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.

Video Trends for 2017

RCA_CT100-hdFollowing 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.

ESPN and the Cable Industry

espnI’ve been writing periodically about ESPN because they seem to be the poster child for what is happening to cable TV and to programmers in the country. It’s been obvious over the last year or two that ESPN is bleeding customers, and the many articles about them concentrate on that issue.

ESPN is a good bellwether for the industry because they are carried by practically every cable TV provider, and because their contracts require that the channel be carried in the expanded basic tier – the tier that generally has between 50 and 75 channels. Only a few tiny rural cable systems don’t carry ESPN since they carry only a small number of channels.

When ESPN loses customers it can only come from one of two reasons – people that cut the cord and drop cable altogether or from cord shavers who downsize to the smallest basic cable package. Basic cable is the small package of 10 – 15 channels that includes the local network affiliates, government channels and a few cheap throw-ins like shopping channels.

But it’s not easy to figure out the real number of cord cutters and cord shavers. The largest cable companies report total subscriber numbers each quarter but they don’t report on the packages that customers buy. Various analysts estimate the number of cord cutters each quarter, but they differ on these estimates – and I haven’t seen anybody try to estimate the number of cord shavers.

Nielsen tracks the number of customers of each cable network and that tells us how the various cable TV networks are faring. The latest article on ESPN comes from Sports TV Ratings, a website that tracks subscribers to the various sports networks. That site shows that ESPN lost 621,000 subscribers just last month (October 2016). That is an astounding number since ESPN has roughly 89 million customers – it’s a drop of 7/10’s of a percent, which annualized would be over 8% of ESPN customers.

But that number may not be a huge aberration. FierceCable reported earlier this year that ESPN had lost 2.2 million customers between February and August of this year, which is a clip of 440,000 lost customers per month. And the network has lost more than 11 million customers since its peak in 2013 when it had almost 100 million customers.

Trying to count cord shavings gets even more complicated because of OTT content. The cited drop of 610,000 ESPN customers is from the Nielsen numbers for carriage on cable systems. This doesn’t include online content which includes ESPN. For instance, the basic package on Sling TV includes ESPN and Goldman Sachs estimated that Sling TV will have almost 2 million customers by the end of this year. There are a number of new OTT offerings just hitting the market that will include the network, but for now Sling TV has most of the online ESPN subscribers.

ESPN has an advantage over many other networks in that it probably can add back customers by selling to people directly on the web. And so perhaps the network can find an equilibrium number of customers at some lower threshold than today. But this is not going to be true for a lot of other content. As an example, in October the Golf Channel lost 600,000 subscribers and The Major League Baseball Channel lost 515,000 customers – and those kinds of networks have very limited appeal on a standalone basis. That is the real story behind the losses at ESPN – the vast majority of cable networks are bleeding customers right now.

Some of the content providers are not too worried about the drop of US cable customers since they are picking up far greater numbers of new customers worldwide right now. But networks that are US-centric – sports, news, weather – are in for a rough ride over the next few years as the industry settles out to a new and lower norm. I think we can expect to see a transformation of sports programming as the numerous sports networks bleed customers. This probably means more emphasis on live programming and fewer sports networks.

What’s Up With ESPN?

Maryland TerrapinsI’ve been following ESPN for a few years in this blog for several reasons. First, I’m a sports fan and I generally like what they offer. But as an industry person they are also interesting because they are the most expensive network for cable operators other than premium movie channels. They also have the distinction of being one of the few domestic networks that has no appeal overseas – they are strictly an American channel showing American sports.

And it is the last two reasons that might make them the bellwether of what might happen to cable networks over time. ESPN peaked in 2011 with just over 100 million paid subscribers. But they have been losing subscribers since then and they are projected to be down to between 87 and 88 million customers by the end of 2016. They lost 1.5 million customers just between February and May alone.

This has to be very troubling to a network that gets about 60% of its revenues from subscription fees. Most of the rest of their revenues come from advertising which also depends upon the number of eyeballs watching content on the network.  I’ve found a few web sources that estimate that the full ESPN suite of channels now costs cable companies around $8 per month, meaning the 12 million lost subscribers represent a lost $1.1 billion per years in annual revenues.

