Is Cord Cutting Accelerating?

The research firm eMarketer is predicting that cord cutting is accelerating this year at a pace faster than predicted by the industry. They’ve done surveys and studies and conclude that 187 million people will watch Pay TV this year (satellite or cable TV), a drop of 3.8% in viewership.

The drop in 2017 was 3.4%, but the big cable companies like Comcast and Charter hoped they could slow cord cutting this year by offering Netflix and other alternative programmers on their platforms. Perhaps that is working to a degree since cable companies are losing customers at a slower pace than satellite cable or the big telcos delivering cable on DSL, like AT&T.

eMarketer looks at the statistics in a different way than most others and predicts the people who will watch the various services – which is different than counting households. I suppose that some members of a household could stop watching traditional Pay TV while the home continues to pay for a subscription. They are predicting that the total number of people who will stop watching Pay TV will rise to 33 million by the end of 2018, up from 25 million just a year ago.

As you would expect, if Pay TV viewers are dropping, then viewers of online services ought to be increasing. They are predicting the number of viewers of the major OTT services as follows for 2018:  YouTube – 192 M; Netflix – 147.5 M; Amazon – 88.7 M; Hulu – 55 M; HBO Now – 17.1 M and Sling TV – 6.8 M. eMarketer says that in 2018 that 52% of homes now watch both Pay TV and an online service.

We know that Netflix’s growth has slowed and they added only 670,000 net customers in the US in the second quarter of this year and only 4.5 million worldwide. It appears, however, that the other online services are all growing at a faster pace as people are diversifying to watch more than just Netflix.

eMarketer credits a lot of the exodus of Pay TV subscribers to the proliferation of original content available. In 2010 there were 216 original TV series produced. That was 113 from the broadcast networks, 74 from cable-only networks, 25 from premium movie channels and 4 from online providers like Netflix. In 2017 that number has grown to an astonishing 487 original series. That’s 153 from the broadcast networks, 175 from cable-only networks, 42 from premium movie channels and 117 from online providers. A large percentage of the 487 series are now available online to somebody willing to track them down. These figures also ignore the proliferation of other content available online such as movies, documentaries, comedy specials, etc.

The proliferation of content from multiple sources is making it harder to rely on just one source of content these days. Somebody with a basic cable subscription is missing out on the 159 series produced by the premium movie channels and the online providers. Somebody cutting the cord and only using Netflix would be missing out on even more content. Some of the content generated by the broadcast and cable networks is available for free online, with commercials from places like Hulu. If a cord cutter wants to have access to a lot of the available content they’ll have to subscribe to multiple services – perhaps Netflix plus something like Hulu or Sling TV.

The eMarketer survey didn’t ask about the affordability of traditional cable – a factor that is at the top of the list in other surveys that have studied cord cutting. This particular survey concentrated on what people are watching without delving into the issues that drive somebody to cut the cord.

I don’t know about my readers, but I’m a cord cutter and I’ve already reached the point of content saturation. I probably have fifty items on my Netflix watchlist, and it would take more than a year to watch it all, even if I never add anything new. I have a similar list on Amazon Prime and a smaller list on Hulu. I never sit down to watch content without more options than I know what to do with. I have the luxury these days of watching content that fits my mood and available time – a real luxury compared to even a decade ago.

Plummeting Franchise Fees

The City of Creve Coeur, Missouri recently filed a suit against Netflix and Hulu claiming that the companies should be paying the same local franchise fees as Charter Communication, which is the incumbent video provider in the community. The City claims that it is losing franchise tax revenues as people cut the cord and they want to tax the companies that are taking that business away from Charter. They argue that Netflix and Charter ride the same wires and rights-of-way to deliver content and both should be taxed the same.

My quick reaction is that the lawsuit will get little traction due to the numerous differences between Charter and Netflix. However, I’ve learned over the years that it’s hard to predict tax disputes and it’s certainly possible that a judge might agree that Netflix can be taxed. If the courts see this as a regulatory battle the case will likely get referred to the FCC, but there’s no telling what happens if it’s instead considered as a tax dispute.

