25% of sports fans would agree to pay that much. There is no model for a standalone ESPN that can make as much money as they make today.

Something is going to have to give as the sports networks lose customers. The most obvious thing to give is the millions that ESPN and the other sports networks pay to sports leagues to get exclusive rights to their content. As the sports networks make less money those payments are going to have to drop.

Many think that would be a good thing for sports. It is these TV payments that have led to college football teams paying multi-million dollar salaries for coaches. It’s these same TV payments that have led to crazy realignment of college leagues, such as seeing Maryland join the Big 10 or West Virginia join the Big 12. Big time college football and basketball have become all about the money and this has gotten carried to ridiculous extremes in recent years. Big TV revenues are also what feeds the giant payments to professional baseball and basketball players.

There are some sports networks that won’t survive a downsizing of the industry. But if a network like ESPN can be disciplined enough to not outspend their revenues then they should be around for a long time. There are a whole lot of folks who are going to be in for a rude awakening when this day hits – and the day of being realistic about payments for sports content is going to happen within the coming decade. It’s hard to imagine what college sports budgets will look like if a huge part of their revenues disappear = and the people in charge of those budgets better start thinking about that now before it’s too late to do anything about it.

The Industry

Sports and Cord Cutting

There are two trends having to do with TV and sports that are headed in opposite directions. There is a continued bidding war where networks are paying records prices to lock down sports content. But we also have the cord cutters who are dropping off the network and reducing the size of the cable TV subscriber base. Somewhere soon those two trends are going to collide in a big way.

The sports programmers keep hammering cable operators with higher costs. Time Warner claims that they have seen a 91% increase in sports programming since 2008. Where is this increase coming from?

  • There are more new sports channels all of the time. There has been an explosion of sports channels over the last decade.
  • The programmers force bundles. For example, I have clients throughout the country who are now being forced to carry the SEC channel, although their customers have very little interest in southern college football.
  • The various leagues are extracting huge payments for rights to their content and this translates into the cost of sports programming growing faster than other programming.

Let’s look at an example of this. I am a Maryland Terrapins fan and they just moved this year to the Big10, largely to get a share of larger television revenues there. The Big10 will reportedly pay out almost $31 million per school this year, mostly due to revenues from the Big Ten Network (and some from bowl games). That network is carried by 60 million homes. They have expended to new TV markets by the additional of Maryland and Rutgers and the projected payments per school are estimated to grow to $44.5 million per school by 2017.

But even in the Midwest, no more than 5% of households, at most, watch the Big Ten Network very much. The two big draws on the network are college football and basketball. Most college football games on the network draw only a few million viewers, with some games getting far fewer than that. And basketball games in general draw maybe half of what football draws. And only the diehard fans watch the network the rest of the year when they show wresting, volleyball, baseball and all of the other Big10 sports.

So the network is pulling in huge dollars due mostly to a three months of college football and most of the rest of the year there are very few eyeballs on the network. Contrast this to ESPN which has a lot of programming that outdraws the Big Ten Network. ESPN has more viewers on a day-to-day basis than a whole season of Big10 football. And so a network like ESPN can make more money from advertising than they do from subscriber fees.

One has to wonder what is going to become of networks like the Big Ten Network as cord cutters cut into programming revenues. We recently saw ESPN agree to be on the Sling TV lineup which is going to be completely online. That will get them new subscribers from sports-loving cord cutters, but it’s also going to attract a new wave of cord cutters. And Sling TV is not the end game, but just the first volley. It seems like there are dozens of companies working to put packages of programming on the web.

The cable industry as a whole stopped growing a few years ago due to cord cutters. Instead of adding a few million new homes per year, the total number of cable households has held steady. But lately it’s finally starting to drop, and when there are real options online a lot more households are going to opt out of the big cable packages.

I’ve seen statistics that say that the average household only watches 17 channels out of the hundreds of programs on the typical cable lineup. When households start finding $20 and $30 dollar packages that give them most of the channels they want, it’s going to become easy for them to jump ship.

ESPN is probably going to make the transition to the web just fine because they are going to be included in most of the web packages. But networks like the Big Ten Network and every other regional sports network are not going to fare so well. It’s just a matter of math.

Let’s say the Big Ten Network wants to make $350 million annually from programming. If there are only 2 million homes willing to pay for the network then they need to charge $14.58 per month. With 3 million customers it’s $9.72, 4 million it’s $7.29 and 5 million is $5.83. Perhaps they can find one of those price points to make it work. But they won’t be operating in a vacuum and there are going to be lots of other sports channels trying to do the same thing and wanting to charge the same high fees. On an a la carte basis it is going to cost a sports fan a lot more than what they pay today for all of the channels, and that is where the rubber hits the road.

I don’t know what is going to happen any more than anybody else. But my gut tells me that the revenue collected by networks like the Big Ten Network are going to drop – slowly at first and eventually precipitously. At some point they will have to get on the web and reach a new stasis, and that probably means making less revenue than today. That’s not such good news for the Terps and the teams of the Big10.