What is probably most troubling for the network is a poll from January of this year that shows that 56% of households would drop ESPN if they could save $8 per month on their cable bill. The results surprisingly were not that different by sex with 49% of males and 60% of females saying they would ditch the network if they could.

You have to wonder how to account for all of the lost customers. The cable industry points out at every chance that cord cutting is as not a significant phenomenon, and they are right. Cord cutting has manifested by stopping the growth of total cable subscribers and overall cable subscribers are still currently around 100 million.

So if the cable industry is currently not shrinking much, why is ESPN losing so many customers? The only answer has to be cord shaving. This is something that none of the cable companies will talk about, but cord shaving is where customers are downsizing to smaller packages of channels. Since most of the cable companies include ESPN in their expanded basic line-up (the line-up that is usually between 50 and 80 channels), then there has to be a lot of people downsizing from that tier of service. And the only place for them to go from there is down to basic cable – the lineup of 15 to 20 channels that includes network TV, local government and a few other very inexpensive programs.

ESPN is looking for ways to get back some of the lost customers. They are now part of the online Sling TV line-up. But Sling has recently moved ESPN out of the $20 starting tier into the $30 tier. ESPN is also reported to be getting ready to launch a standalone ESPN product online. They reason that there are sports fans willing to pay for the network that don’t want other standard cable fare. They might be right because I would consider an online standalone ESPN product if it isn’t exorbitantly expensive.

The funny thing is that ESPN isn’t acting like a network in trouble. For example, they just recently bought new rights to Big 10 sports for $1.1 billion dollars over the next six years. They are actively engaged in discussions with other sports leagues, and are preparing to renew older sports content relationships.

So certainly ESPN is not yet in trouble, but they are starting to show us what can happen to networks in the future as customers cut the cord or downsize packages. ESPN is not the only network losing subscribers and cord cutting and cord shaving are going to impact a lot of them as those trends continue to grow. Cable networks with more generic content are making up for losses of American subscribers by booming sales of content overseas. But that is a luxury not available to sports networks, news programming and anything else that doesn’t have a worldwide appeal.

Video and Cable TV Trends

television-sony-en-casa-de-mis-padresFrom 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 Future for Cord Cutters

RCA_CT100-hdI read an article by Nathan McAlone in Business Insider that opined that people are going to look back five years from now and wish for the good old days of the big cable packages. I suspect for many people he might be right.

Right now cord cutters are definitely happier with dropping out of the big packages and finding smaller solutions that fit them specifically. As a family that hasn’t had a cable package in years, the recent emergence of online content feels wonderful to my family. Even with my few paid choices of Netflix, Hulu, Amazon Prime, and Sling TV I have far more options than I know what to do with. I have found myself liking to binge watch obscure series like Death in Paradise on BBC that is about a detective on a fictional island in the Caribbean. Even with the big cable package I would not have been likely to have found or watched this kind of programming.

But there are going to be long term consequences of cord cutting and of the big cable companies migrating to skinny packages. Verizon FiOS recently reported that a majority of their new customers are choosing their small skinny package rather than the traditional big package.

The main consequence is going to be to programmers. Every customer who cuts the cord or downsizes to a skinny package stops paying fees to a big pile of networks in the traditional bundle. We now know that ESPN has lost 7 million customers over the past few years and they cannot be the only one. One has to think that the same is happening to all of the sports networks like the Big Ten Network or Tennis TV. And it’s likely that over time the same thing is going to happen to any network that doesn’t have worldwide appeal such as religious networks, weather networks, music networks, or even the smaller networks such as Discovery Health that are only carried in the big cable packages.

I see several long term consequences of the shift to skinny bundles. First, I see it returning some of the negotiating power to service providers for those networks that are only in the big packages. Cable companies are going to become more and more willing to say no to programmer demands that they must carry the full suite of everything offered by a programming company. The programmers will still be in the driver’s seat for the most popular networks – those channels that everybody wants to put into their skinny bundles like the Food Network or the Travel Channel. But the programmers are going to lose leverage with their less popular networks because cable systems will be more and more likely to push customers to smaller bundles rather than be held hostage to huge payments for content.