Most cable franchise taxes around the country are levied against the amount of cable TV revenues sold in a community. The nature of franchise agreements varies across the country and there are some jurisdictions that also tax telephone and broadband services.

There some interesting differences between a cable provider like Charter and Netflix.

  • I’ve read a lot of franchise agreements and one of the most common characteristics of these agreements is that, while the assess the tax levy on cable revenues, the basis of the agreement is to grant access to public rights-of-way to allow a cable provider to hang wires or bury cable in the community. Charter owns a wired network in the City while a company like Netflix does not.
  • Franchise agreements almost always create an obligation for a cable provider to serve everywhere in the community, or at least to the parts of the community that have a certain level of home density. For instance, cable companies are often required to build wires to any parts of town that have at least 15 or 20 homes per linear mile. The same obligation can’t really be applied to Netflix – they can only sell to homes that have sufficient broadband to use their service.
  • There are often other requirements that come with a franchise. For instance, the franchise holder might be required to dedicate a channel for local government programming. Franchise holders are often required to provide fiber or bandwidth to the City. Netflix wouldn’t be able to meet any of these obligations.

I don’t know if the City ultimately wants Netflix and Hulu to sign a franchise agreement, but if they do the City might not like the result. Current regulations require that a City can’t demand concessions from one franchise holder that doesn’t apply to all franchise holders. I can picture a stripped-down franchise agreement for Netflix for which Charter would immediately demand to use if Netflix was excused from any obligations required of Charter.

The FCC does not want this issue handed to them because it opens the door to defining who is a cable company. The agency opened an investigation into this issue a few years ago and quietly let it drop, because it’s not a decision they want to make. The FCC is constrained on many issues related to cable by laws passed by Congress. I think the FCC decided early in the investigation that they did not want to tackle the sticky issues of declaring online programmers to be cable companies. Had the FCC done so then this suit might have good traction.

Even a few years ago at the early start of online content the FCC could see that the online content world would become messy. There are now companies like Sling TV and DirecTV Now which look a lot like a cable company in terms of programming. But there are far more online providers that don’t fit the mold. Is a company that only streams British comedy, or soccer, or mystery movies really a cable company? Is a web service that streams blogs a content provider? I think the FCC was right to let this issue quietly die. I’m sure the day will come when the FCC finally acts on the issue, but when they do it’s more likely that traditional cable companies will be freed from regulation instead of dragging OTT providers into regulation.

It’s hard to think any city can justify the legal expense of pursuing this to the end – even winning might not give them the results they want. Without congressional action the City would have to tackle each of the hundreds of online video content providers to somehow get them to also pay a tax. This feels a lot like tilting at windmills. However, many taxes we pay today started when one jurisdiction tackled the issue and others climbed aboard – so this is worth keeping an eye on.

Simultaneous Data Streams

By working all over the country I get to hear a lot of stories about how people use broadband. I’ve noticed that over the last few years that the household expectation for broadband performance has changed.

As recently as three or four years ago most households seemed to judge the adequacy of their broadband connection by how well it would handle a video stream from Netflix or other streaming service. Households that couldn’t stream video well were unhappy, but those that could generally felt that their broadband connection was good enough.

Interestingly, much of the perceived improvement in the ability to steam video was not due to better broadband performance. Streaming services like Netflix took steps to improve the performance of their product. Netflix had always buffered their content, meaning that a customer would load the video stream a few minutes ahead of viewing to eliminate the variation in customer broadband connections. They subsequently built some brains into the service so that the compression used for a given stream would vary according to the broadband connection of the customer. They also began caching their content with ISPs so that their signal would be generated from the ISP’s local network and not from somewhere in the distant cloud.

