A Bad Year for the Cable Industry

The traditional cable TV industry had a miserable 2019. Collectively the biggest cable TV providers lost over 5.9 million subscribers during the year, almost 7% of the total customer base. The impacts of COVID-19, along with the already existing trends in the industry spell bad news for the industry in 2020.

I expect that customer losses will accelerate over 2019 levels. The majority of subscribers leaving traditional cable cite cost as the primary reason, and as millions of people lose their jobs, one of the first things they are going to do is to ditch traditional cable for something less expensive. For years, nationwide surveys of subscriber sentiment have shown that as many as 20% of households each year contemplate dropping traditional cable TV, but for a variety of reasons many households don’t get around to doing so. This year a lot of these homes are finally going to make the change.

The industry has also lost its largest advertising draw in sports. MoffettNathanson predicted that just losing the spring and early summer sports could cost the industry as much as $26 billion in advertising. If COVID-19 carries forward through baseball and into football season those numbers will climb much higher. The MoffettNathanson numbers also didn’t include the impact on Comcast of delaying the Olympics for a year, which are a significant piece of corporate earnings. The impact of sports advertising will be uneven throughout the industry because of contractual relationships. Many contracts require networks to continue to pay for sports rights to the various sports leagues even if the games aren’t played, but contracts also require the leagues to compensate networks for lost advertising revenue. That’s going to mean a lot of lawsuits, but the bottom line is that sports leagues and cable networks will both lose a lot of revenue.

Advertising is taking additional hits. Travel-based advertising has already disappeared. It’s also now obvious that a lot of local advertising is drying up as small businesses feel the pinch from this crisis, affecting both local TV stations and newspapers. A number of small newspapers around the country have already folded, and local television and radio stations are likely to follow.

Another big hit for the industry will come as the production of new content has slowed to a crawl. Movie and television studios have put the production of new content on hold. How long will homes remain happy crawling through the old content on Netflix, Amazon Prime, Hulu, etc?

Sports networks are in big trouble since they have no live content to share. Watching ESPN right now is downright sad for a sports fan. Sports fans might watch old playoff games on ESPN, FS1 and other networks for a few weeks, but that’s going to get quickly lose its appeal.

The programmers have already baked future rate increases into their future contracts with cable providers. With sports programming and new content both dwindling, I expect a lot of small telcos and cable companies will decide that this is a good time to ditch the cable product entirely. Half of my clients that offer cable TV have already been having internal discussions about if and when to walk away from cable – this year might provide the impetus to do so.

If there is any silver lining for the industry, it’s that this is an election year and there promises to be a lot of political advertising between now and November – at least in states with close races for President or with a heavily contested Senate race.

The cable industry was already under stress and this year ought to push it closer to the brink where the traditional cable model breaks. The industry isn’t to that brink yet and over 60% of homes are still subscribing to traditional cable TV. But as that number drops, many of the industry paradigms are going to break and the industry will either have to reinvent itself or undergo the slow death that we saw with residential landlines.

Where’s My Refund?

Today’s blog is a little tongue-in-cheek, but not entirely so. The blog was prompted by seeing that auto insurance companies are sending refunds to customers since they are no longer driving their cars much during the COVID-19 pandemic. This is pretty obvious when the web is full of pictures of major urban highways with practically no traffic at rush hour.

My question is why my cable company doesn’t reimburse me for sports channels that no longer carry sports. On the flip side, why would the cable company pay the sports networks since they aren’t delivering what was promised? This is not an inconsequential amount of money. In 2018 Kagan, a media research group within S&P Global Markets Intelligence reported that the average cost of sports programming in the US was $18.55 per subscriber per month. Since then, that cost will have climbed and is likely at least $20 per cable subscriber per month – even higher in metropolitan markets with local sports networks that carry baseball or basketball.

That’s a substantial amount of customer billing that ought to be refunded. With over 83 million traditional cable customers at the end of 2019, that’s over $1.6 billion per month in subscriber fees. The customers of Sling TV, YouTube TV, and other online programmers pay similar monthly fees. There are additional customers subscribing to extra programming such as ESPN+ and BIG 10 TV. Altogether it’s likely that the public is paying at least $2 billion per month for sports content that currently isn’t being delivered.

