Forecasting the Future of Video

I recently saw several interesting forecasts about the cable industry. The research firm SNL Kagan predicts that broadband-only homes in the US – those that don’t subscribe to traditional linear cable TV – will increase from 23.3 million in 2018 to 40.8 million by 2023. In another forecast Parks Associates predicts that the number of worldwide OTT subscribers – households that subscribe to at least one online video service – will grow to 310 million by 2024.

These kinds of forecasts have always intrigued me. I doubt that there is anybody in the industry that doesn’t think that cord cutting won’t keep growing or that the market for services like Netflix won’t keep growing. What I find most interesting about these total-market forecasts is the specificity of the predictions, such as when Kagan predicts the 40.8 million number of broadband-only homes. I suspect if we did deeper into what Kagan says that they have probably predicted a range of possible future outcomes and were not that specific. But I also understand that sometimes putting a number on things is the best way to make a point in a press release.

What I’ve always found interesting about future predictions is how hard it is to predict where a whole industry is going. If I look back ten years I could find a dozen experts predicting the death of traditional landline telephones, and yet not one of them would have believed that by 2019 that landline penetration rates would still be around 40%. I imagine every one of them would have bet against that possibility. It’s easy to understand the trajectory of an industry, but it’s another thing to predict specifically where an industry will land in the future. It wasn’t hard ten years ago to predict the trajectory of the landline business, but it was nearly impossible to know how many landlines would still be around after ten years.

That doesn’t mean that somebody doesn’t have to try to make these predictions. There are huge dollars riding on the future of every telecom industry segment. Companies that invest in these industries want outside opinions on the direction of an industry. If I was developing a new OTT product like Apple is doing, I’d want some feel for the potential of my new investment. I’d want to gather as many different predictions about the future of the OTT market as possible. The above two predictions were announced publicly, but corporations regularly pay for private market assessments that never see the light of day.

To show how hard it is to make such predictions, I want to look a little more closely at the Kagan prediction. They are predicting that in five years there will be 17.5 million more homes that buy broadband and don’t buy a traditional TV product. There a number of factors and trends that would feed into that number:

  • It looks like first-time households of millennials and generation Z don’t subscribe to cable TV at nearly the same levels as their parents. Some portion of the increase in broadband-only homes will come from these new households.
  • While final numbers are still not in for 2018 it appears that there will be around 2 million homes that cut the cord last year and dropped cable TV. Is the future pace of cord cutting going to be faster, slow or stay the same? Obviously, predicting the future of cord cutting is a huge piece of the prediction.
  • It’s becoming a lot more complicated for a household to replace traditional cable. It looks like every major owner of content wants to put their unique content into a separate OTT service like CBS All Access did with the Star Trek franchise. The cost of subscribing to multiple OTT services is already getting expensive and is likely to get even costlier over time. Surveys have shown that households cut the cord to save money, so how will cord cutting be impacted if there are no savings from cutting the cord?
  • The big cable companies are creating new video products aimed at keeping subscribers. For instance, Comcast is bundling in Netflix and other OTT products and is also rolling out smaller and cheaper bundles of traditional programming. They are also allowing customers to view the content on any device, so buying a small bundle from Comcast doesn’t feel much different to the consumer than buying Sling TV. What impact will these countermeasures from the cable companies have on cord cutting?

I’m sure there are other factors that go into predicting the number of future homes without traditional cable TV and these few popped into my mind. I know that companies like Kagan and Parks have detailed current statistics on the industry that are not available to most of us. But statistics only take you so far, and anybody looking out past the end of 2019 is entering crystal ball territory. Five years is forever in a market that is as dynamic as cable TV and OTT content.

We aso know from past experience that there will be big changes in these industries that will change the paridigm. For example, the content owners might all decide that there is no profit in the OTT market and could kill their own OTT products and cause an OTT market contraction. Or a new entrant like Apple might become a major new competitor for Netflix and the demand for OTT services might explode even faster than expected. I don’t know how any prediction can anticipate big market events that might disrupt the whole industry.