I also see some of the less popular networks folding. The only thing that keeps a lot of these networks going is that they get a few cents per month from 100 million households. When that audience retracts a lot of them are not going to be economically viable.

Interestingly I think skinny bundles will mean more profits to cable providers. The margins on the 300-channel line-ups are getting thinner all of the time. There is the possibility of being able to make more money selling 30 channels than there is for selling 300.

And finally, as the article that prompted this blog suggests, I think eventually it will get very expensive for the cord cutter who wants to buy a lot of different content. It might well cost more to put together the channels that you really want than buying today’s big packages. It’s not hard to imagine a world where ESPN costs $20, AMC costs $10, and a regional sports network might cost $15. Before you know it, if you have a wide interest in different programming, you could pay more than today for many fewer choices. But I think in the long run that the average person is going to do what I do today. They are going to buy a pile of programming and then learn to be happy with what they have bought. I find myself watching things now that I would never have considered years ago – and it works for me. I don’t miss the channels that I can’t see.

Fighting Against the Cost of Programming

Numismatics_and_Notaphily_iconToday I want to talk about the cost of programming from the perspective of a small cable provider. In the cable world, any company without many millions of cable customers is considered small because they have no effective negotiating power against the programmers.

For decades most small cable systems have purchased a lot of their programming with rates negotiated by the National Cable Television Cooperative (NCTC). There are currently 850 member of this cooperative. Altogether the NCTC group represents the second biggest pile of cable customers after Comcast. It’s hard to know the exact number of customers they represent because a few of the larger cable companies like Cox and MediaCom have joined and then left the cooperative over the last few years. At one point I heard the number 20 million subscribers bandied around the industry but it’s probably smaller now.

Not all programmers will work with NCTC and some require cable providers of any size to sign a contract directly with them. But NCTC represents a significant portion of the channels used by cable systems. Within that negotiated pile of content members must still sign a contract with each programmer and are free to sign the NCTC contract, negotiate directly with the programmer, or else sign no contract if they don’t want to carry a given programmer.

Back in 2014 there was a big furor among small cable companies when the Viacom group asked for a huge rate increase, reported to be over 60%. Viacom includes channels like MTV, VH1, Nickelodeon, Comedy Central, Spike, BET, and other music channels. At the time about 60 NCTC members, representing about 900,000 subscribers, decided that they could not afford to pay the higher rates and so dropped the Viacom channels from their cable systems.

We are seeing a similar battle brewing today as AMC is asking for a huge increase in rates with NCTC. I’ve not seen the new proposed rates, but have seen news articles describing this as a 379% rate increase over the term of the new contract, which is probably for five years. AMC includes the channels AMC, We tv, IFC, and Sundance TV. Additionally the new contract also covers BBC America and BBC World News, which are 50% owned by AMC.

How can a programmer ask for such a big increase? Programmers are very attuned to the Nielsen ratings which constantly track the number of people that watch each network. The general concept used by programmers is that their network is worth at least as much as other networks that get the same number of eyeballs, very similar to the way that a professional baseball player sets his worth by comparing his statistics to his peers.

AMC’s popularity has exploded in the last few years as it changed from a channel showing old movies to one which now carries very popular original programming like Mad Men, Breaking Bad, and The Walking Dead. This has raised their Nielsen rating and the network wants to charge more due to being a lot more popular.

The whole programmer industry owes a debt of gratitude to ESPN which was the first network to constantly and significantly increase their fees over the years. Every time that ESPN signed a new deal to carry programming for a sports league they then raised their prices to cover the new fees they were paying to those leagues.

But in doing so ESPN was setting an industry pricing standard against which other networks can be measured. We saw this happen with retransmission agreements with the major broadcast networks that have grown from zero to several dollars each per customer per month over the last decade. And we’ve seen popular channels ask for more as they get more viewers. The funny thing is, though, that when a network loses viewers they never seem to drop their rates.

Caught in the middle of all of this are the service providers that offer cable TV. They keep seeing bigger and bigger increases each year in programming costs and some are reporting overall programming costs growing by at least  15% per year. They are left with little choice but to raise rates, which puts many of them into a poor position compared to the satellite providers. And with each rate increase comes more customer impetus to cut the cord or at least cut back on the programming they purchase.