Streaming quality then became an issue again with the introduction of live streaming sports and other content, and many of the flaws in the video stream became more apparent. I remember trying to watch ESPN online when it was first offered by Sling TV and the experience was miserable – the stream would crash a number of times during a football or basketball game. Live-streaming services have subsequently improved their product to work better with a variety of broadband connections.

Over the last two years I’ve noticed a big change in how households talk about their broadband performance. I haven’t heard anybody mention single video streaming in a few years and the expectation for a broadband connection now is that it can handle multiple data streams at the same time.

This tells me two things. First, as mentioned above, video streaming has improved to the point where you don’t get interruptions on most broadband connections. But more importantly, households have changed how they use broadband. I think my household is a typical example. The only broadband need we have that is different from many families is that my wife and I both work from home. But other than that, we don’t have atypical broadband demands.

If you go back five years we probably had perhaps half a dozen devices in our home capable of connecting to the Internet. We rarely demanded a lot of simultaneous broadband. Today we have over 40 Internet capable devices in our house. While some of them use little or no broadband, we’ve changed how we use broadband. We are cord cutters and routinely are streaming several videos at the same time while also using the Internet for gaming and schoolwork. We’re often stream music. Our computers automatically upload files to the cloud and download software updates. Cellphones are connected to the WiFi and there is regular use of FaceTime and other apps that include video streams.

Interestingly, when the FCC established 25/4 Mbps as the definition of broadband they justified the speed by looking at simultaneous uses of multiple broadband services. At that time a lot of critics derided the FCC’s justification since it wasn’t realistic for how most households really used broadband. Perhaps the staff at the FCC was prescient, because their illustrative examples are exactly how a lot of homes use broadband today.

If anything, the FCC’s method was conservative because it didn’t account for the interference that arises in a home network that is processing multiple data streams at the same time. The more streams, the more interference, and it wouldn’t be unusual for a home like ours to experience 20% to 30% overhead in our WiFi network while processing the numerous simultaneous streams.

Unfortunately, many policy makers are still stuck on the old paradigm. This is the only way they can justify something like the CAF II program that will provide data steams in the 10 Mbps range. They still talk about how that connection will allow a household to watch video or do homework, but they ignore all of the other ways that homes really use broadband today. I know for my home that a 25 Mbps broadband stream is not sufficient and will bog down at various times of the day – so I buy something faster. It’s hard to imagine stepping back to a 10 Mbps connection, because doing so would force us to make hard choices on curtailing our broadband usage.

The Growing Dislike of Big ISPs

The annual ratings from the American Consumer Satisfaction Index came out recently, and they show that consumer dislike for the big ISPs is increasing. This survey looks at how consumers feel about a wide range of businesses, and the ISPs have been ranked as some of the most disliked corporations for a number of years.

The survey asks numerous questions and creates a satisfaction scale from 1 to 100. The survey looks at several different categories of telecom companies and has separate rankings for for cable TV providers, broadband providers and a new category for streaming video providers.

Among the big ISPs that offer cable TV service, the rank of every provider except AT&T U-Verse sank compared to last year. AT&T was the highest rated company in this group with a rating of 70. At the bottom was Mediacom with a rating of 55, down from 56 a year ago. The two giant cable companies both saw a drop in consumer satisfaction: Charter had a huge drop from 63 down to 58, Comcast dropped from 58 to 57.

The rankings for how consumers feel about their broadband provider were similar. The only big ISP that didn’t drop was Comcast that stayed at a ranking of 60 for two years running. Everybody other big ISP dropped. At the top of the list was Verizon FiOS which dropped from 71 to 70. At the bottom was Mediacom again which had a big drop from 58 to 53. Charter also had a big drop from 63 to 58. Rounding out the bottom rankings were Frontier (54), Windstream (56) and CenturyLink (58)

Streaming services got significantly higher rankings. Topping this first time list were Netflix, Playstation Vue and Twitch with a ranking of 78. At the bottom were Sony Crackle (68), Showtime Anywhere (70) and DirecTV Now (70), all still significantly better than traditional cable companies.