Sports networks are currently sad for any sports fans. The NCAA basketball tournament would have just concluded. It’s almost time for the NBA and NHL playoffs. This would be the early weeks of a new professional baseball season. College baseball would be well underway marching towards the college world series. There would also be plenty of coverage for soccer and NASCAR. Sports networks would be covering other college sports like lacrosse, gymnastics, and track and field. There would be boxing, wrestling, and the UFC and MMA.

Instead, the sports networks sit empty of sports. These networks are filling the day by playing older sporting events or showing talking heads talking about sports – but there are no sports on the air. I watched a couple of old Maryland basketball games at the start of the COVID-19 shutdown as a substitute for the NCAA tournament, but I suspect most sports fans have stopped watching the sports networks.

The money streams for sports programming is complex. Consider ESPN, the flagship sports network as an example of how this industry segment operates. The monthly fee charged to cable operators to carry the ESPN channels is around $9 per customer. Disney doesn’t report ESPN numbers separately, but industry analysts estimated that those fees account for about 60% of ESPN’s revenues. Most of the rest of the revenue stream comes from the advertising shown on ESPN. The most expensive advertising rates are charged during sporting events.

ESPN’s biggest costs are fees paid to sports leagues for rights to carry the sporting events. The latest figures I could find for these fees was from a 2017 study done by the Sports Business Journal. The annual payments made by ESPN in that study included payments such as $608 million per year for the college playoffs, $700 million for major league baseball, $38 million for major league soccer, $1.4 billion per year for the NBA, $1.9 billion per year for the NFL, $75 million per year for US Open Tennis, $40 million per year for Wimbledon, $240 million per year to the Atlantic Coast Conference, $100 million for the Big 12, $100 million for the Big 10, $125 million for the Pac-12, $300 million for the Southeastern Conference, plus a number of smaller payments for other sports. These payments have likely climbed since 2017.

The dollar impact of sports advertising gets complicated during the COVID-19 crisis because of the contractual relationships among the parties. Many of the above payments to sports leagues are guaranteed even if there are no sports being played. However, these same contracts likely require the leagues to compensate networks like ESPN for lost advertising revenue. That makes it hard to estimate the net impact of sports coming to a grinding halt. Ultimately the advertising money should roughly be a wash. If there are no sports, there are no big advertising dollars and leagues and networks both suffer losses.

But the payments from customers continue. I’ve canceled my subscription to YouTube TV since I only purchased it to watch sports – and I suspect many other households are cutting the cord right now. But the $2 billion monthly payments to networks like ESPN continue. If my car insurance company is going to send me a check for not driving, then I don’t know why cable providers shouldn’t return my money for sports channels that carry no sports. This sounds to me like a ripe opportunity for a class action lawsuit.

Trusting Big Company Promises

When AT&T proposed to merge with Time Warner in 2016, attorneys at the Justice Department argued against the merger and said that the combined company would have too much power since it would be both a content provider and a content purchaser. Justice Department lawyers and various other antitrust lawyers warned that the merger would result in rate hikes and blackouts. AT&T counterargued that they are good corporate citizens and that the merger would be good for consumers.

In retrospect, it looks like the Justice Department lawyers were right. Soon after the merger, AT&T raised the prices for DirecTV and its online service DirecTV Now by $5 per month. The company raised the rates on DirecTV Now again in April of this year by $10 per month. AT&T accompanied the price increases with a decision to no longer negotiate promotional prices with TV customers. In the first two quarters of this year DirecTV lost over 1.3 million customers as older pricing packages expired and the company insisted that customers move to the new prices. AT&T says they are happy to be rid of customers that were not contributing to their bottom line.

In July of this year, CBS went dark for 6.5 million DirecTV and AT&T U-verse cable customers. AT&T said that CBS wanted too much money to renew a carriage deal. The two companies resolved the blackout in August.