It’s been my experience that few of my small clients that carry cable have been bold enough to pass on all programming cost increases, and so their margins on cable keep shrinking. On a fully allocated cost basis many of them are underwater with the cable product. And sadly, as is shown by the recent AMC rate demands, there is no end in sight for continued huge increases in programing costs. It’s a lousy time to be a small cable provider, that’s for sure.

Sports Will be the First Victim of Cord Cutting

Maryland TerrapinsThe 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.

If All Programming Went Online

TelevisionRecently, in a comment made on one of my blog posts, somebody postulated that eventually cable lineups will get much smaller and cable companies will be reduced mostly to a platform to broadcast live sports events. That is a possibility because sports are clearly the most valuable programming asset that broadcasters have today.

But even in the sports world we have seen some experimentation with the web. On fall Saturdays, for every football game that is on one of the cable sports networks there are a lot more games that are only on ESPN3, the online channel from ESPN. For most of these games online is the only way to view them. And even ESPN itself has allowed their ESPN, ESPN2, ESPNU, ESPN Deportes and the SEC Channel onto Sling TV and it’s likely they are negotiating the same deal with others.

But let’s assume for a second that the more lucrative sports like pro football stay off the web. What might a world look like where most programming was streaming rather than broadcast?

First, this would create a huge increase in web traffic, particularly in the evenings in each time zone. According to Nielsen, in 2014 the average home watched broadcast TV for almost 143 hours per month while the average home watched streaming video on the Internet for 6 hours and 41 minutes. This means that less than 5% of video programming being watched is on the web. The companies that control the Internet have already been screaming about the impact of Netflix on their networks, and yet the web is still only carrying a small portion of the video content that people routinely watch.

There are certainly problems to solve before we can put most video on the Internet. One must first consider the difference between broadcasting live video versus streaming video like Netflix does. There is not a lot of live video on the web because the web architecture is not really designed to always deliver content exactly on time. I’ve reviewed Sling TV on my blog a few times and their live sports programming is so terrible that it’s basically unwatchable. Anybody who has watched ESPN3 will tell you a little better story, but even that is not great. ESPN3 mostly is made to work by sending out fairly low quality video to hold down the bandwidth demand. And unlike Sling TV, ESPN seems to have invested in carriers with a more robust backbone. The live streaming problem is not just about sports because many of the other popular shows that have been aired live on the web, like the Oscars, have been a debacle.

There is a huge difference between live shows and streamed video. Netflix can send out many copies of a streamed video at the same time because each end user is basically downloading a large file. As long as the download speed can stay ahead of where the show is being viewed then the viewer gets the intended quality. It doesn’t matter if the download process is erratic as long as the viewer stays ahead of the download. But live shows must be delivered immediately and to many homes at the same time. And when there is any glitch anywhere in the network, the live broadcast is going to hiccup or crash. If there is a local problem then only a few viewers have a problem, but if there are network delays then many viewers will suffer.

The results of moving everything to the web would be dramatic at the customer end of the network as well. The first issue would be all of the customers using DSL or slow cable modems that can’t easily receive multiple video streams. The FCC set the new standard of 25 Mbps download based upon homes wanting to watch 3 videos simultaneously as well as doing other normal web things. If you are sitting today on a 6 Mbps DSL line you already know that watching even one Netflix stream can sometimes be a challenge.

But even assuming that everybody gets upgraded speeds (which might be hard since most DSL won’t go much faster), I still have to wonder how the cable companies and telcos would handle a 10 times increase in video download demand. Almost all local networks have some sort of shared nature. In fiber-to-the-home networks a data stream is typically shared with up to 16 homes. But in cable networks that number can be greater than 500 homes.

You don’t have to remember back more than a few years when the speeds on cable networks almost died every night during prime time as most homes got on the computer. Cable companies have responded by increasing the size of the data path to the nodes and by cutting many nodes in half. But a 10 times increase in video volumes would bring every cable network to their knees. They would have to construct a lot more fiber and they would need to reduce the size of their nodes down to something a lot closer to the size of fiber systems. And they would have to do all of this without getting any additional revenue.