It must be frustrating for the big ISPs to see their customer satisfaction drop year after year. The rankings of the ISPs are lower than other unpopular industries like airlines, banks, insurance companies and even the Internal Revenue Service.

If there is any upside to the low customer satisfaction rankings it’s that it creates opportunities for competitors. It’s been conventional wisdom for years that a new competitor will get up to 30% of a market just for showing up with an alternative network – assuming they know how to sell and have decent customer service.

They survey doesn’t dig into the reasons for the sinking dissatisfaction, but it’s easy to speculate on some of the reasons. People are certainly unhappy with traditional cable TV due to the ever-rising prices. High prices are the number one factor cited for consumers who are cutting the cord, and the dropping satisfaction shows there is likely another growing pile of future cord cutters.

It’s a little harder to understand the dissatisfaction with broadband. At least in major metropolitan areas the ISPs have continued to unilaterally increase download speeds with only modest rate hikes. One would expect satisfaction with the the broadband product to be higher and my guess is that the low ranking deal more with the pain involved in having to ever call these big companies. Compared to other businesses we all deal with, the interaction with the cable company / ISP is often the one we dread the most. The other likely cause for dissatisfaction is that ISPs often don’t deliver the speeds they promise. This varies by market, but we’ve seen cities where consumers only get a fraction of the speed they are paying for.

It’s much easier to understand unhappiness with ISPs immediately outside of big cities. Broadband is smaller towns is often still generations behind and is inadequate for what households expect today in terms of download speeds and latency. Anybody who reads this blog will understand the near-hatred for the ISPs in rural areas. The cable companies don’t come to rural America and the big telcos have abandoned maintenance of the copper networks for decades. Rural broadband is either poor or nonexistent with practically everybody hating the companies that won’t bring them broadband.

 

Industry Shorts – March 2018

Following are a few topics that I find interesting, but which are too short to cover in a full blog:

Surge in Online Video Subscriptions. The number of households buying online video is surging. Netflix added almost 2 million US and 6.36 million international customers in the 4th quarter of 2017. That’s 18% more than the same quarter from a year earlier. There are also a growing number of vMVPD customers. At the end of last year CBS All Access has nearly 5 million customers. Showtime OTT also has nearly 5 million customers. Sling TV now has nearly 2 million customers. AT&T DirecTV hit the 1 million customer mark in December. PlayStation Vue reported 670,000 customers in mid-December. The new YouTube service has about 300,000. Hulu is also growing but doesn’t separately report it’s live TV customers from it’s video on demand customers (reported at 17 million total in December). Note that Hulu let’s customers buy one TV series or movies without needed a subscription.

Cellphone Data Usage Growth. According to the research firm NPD the average US smartphone now is used for an average of 31.4 GB per month of data. This is combined usage between cellular and WiFi data and is evidence that people are starting to really accept the small screen for video. This is up over 25% from a year earlier. The firm reports that video accounts for 83% of the usage.

The number of people willing to use a cellphone for video has also surged. NPD reports that 67% of cellphone users watched at least one video during the 3rd quarter of 2017, up from 57% in the 2nd quarter. Another research firm, Strategic Analytics reported that worldwide cellular data usage grew 115% in 2017, or more than doubled.

Global Streaming Doubled in 2017. Conviva, which provides systems to monitor and analyze online usage also reports that online video content more than doubled last year. They report that there were 12.6 billion viewing hours of online video in 2017 measured across 2.4 billon viewing devices. They report that 58% of video viewing came from North America; 21% from Europe; 19% from Asia 2% from the rest of the world.

Satellite TV Taking the Brunt of Cord Cutting. For some reason cord cutting seemed to be hitting the two big satellite TV providers even harder than landline cable companies. Dish Networks and DirecTV together lost 4.7% of their subscribers in the fourth quarter of 2017. We can only speculate for the reasons for the shift. The bundles of the landline cable companies make it harder for customers to drop their cable subscription. But to offset this, many satellite customers are in rural areas where there is often not a good broadband alternative to cable. But perhaps the FCC’s CAF II and ACAM programs are speeding up rural broadband enough for households to consider cutting the cord. It should be noted that AT&T is pushing their DirecTV now product more than their satellite TV, which also might account for part of the shift from satellite TV.