Understand that I am not busting on these two predictions – I don’t know enough to have the slightest idea if these predictions are good are bad. These companies are paid to make their best guess and I’m glad that there are firms that do that. For example, Cisco has been making predictions annually for many years about the trajectory of broadband usage and that information is a valuable piece of the puzzle for a network engineer designing a new network. However, predicting how all of the different trends that affect video subscriptions over five years sounds like an unsolvable puzzle. Maybe if I’m still writing this blog five years from now I can check to see how these predictions fared.  One thing I know is that I’m not ready to take any five-year forecast of the cable industry to the bank.

Prices are Driving Cord Cutting

It’s been general wisdom for several years that high cable TV prices are one of the predominant factors behind cord cutting. TiVo’s recently released Q4 2017 Online Video and Pay-TV Trends Report says that prices are even more important than we thought. TiVo talked to a number of cord cutters in 2017 and found that 86.7% of those who dropped TV in 2017 list high prices as the number one reason for abandoning traditional cable TV. This is up from 80.1% a year earlier.

It’s not hard to understand why price is becoming such a big factor. Over 50% of households now say that their monthly cable bill is more than $75 per month. And only 15% pay less than $50, down from 18% a year earlier. Annual rate increases that are far greater than the cost of general inflation are pushing cable prices out of the affordability zone for many households.

Interestingly we see this same trend manifesting in another way. In a recent survey Parks Associates report that a little over 20% of households now use digital antennas in their homes to receive over-the-air networks like ABC, CBS, NBC, FOX and PBS. That’s up from 15% in 2015. That’s a huge swing and means that over 6 million homes have started using antennas in just the last two years.

Nationwide more than 3 million households (2.4% of all households) dropped cable in 2017 – as witnessed by the subscribers of the largest cable TV companies. Just about every one of my clients will tell you that they lost a larger percentage than the average. The nationwide numbers are bolstered by the fact that Comcast lost only 0.7% of its cable customers and Charter lost 1.4%. But telcos did far worse with AT&T losing 14.6% and Frontier losing 16.1%.

Higher prices are almost entirely due to increased programming costs. Small companies have seen programming costs grow over 10% per year, and the rate of annual growth is increasing. Some have reported annual increases to me as high as 15% in the most recent two years.

One of the biggest drivers of high programming costs are the retransmission charges that local affiliates of the major networks charge to cable companies to cover the over-the-air networks. In large cities a lot of the local TV stations are owned directly by the major networks like NBC or ABC, but in smaller markets these are generally owned by others. The independent local stations have no recourse but to raise retransmission rates each year since the networks increase the costs to them for remaining as an affiliate. In the end, all of the extra revenues from retransmission fees flows up to the major networks, which now see this as a major source of revenue growth.

It’s not just the major networks that are increasing rates. Practically every cable network is increasing rates at a faster pace than a decade ago. It’s a really odd economic phenomenon to see big price increases occurring in an industry that is losing customers at this pace. Any economics 101 book would suggest that the laws of supply and demand would drive prices for programming in the other direction.

But the cable industry is perverse due to regulations. The cable rules require stations to carry local networks that are within their range. I know a number of cable companies who would gladly provide rabbit ears to customers rather than continue to raise rates every year – but they are required by laws passed by Congress to carry these stations. The same laws also force cable companies to carry large lineups in the basic and expanded basic tiers that we are all familiar with.

These laws mean that cable providers have few options on what networks to carry. I don’t know any cable providers who wouldn’t like to try something different and perhaps offer smaller packages of the most-watched networks that people could afford to buy. But the legal requirements for cable lineups embolden the programmers to charge exorbitantly because cable operators have no power to push back. The most a cable provider can do is to take all of the networks from a given programmer off the air – and even this is impractical since each of the few major programmers own a lot of networks.

You can’t really fault the programmers since they are all publicly-traded companies which are responding to Wall Street demands that they increase profits quarter after quarter. The whole cable ecosystem is polluted by the need to increase profits. It’s sad, because without the price increases each year all of the companies involved could continue to make high margins and big profits.

Even with all of this turmoil in the industry I don’t hear of any discussion in Congress about tackling the issue and relaxing the current rules that are breaking the industry. Instead we see people fleeing traditional cable TV and buying smaller packages of the same programming online from Sling TV, DirecTV Now and Playstation Vue.

The rate of cord cutting is clearly accelerating and it’s not going to take many more years until these issues can’t be fixed – because by then the majority of households will be getting programming online rather than from cable companies.