And rural folks would just be left out. All of the millions of homes that are being upgraded to 10 Mbps download by the Connect America Fund (and the tens of millions of other ones already with slow DSL) would be shut out in a world where most video was on the web rather than on the cable systems. I wonder if the politicians could ignore a rural TV gap in the same manner that they ignore the rural broadband gap?

Cord Cutting Might Finally be Here

Fatty_watching_himself_on_TVRecently, Wall Street has been hammering media stocks due to the fact that most of them have reported falling US subscribers. That makes me ask a question I have asked several times before: are we finally seeing the impact of cord cutting? Most cable companies just released 2nd quarter 2015 cable subscriber numbers and except for Verizon FiOS, all of the other large cable providers lost cable customers for the quarter, as follows:

  • DirectTV               -133,000
  • Dish                        -81,000
  • Comcast                 -69,000
  • Time Warner         -45,000
  • Suddenlink            -44,000
  • Charter                  -33,000
  • AT&T                      -22,000
  • CableOne              -21,000
  • Cablevision           -16,000
  • MediaCom            – 3,000

Just for this group of companies that’s a loss of 423,000 cable customers. And the numbers are actually worse. For instance, the Dish numbers might be as high as a loss of 187,000 because they are now netting the gains from Sling TV into the reported today. And Cox is not in these numbers since it’s privately held. The total losses above are something greater than 530,000 for the quarter.

Then you have to consider the fact that historically cable companies would have captured a significant share of new households. With the improved economy there will probably be at least 1 million new households added to US housing this year, and cable would normally have added about 200,000 customers each quarter from these new potential customers. That brings total net losses compared to historic trends to over 700,000 in a quarter.

The large cable companies have been losing customers for several years now. For a while these losses were offset by increases in satellite customers. More recently there was nearly a one-for-one between the losses experienced by the cable companies and the gains of the telcos, mainly AT&T and Verizon. But in this latest quarter Verizon gained only 26,000 and AT&T lost nearly that many, so that sector is no longer growing.

The second quarter is traditionally one of the poorest performing quarters of the year. For example, the cable industry as a whole suffers when campuses shut down for the summer, although those losses generally net out to gains again in the fall. And so it’s unlikely that these losses are going to annualize to the 2 million customers you might expect from these figures. But for the first time there is going to be a significant loss of cable customers for the year.

The cable companies almost all reported improved revenues. Even though they lost a lot of cable customers, the group as a whole gained 377,000 new data customers. Further, the cable companies had significant cable rate increases (although they also had significant increases in programming costs).

But it’s not hard to see how these kinds of losses affect the programmers. Take ESPN – it’s been reported that they charge cable companies more than $5.50 per customer per month. At that rate the loss of 530,000 paying customers annualizes to almost $35 million per year in lost revenues. And if you look at the historic trend including new housing units their loss is even greater than what they traditionally could have expected.

Not reported in the above numbers is the impact of cord shaving. It’s been anecdotally reported that there are a lot of customers cutting back to smaller TV packages, meaning that they are paying for fewer channels. The channels in the premium tiers have to be losing revenue at a significantly higher rate than the basic channels that everybody gets. But the cord shaver numbers are hard to come by and are not reported in cable company press releases.

ESPN is part of Disney which is a very large corporation with diversified revenues, and $35 million lower revenues gets lost in the rounding on their corporate books. But Wall Street is looking at the long term trend and is worried about programmers in general.

Finally, there is another industry measure that may have also spooked Wall Street. Nielsen recently released trends in TV viewing time. Since 2010 viewing hours per week have dropped for all age groups, but particularly for younger viewers. Viewing by 50-64 year old was down 1%, 35-49 year olds down 10%, 25-34 year olds down 23% and 18-24 year olds down a whopping 32%. That speaks tons about the dropping trend for future advertising revenues, which are aimed more heavily at young viewers.

It’s no wonder that Wall Street is punishing the media companies when they are losing revenues from both subscribers and advertising. Many of the programmers are selling enough new content overseas to make up for the US losses, but analysts are obviously worried that this trend is going to quicken in the same manner it did for landline telephones. This could get ugly fairly quickly.