Meanwhile, AT&T and Dish networks got into a dispute in late 2018 which resulted in turning off HBO and Cinemax on Dish Network. This blackout has carried into 2019 and the two sides still have not resolved the issue. The dispute cost Dish a lot of customers when the company was unable to carry the Game of Thrones. Dish says that half of its 334,000 customer losses in the fourth quarter of 2018 were due to not having the Game of Thrones.

I just saw headlines that AT&T is headed towards a rate fight with ESPN and warns there could be protracted blackouts.

It’s hard to fully fault any one of the AT&T decisions since they can be justified to some degree as smart business practices. But that’s how monopoly abuses generally work. AT&T wants to pay as little as possible when buying programming from others and wants to charge as much as possible when selling content. In the end, it’s consumers who pay for the AT&T practices – something the company had promised would not happen just months before the blackouts.

Programming fights don’t have to be so messy. Consider Comcast which is also a programmer and the biggest cable TV company. Comcast has gotten into a few disputes over programming, particularly with regional sports programming. In a few of these disputes, Comcast was leveraging its programming power since it also owns NBC and other programming. But these cases mostly got resolved without blackouts.

Regulators are most worried about AT&T’s willingness to allow prolonged blackouts because during blackouts the public suffers. Constantly increasing programming costs have caused a lot of angst for cable TV providers, and yet most disputes over programming don’t result in turning off content. AT&T is clearly willing to flex its corporate muscles since it is operating from a position of power in most cases, as either an owner of valuable content or as one of the largest buyers of content.

From a regulatory perspective this raises the question of how the government can trust the big companies that have grown to have tremendous market power. The Justice Department sued to challenge the AT&T and Time Warner merger even after the merger was approved. That was an extraordinary suit that asked to undo the merger. The Justice Department argued that the merger was clearly against the public interest. The courts quickly ruled against that suit and it’s clear that it’s nearly impossible to undo a merger after it has occurred.

The fact is that companies with monopoly power almost always eventually abuse that power. It’s incredibly hard for a monopoly to decide not to act in its own best interest, even if those actions are considered as monopoly abuses. Corporations are made up of people who want to succeed and it’s human nature for people to take any market advantages their corporation might have. I have to wonder if AT&T’s behavior will make regulators hesitate before the next big merger. Probably not, but AT&T barely let the ink dry on the Time Warner merger before doing things they promised they wouldn’t do.

The High Cost of Sports Programming

The web news site Axios reports that sports channels were the top ten most expensive channels in terms of what is charged to cable operators. Not only are sports channels the most expensive programming, but their prices are increasing faster than most other channels, helping to continue to drive up the cost of a cable subscription. They only other channels that are increasing prices at a faster clip are local network affiliates of the big over-the-air networks like ABC, CBS, FOX and NBC.

Axios reports that they received the cost of networks from industry analysts Kagan. The five most monthly cost to cable companies include:  ESPN $7.54; YES $6.05 (Yankees and Nets); SportsNet LA $4.64; Fox Sports AZ $4.63; and Fox Sports Detroit $4.51.

I’ve seen estimates that the average cable subscriber pays about $20 per month to cover sports programming – a huge percentage of a total cable bill. That figure obviously varies by market and by specific cable package, but most expanded basic cable packages include numerous sports channels like ESPN, FS1, the NFL Channel, the NBA Channel, etc.

Sports channels are expensive due to the high costs of obtaining the broadcast rights to various sports teams and leagues. For example, a major percentage of the revenues earned by college football and basketball programs comes from revenue agreements with networks like ESPN.

Another reason that the monthly fees charged for sports networks keep rising is due to cord cutting and the overall loss of cable customers in the industry. It’s been reported that ESPN has already lost over 2 million customers for the year – a number that is line with estimates of cord-cutting. ESPN has lost almost 12 million customers since their peak at the end of 2013.

Subscription fees to cable companies account for more than 60% of ESPN’s revenues (with most of the rest coming from advertising sold during sporting events). It’s also been reported that ESPN accounts for almost 30% of the value of Disney stock, so it has to be alarming to the Disney parent company to continue to watch customers leave the service. ESPN has made up for some of these losses by selling over a million monthly subscriptions at $5 for ESPN+, an online network that offers sports programming not shown on the basic ESPN channels.