Apple Jumps into Programming. Apple quietly has gotten into the programing business. They’ve allocated over $1 billion in 2018 for the creation of new content. They’ve landed some big-name talent such as Steven Spielberg, Jennifer Aniston and Reese Witherspoon for projects. Apple doesn’t have a content platform and the industry is buzzing with speculation on how they might market and distribute the content.

Pirated Video Content on Rise. Sandvine reports that 6.5% of North American households have accessed pirated video content in the last year. I’ve read reports from Canada of companies openly advertising pirated content, including providing settop boxes that can download IPTV content directly from the Internet. Yesterday’s blog talked about new efforts by content owners to force ISPs to enforce copyright infringement.

AT&T and Net Neutrality

The big ISPs know that the public is massively in favor of net neutrality. It’s one of those rare topics that polls positively across demographics and party lines. Largely through lobbying efforts of the big ISPs, the FCC not only killed net neutrality regulation but they surprised most of the industry by walking away from regulating broadband at all.

We now see states and cities that are trying to bring back net neutrality in some manner. A few states like California are creating state laws that mimic the old net neutrality rules. Many more states are limiting purchasing for state telecom to ISPs that don’t violate net neutrality. Federal Democratic politicians are creating bills that would reinstate net neutrality and force it back under FCC jurisdiction.

This all has the big ISPs nervous. We certainly see this in the way that the big ISPs are talking about net neutrality. Practically all of them have released statements talking about how much they support the open Internet. These big companies already all have terrible customer service ratings and they don’t want to now be painted as the villains who are trying to kill the web.

A great example is AT&T. The company’s blog posted a letter from Chairman Randall Stephenson that makes it sound like AT&T is pro net neutrality. It fails to mention how the company went to court to overturn the FCC’s net neutrality decision or how much they spent lobbying to get the ruling overturned.

AT&T also took out full-page ads in many major newspapers making the same points. In those ads the company added a new talking point that net neutrality ought to also apply to big web companies like Facebook and Twitter. That is a red herring because web companies, by definition, can’t violate net neutrality since they don’t control the pipe to the customers. Many would love to see privacy rules that stop the web companies from abusing customer data – but that is a separate issue than net neutrality. AT&T seems to be making this point to confuse the public and deflect the blame away from themselves.

Stephenson says that AT&T is favor of federal legislation that would ensure net neutrality. But what he doesn’t say is that AT&T favors a bill the big companies are pushing that would implement a feel-good watered-down version of net neutrality. Missing from that proposed law (and from all of AT&T’s positions) is any talk of paid priority – one of the three net neutrality principles. AT&T has always wanted paid prioritization. They want to be able to charge Netflix or Google extra to access their networks since those two companies are the largest drivers of web traffic.

In my mind, abuse of paid prioritization can break the web. ISPs already charge their customers enough money to fully cover the cost of the network needed to support broadband. Customers with unlimited data plans, like most landline connections, have the right to download as much content as they want. The idea of an AT&T then also charging the content providers for the privilege to get to customers is a terrible idea for a number of reasons.

Consider Netflix. It’s likely that they would pass any fees paid to AT&T on to customers. And in doing so, AT&T has violated the principle of non-discrimination of traffic, albeit indirectly, by making it more expensive for people to use Netflix. AT&T will always say that are not the cause of a Netflix rate increase – but AT&T is able to influence the market price of web services, and in doing so discriminate against web traffic.

The other problem with paid prioritization is that it is a barrier to the next Netflix. New companies without Netflix’s huge customer base could not afford the fees to connect to AT&T and other large ISPs. And that barrier will stop the next big web company from launching.

