Can Skinny Bundles Remain Viable?

It seems like the industry has accepted the new paradigm that households are cutting the cord and getting programming online. Those going online have a few options. The option that gets the most press are skinny bundles – those online services that offered a smaller version of traditional cable programming. Another alternative is for households to abandon the traditional content found on cable and to seek different content from providers like Netflix and Amazon Prime.

At the end of June there were about 6 million households that have purchased the online skinny bundles. That number is still small compared with the 90 million or so homes that still buy traditional cable programming from cable or satellite providers, but it represents a 75% growth just since October of 2017.

Current estimates of customers of the largest services include Sling TV at 2.3 million, DirecTV Now at 1.5 million, Hulu Live at 1 million, YouTube TV at 800,000 PlayStation View at 500,000.

Skinny bundles providers are attracting customers by offering a suite of the most-watched cable channels at a lower price than the cable company. They also get rid of all of the hassle of dealing with a cable company and customers can come and go easily without having to deal with cable company customer service.

I have to wonder how sustainable these businesses are. Every analyst I’ve been reading speculates that these businesses are all losing money and are using low prices to gain market share. But that means they lose more money with each customer added and it’s hard to see the end game for this industry segment.

One article I read speculated that YouTube TV is paying more for programming than the consumer price being charged. It’s unlikely that anybody but a few insiders really know the cost of programming, but the analyst estimated that YouTube TV was paying $49 per month for content to support its $40 consumer product. They speculated that YouTube might also be making $15 per month from advertising. That would mean only a tiny margin before considering any of the costs of operating the business. Obviously this is a concern for the skinny bundle providers, and YouTube TV and Sling TV each recently raised monthly rates by $5 per month.

The biggest issue for the skinny bundle companies is that they are still operating in a world where the programmers control their costs. Programmers have little incentive to offer big discounts to skinny bundle providers, which would provide incentives for more customers to cut the cord.

The big programmers all have interesting pricing that penalizes skinny bundle providers. They tend to charge a lot for their most popular channels and very little for the many other channels that they provide to cable companies. For the skinny bundle provider this means that they might spend as much to buy the one or two most popular Discovery channels or MTV channels and still pay as much for programming as the cable companies that get a whole large suit of channels for almost the same cost. Programming has been sold that way for years and I always assumed it was so that the programmers could extract full price out of smaller cable systems that can’t physically handle the 200-channel line-ups. But this pricing seems tailored-made as a way for programmers to minimize losses from selling to the skinny bundle providers.

Ultimately something has to give for skinny bundles to become a viable alternative to traditional TV. One alternative is for the prices to rise to be similar to traditional cable with the value proposition being that customers can easily come and go with a provider without the hassle. However, numerous surveys have shown that the primary reason for cutting the cord is to save money, and so skinny bundles likely can never charge as much as traditional cable. In the long-run skinny bundle providers can’t keep losing money, and it’s hard to see this same industry being around five years from now.

Skinny bundle providers share some of the same concerns as traditional cable companies. Many cord cutters seem willing to give up on watching many of the networks they have been accustomed to watching. This is what my household has done. We mostly watch the content on Amazon Prime and Netflix, including buying the occasional seasons of specific shows from other networks. That means that we no longer watch content from Discovery, MTV, the Comedy Channel and the many other traditional cable networks – we’re satisfied with the wide array of alternative programming.

Surveys from Nielsen show that people become loyal to the content they watch, but that means that they are also able to forget about and not care about content that they no longer watch. If price is the main driver for consumers to choose programming, then traditional cable TV and skinny bundles both are battling a losing battle if their must charge a lot to cover the high cost of programming.

Two Views on Skinny Bundles

The industry is abuzz this year with talk about skinny bundles. But there is a lot of disagreement about whether skinny bundles are really going to be effective and if they will put a serious dent in the pay-TV market. Today I look at opposing views from two major players in the industry.

First are the recent statements by David Zaslav, the CEO of Discovery Communications. He says the skinny bundles we see in the US are not really ‘skinny’ and are instead just another way to package traditional programming. He says that Discovery sells programming around the world and that in almost 200 other worldwide cable markets there are true skinny bundles that cost between $8 and $12 per month. He says these bundles are popular and give people a real alternative to the big cable bundles.