Live sports are still one of the major draws for consumers. Numerous surveys have shown that local sports are one of the primary reasons why many customers keep their traditional cable subscriptions. So far, sports programing has not been offered on the Internet except through expensive monthly plans like Sling TV or PlayStation Vue that look a lot like a cable subscription.

There might be a coming shake-up in the sports programming world. Currently Disney is selling 22 regional Fox sports networks, which was one of the government’s requirements for the merger of Disney and 21st Century Fox. One of the bidders for these networks is Amazon, and the speculation is that they might offer much of the content on a streaming basis. That would be a major shake-up of the industry that thrives due to sales only to cable companies. The Fox sports networks own over half of the rights to Major League Baseball, the NBA and the National Hockey League, so it’s a powerful pile of programming rights.

A few things are certain. The model of raising subscriber cable prices by $2 every year to cover increases in sports programming is a model that can’t be sustained forever. Saving money is the number one reason given by cord-cutters for leaving traditional TV. It’s also likely that Amazon or somebody else is going to change the market paradigm and will sell sports content a la carte by the game.

I subscribe to PlayStation Vue mostly to get the sports. I could cut that annual bill in half if I could pay $5 per event to watch those events I really want to watch. A Gallup poll last year showed that 37% of households say they are not sports fans. Rising cable prices are going to drive a lot of these households to find cheaper alternatives, and as dropping ESPN subscribers show they will opt out of paying for sports they don’t watch. Charging each cable household $20 per month to watch sports is not sustainable.

The Crowded MVPD Market

The virtual MVPD (Multichannel Video Programming Distributor) market is already full of providers and is going to become even more crowded this year. Already today there is a marketing war developing between DirecTV Now, Playstation Vue, Sling TV, Hulu Live, YouTube TV, CBS All Access, fuboTV and Layer3 TV. There are also now a lot of ad-supported networks offering free movies and programming such as Crackle and TubiTV. All of these services tout themselves as an alternative to traditional cable TV.

This year will see some new competitors in the market. ESPN is getting ready to launch its sports-oriented MVPD offering. The network has been steadily losing subscribers from cord cutting and cord shaving. While the company is gaining some customers from other MVPD platforms they believe they have a strong enough brand name to go it alone.

The ESPN offering is likely to eventually be augmented by the announcement that Disney, the ESPN parent company, is buying 21st Century Fox programming assets, including 22 regional sports networks. But this purchase won’t be implemented in time to influence the initial ESPN launch.

Another big player entering the game this year is Verizon which is going to launch a service to compete with the offerings of competitors like DirecTV Now and Sling TV. This product launch has been rumored since 2015 but the company now seems poised to finally launch. Speculation is the company will use the platform much like AT&T uses DirecTV Now – as an alternative to customers who want to cut the cord as well as a way to add new customers outside the traditional footprint.

There was also announcement last quarter by T-Mobile CEO John Legere that the company will be launching an MVPD product in early 2018. While aimed at video customers the product will be also marketed to cord cutters. The T-Mobile announcement has puzzled many industry analysts who are wondering if there is any room for a new provider in the now-crowded MVPD market. The MVPD market as a whole added almost a million customers in the third quarter of 2017. But the majority of those new customers went to a few of the largest providers and the big question now is if this market is already oversaturated.

On top of the proliferation of MVPD providers there are the other big players in the online industry to consider. Netflix has announced it is spending an astronomical $8 billion on new programming during the next year. While Amazon doesn’t announce their specific plans they are also spending a few billion dollars per year. Netflix alone now has more customers than the entire traditional US cable industry.

I would imagine that we haven’t seen the end of new entrants. Now that the programmers have accepted the idea of streaming their content online, anybody with deep enough pockets to work through the launch can become an MVPD. There have already been a few early failures in the field and we’ve seen Seeso and Fullscreen bow out of the market. The big question now is if all of the players in the crowded field can survive the competition. Everything I’ve read suggests that margins are tight for this sector as the providers hold down prices to build market share.