I’ve been predicting that the ISPs are not going to do anything that drastically violates net neutrality for a while. They are going to be cautious about riling up the public and legislators since they understand that Congress could reinstate both net neutrality and broadband regulation at any time. The ISPs are enjoying the most big-company friendly FCC there has ever been, and they are getting everything they want out of them.

But big ISPs like AT&T know that the political and regulatory pendulum can and will likely swing the other way. Their tactic for now seems to be to say they are for net neutrality while still working to make sure it doesn’t actually come back. So we will see more blogs and newspaper ads and support for watered-down legislation. They are clearly hoping the issue loses steam so that the FCC and administration don’t reinstate rules they don’t want. But they realistically know that they are likely to be judged by their actions rather than their words, so I expect them to ease into practices that violate net neutrality in subtle ways that they hope won’t be noticed.

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.

 

Portugal and Net Neutrality

Last week I talked about FCC Chairman Ajit Pai’s list of myths concerning net neutrality. One of the ‘myths’ he listed is: Internet service will be provided in bundles like cable television as has happened in Portugal.

This observation has been widely repeated on social media and has been used as a warning of what would happen to us Internet access without net neutrality. The social media postings have included a screen shot of the many options of ‘bundles’ available from the mobile carrier Meo in Portugal. Taken out of context this looks exactly like mobile data bundles.

Meo offers various packages of well-known web applications that customers can buy to opt the applications from monthly data caps. For example, there is a video bundle that includes Netflix, YouTube, Hulu, ESPN, Joost and TV.Com. There are a number of similar bundles like the social bundle that includes Facebook and Twitter, or the shopping bundle that contains Amazon and eBay.

But the reality is that these bundles are similar to the zero-rating done by cellular carriers in the US. The base product from Meo doesn’t block any use of cellular data. These ‘bundles’ are voluntary add-ons and allow a customer to exclude the various packaged content from monthly data caps. If a customer uses a lot of social media, for example, they can exclude this usage from monthly data caps by paying a monthly fee of approximately $5.

The last FCC headed by Tom Wheeler took a look at zero-rating practices here in the US. They ruled that the zero-ratings by AT&T and Verizon violated net neutrality because each carrier has bundled in their own content. But the FCC found that T-Mobile did not violate net neutrality when they included content from others in their zero-rating package. The current FCC has not followed through on those rulings and has taken no action against AT&T or Verizon.

The Meo bundles are similar to the T-Mobile zero-rating packages, with the difference being that the Meo bundles are voluntary while T-Mobile’s are built into the base product. The FCC is correct in pointing out that Portugal did not create mobile ‘bundles’ that are similar to packages of cable TV channels. If anything, I see these bundles as insurance – in effect, customers spend a small amount up front to avoid larger data overages later.

It is also worth noting that Portugal is a member of the European Union which has a strong set of net neutrality rules. But the EU is obviously struggling with zero-rating in the same way we are in the US. The real question this raises is if zero-rating is really a violation of net neutrality. It’s certainly something that customers like. As long as we have stingy monthly data caps then customers are going to like the idea of excusing their most popular apps from measurement against those caps. If cellular carriers offered an actual unlimited data then there would be no need for zero-rating.

I disagreed with the Wheeler FCC’s ruling on T-Mobile’s zero-rating. That ruling basically said that zero-rating is okay as long as the content is not owned by the cellular carrier. This ignores that fact that zero-rating of any kind has a long-term negative impact on competition. T-Mobile is like Meo in that they exclude the most popular web applications from data ca measurement. One of the major principles of net neutrality is to not favor any Internet traffic, and by definition, zero-rating favors the most popular apps over newer or less popular apps.

If enough customers participate in zero-rating the popular apps will maintain prominence over start-ups apps due to the fact that customers can view them for free. This is not the same thing as paid prioritization. That would occur if Netflix was to pay T-Mobile to exclude their app from data caps. That would clearly give Netflix an advantage over other video content. But voluntary zero-ratings by the cellular carriers has the exact same market impact as paid prioritization

None of this is going to matter, though, if the FCC kills Title II regulations. At that point not only will zero-rating be allowed in all forms, but ISPs will be able ask content payers for payment to prioritize their content. ISPs will be able to create Internet bundles that are exactly like cable bundles and that only allow access to certain content. And cellular carriers like AT&T or Comcast are going to be free to bundle in their own video content. It’s ironic that Chairman Pai used this as an example of an Internet myth, because killing net neutrality will make this ‘myth’ come true.

Why Isn’t Everybody Cutting the Cord?

Last year at least two million households cut the cord. I’ve seen headlines predicting that as many as 5 million more this year, although that seems too high to me. But both of these numbers are a lot lower than the number of people who say they are going to cut the cord in the coming year. For several years running various national surveys show that 15 million or more households say they want to cut the cord. But year after year they don’t and today’s blog looks at some of the reasons why.

I think one of the primary reasons people keep traditional cable is that they figure out that they won’t save as money with cord cutting as they had hoped. The majority of cord cutters say that saving money is their primary motivation for cutting the cord, and once they look hard at the actual savings they decide it’s not worth the change.

One issue that surprises a lot of potential cord cutters is the impact of losing their bundling discount if they are buying programming from a cable company. Big cable companies penalize customers who break the bundle. As an example, consider a customer who has a $50 broadband product and a $50 cable product, but for which the cable company charges $80. When a customer drops one of the two products the cable company will charge them $50 for the remaining one. That means there is a $20 penalty for cutting the cord and thus not much savings from cutting the cord.

Households also quickly realize that they need to subscribe to a number of OTT services if they want a wide array of programming choices. If you want to watch the most popular OTT shows that means a $10 subscription to Netflix, an $8.25 per month subscription to Amazon and a Hulu package that starts at $8. If you want to watch Game of Thrones you’ll spend $15 for HBO. And while these packages carry a lot of movies, if you really love movies you’ll find yourself buying them on an a la carte basis.

And OTT options are quickly proliferating. If you want to see the new Star Trek series that means another $5.99 per month for CBS All Access. If your household likes Disney programming that new service is rumored to cost at least another $5 per month.

And none of these options bring you all of the shows you might be used to watching on cable TV. One option to get many of these same networks is by subscribing to Sling TV or PlayStation Vue, with packages that start at $20 per month, but which can cost a lot more. If you don’t want to subscribe to these services, then buying whole season of one specific show can easily cost $100.

And then there is sports. PlayStation Vue looks to have the best basic sports package, but that means buying the service plus add-on packages. A serious sports fan is also going to consider buying Fubo. And fans of specific sports can buy subscriptions to Major League baseball, NBA basketball or NHL hockey.

Then there are the other 100 OTT options. There is a whole range of specialty programmers that carry programming like foreign films, horror movies, British comedies and a wide range of other programming. Most of these range from $3 to $7 per month.

There are also hardware costs to consider. Most people who watch a range of OTT programming get a media streaming device like Roku, Amazon Fire, or Apple TV. Customers that want to record shows shell out a few hundred dollars for an OTT VCR. A good antenna to get local programming costs between $30 and $100.

The other reason that I think people don’t cut the cord is that it’s not easy to navigate between the many OTT options. They all have different menus and log-ins and it can be a pain to navigate between platforms. And it’s not easy to find what you want to watch, particularly if you don’t have a specific show in mind. It’s hard to think that it’s going to get any easier to use the many OTT services since they are in competition with each other. It’s hard to ever see them agreeing on a common interface or easy navigation since each platform wants viewers to stay on their platform once logged in.

Finally, none of these combinations gets you everything that’s on cable TV today. For many people cutting the cord means giving up a favorite show or favorite network.

If anything, OTT watching is getting more complicated over time. And if a household isn’t careful they might spend more than their old cable subscription. I’m a cord cutter and I’m happy with the OTT services I buy. But I can see how this option is not for everybody.

 

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.