I have already tried a number of the services including Sling TV, fuboTV, DirecTV Now and Playstation Vue. There honestly is not that much noticeable difference between the platforms. None of them have yet developed an easy-to-use channel guide and they feel like the way cable felt a decade ago. But each keeps adding features that is making them easier to use over time. While each has a slightly different channel line-up, there are many common networks carried on most of the platforms. I’m likely to try the other platforms during the coming year and it will be interesting to see if one of them finds a way to distinguish themselves from the pack.

This proliferation of online options spells increased pressure for traditional cable providers. With the normal January price increases now hitting there will be millions of homes considering the shift to online.

 

Trends for Programmers

It’s always a good idea for anybody that offers a cable product to keep an eye on what is going on with the programmers. Probably the number one problem for small cable operators is the never-ending increase in the prices paid to buy programming. Here are some of the current trends that are going to impact the cost of buying cable programming over the next few years:

Subscriber Losses Continue. All of the major programmers are losing customers. Probably the most widely discussed is ESPN that has lost 13 million customers since 2011. But it’s happening across the board to all of them to a slightly lesser extent.

The loss of customers puts obvious earnings pressure on the programmers. They are now facing a classic Catch-22 situation. If they try to make up for lost revenues by raising rates even faster they are likely to lose customers even faster. It’s getting to be pretty clear that cable rate increases are the driving force behind a lot of cord-cutting. But probably even more important that cord-cutting is cord-shaving where millions of customers are opting for smaller and less expensive channel line-ups. At this point cord-shaving is costing the programmers more loses than cord-cutting – but we don’t know the numbers since the big cable companies are not releasing statistics on cord-shaving.

Advertising Taking a Hit. We are also seeing a crossover point and late last year we saw more advertising being done on the web than on TV. In this latest quarter we are finally starting to see real declines in TV advertising revenue – a far cry from year-after-year growth in ad revenues for the cable networks. For years programmers were on a trajectory of expecting healthy growth of both subscriber revenues and ad revenues, and both are starting to sink at the same time.

At this point the drop in advertising revenues is tiny, but it’s going to get worse as ad spending continues to shift to online. And the ad dollars are not only dropping for the programmers, but drops in advertising are affecting local ad revenues for television stations and cable companies.

Ad revenues are sinking due the shrinking in ‘eyeballs’ watching cable programming. While cord cutting is shaving the total number of cable subscribers, the more substantial issue is that people are spending more time watching Netflix and other OTT content, at the expense of watching cable shows. This means that the ratings for most TV shows has been plummeting and taking with it the willingness of programmers to pay premium rates for ad slots. There is also a big age shift with younger viewers abandoning traditional cable programming at a much faster rate than older generations.

No Easy Shift to Streaming. A lot of programmers were counting on a shift to direct OTT content to help to reverse the shift in traditional TV viewers. For example, Disney / ESPN just announced that they will be offering online versions of their networks starting in early 2018.

But we also just saw NBC cancel their online offering Seeso. The network carried a significant amount of comedy programming and NBC tried to lure customers to pay $3.99 per month for the service. But they had very few takers and that failure is probably scaring the rest of the industry. Recent surveys by Nielsen and others have shown that viewers care as much about the platform as they do about the content. That means that they are only willing to buy a monthly subscription if they see a value in staying on a given platform. The programmers are all hoping that people will be willing to pay a small fee to watch one or two favorite shows, but that doesn’t seem to be the case. People value a platform like Netflix where they can move from show to show without the hassles of logging in to multiple platforms. This doesn’t bode well each programmer creating individual platforms consisting of the same content they show on traditional cable.

Pressure to Create More Content. There are newcomers like Netflix, Amazon and Apple that are spending billions annually to create new content. This is putting a lot of pressure on traditional cable networks to keep up, adding to their bottom line costs. There is always the reward for those handful of hits that become must-watch shows, but the most new content doesn’t generate enough revenue to cover the production costs.

What Does This Mean? All of these trends predict a poorer future for programmers. I think it means some of the following:

  • More mergers. We will probably see more mergers as a way to control costs. We are just now seeing the merger of Discovery and Scripps. But there were only seven major programmers before that merger, so there is only so much benefit that can be gained through mergers.
  • Faster rate increases. These are all publicly traded companies. They are going to try every avenue to maintain earnings, but in the face of dropping subscribers and flat ad revenues they are going to have little ultimate choice but to raise programming rates even faster. But they are also limited in some sense with this because most programming contracts with cable companies are signed on a three-year forward basis, and the prices are already locked for the next few years for most of their cable company customers.
  • Reduced expectations. Programmers have been some of the darlings of Wall Street for the last few decades. But as these new realities sink in there is going to have to be reduced stock prices for these companies as well as lowered expectations about their earnings potential. And in today’s stock-driven corporate world that is anathema. We may be seeing the first hints of an industry whose wheels are coming off.

OTT News – August 2017

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It’s been a busy time in the OTT market with players coming and going and the choices available to customers growing more complicated and confusing.  Here are some of the bigger recent events in the industry.

Continued Cord Cutting. The major cable providers lost 946,000 cable customers in the second quarter – the worst quarterly loss ever. This puts cord cutting at an annual loss rate of 2.7% of customer, up from only 1% a year ago. It’s obvious that cord cutting is picking up momentum, and the wide variety of OTT viewing has to be a contributor. Nielsen recently reported that 62% of homes now watch OTT content at least occasionally.

It’s getting harder for analysts to count cable customers. For example, Dish Networks is not reporting on the specific performance of its satellite service versus SlingTV. The losses for the quarter were also eased a bit by the fact that Charter began counting seasonal customers even when they go dormant, such as the snowbird in Florida who subscribe only in the winter but who keep the account active.

ESPN / Disney OTT Offering. Disney announced that it would be launching two new OTT offerings in 2019 – a standalone ESPN offering and a standalone Disney offering. Along with this announcement they announced they will be withdrawing Disney content from Netflix. The ESPN offering will not duplicate the cable version of the network and will not include things like the NFL and NBA. But it will include major league baseball, the NHL, major league soccer, grand slam tennis events and college sports. Analysts think this offering is mandatory since ESPN has lost 13 million subscribers since 2011 and advertising revenues dropped 8% last quarter.

The standalone Disney offering is also interesting in that the company has decided to take Netflix on head-to-head. Because of contractual arrangements Netflix will still have access to content produced by Disney such as the numerous shows produced by Disney’s Marvel Studios. But starting in 2019 Disney is going to make new content only available on their own platform. This prompted Netflix to purchase Millarworld, a major comics producer.

NBC Closing Seeso. NBCUniversal says that it will be ending the Seeso OTT offering later this year. This is an offering that consisted largely of NBC comedy and related entertainment such as Saturday Night Live and the Tonight with Jimmy Fallon.

This failure is a big warning to the many cable networks that have been contemplating using the strategy of shoving existing content online. Industry analysts say that simply taking linear content online is not a recipe for success. It seems that the platform is just as important as the concept and the bigger platforms like Netflix keep customers engaged and enabling them to move from show to show without leaving the platform. But it’s too easy for a customer to leave a limited-offering platform, thus diminishing the perceived value for customers to buy a subscription.

Facebook OTT Offering. Facebook has announced the launch of Watch, an OTT service that will include content from A&E, Univision, Major League Baseball and other content such as worldwide soccer. For now the new service is being launched overseas with some limited US trials, but is expected to hit the whole US market later this year.

The offering is being structured like YouTube to enable content creators to launch their own channels. Facebook is currently funding some content providers to seed content on the new service. They are hoping that within time the platform becomes self-sustaining and can be an alternative to the wildly popular YouTube. Facebook is counting on their ability to lure enough of their billion plus users to the new platform to make it a success. The company’s goal is to keep people on their platform for more than just social networking.

Apple. Apple will be entering the OTT world and announced that they will spend $1 billion to create programming content over the next year. This puts them into rarified company with Netflix that is spending $6 billion, Amazon at $4.5 billion and HBO at $2 billion. There is no news yet of the nature or timing of an Apple OTT offering.

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.