By contrast all of the major bundles on the market today in the US are priced at $30 to $60 and just provide a different alternative to the cable companies. The current US bundles are expensive because they include high-cost programming like sports, movie channels and major cable networks.

Zaslav’s statements are somewhat ironic since his company is one of the major programmers that drives up the size and the cost of traditional cable TV big channel line-ups. Discovery today includes a suite of 13 channels such as the Discovery Channel, TLC, Animal Planet, Science, and a host of other Discovery channels. Many of my clients are required to carry all of these channels if they want to carry any of them, and at least eight of these channels are required to be in the lower expanded basic tier where most customers have to pay for them. It’s also interesting that most of the current on-line skinny bundles in the US are not carrying the Discovery networks.

An interesting contrast to this comes from Charlie Ergen, Chairman and CEO of Dish Networks. He is wildly enthusiastic about the current US skinny bundles, including his own Sling TV. He says the company first launched Sling TV to try to lure cord cutters back to a paid subscription. But the company found out that they were instead taking customers away from pay-TV including his own satellite customers from Dish networks.

He believes that the public perceives the current US skinny bundles as a real alternative to the traditional pay-TV bundle. Sling TV has done better in the market than original projections. At the end of the 1st quarter of 2017 the company had 1.3 million customers, about double where they sat just last June. The other similar subscription services from Hulu and YouTube are also doing quite well and together are carving off a noticeable slice of the traditional TV market.

But Ergen admits that his Sling TV is a replacement for traditional TV, not a wildly different alternative. A lot of customers like on-line services because they offer the the ability to start and stop service at will or to add or subtract additional small packages of channels to the line-up as their interests change. It’s certainly possible that much of the success of these new bundles comes from consumers who are fed up with the big cable companies.

It’s also debatable if people who move from traditional cable to Sling TV or similar services can be classified as cord cutters. They are cord cutters in that they got rid of coaxial cable feed from the cable company, but they are still subscribing to a lot of the same channels as before and which are still broadcast at set times on a line-up.

For now it looks like the current skinny bundles are meeting moderate success and are attracting a few million customers. They haven’t been around very long and I suspect that a lot of consumers have either never heard of them or haven’t given them any serious consideration. But you can save money with these packages while gaining the flexibility to connect and disconnect on-line at any time – avoiding those dreadful call to cable customer service.

I know I would love to see the skinny bundles that David Zaslav describes. I imagine that each $8 – $12 bundle contains a limited number of channels. At a small size these are probably as close as anybody can get to a la carte programming. And at the end of the day that’s what a lot of cord cutters really want.

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.

The Death of the Big Cable Bundles

TelevisionThere is a ton of evidence that customers no longer want the traditional 200 – 300 channel cable packages. For example, we’ve seen the number of customers of ESPN plunge by millions over the last year to a far greater extent than the overall erosion of the cable industry. The ESPN phenomenon can only be caused by cord shaving – or customers downsizing to smaller packages.

We got more evidence of this last week when Verizon CEO Lowell McAdam said that 40% of cable packages sold on Verizon are now skinny bundles. He said that if he had a preference that Verizon would only offer skinny bundles. He doesn’t believe there is customer demand for the larger packages.

This makes sense and we have had the statistics for years to tell us this. A study by Nielsen earlier this year showed that the average person watches around 17 channels to the exclusion of others. That’s means that the average household is wasting a lot of money paying for channels they don’t want.

Other studies tell us the same thing. A Gallup poll earlier this year said that 37% of households don’t watch any sports. And yet sports programming has become the most expensive component of the big cable bundle. And it’s only common sense that within the 63% who watch sports that a lot of them must be just casual sports fans or fans of only one or two sports.

And the trend has to be downward for the channels on traditional cable. In May of this year Nielsen reported that almost 53 million US homes watch Netflix. Another 25 million watch Amazon Prime. Another 13 million watch Hulu, and since they beefed up their lineup and slashed their price the number of viewers is bound to climb.

Unfortunately skinny bundles are not universally available everywhere. Only the largest cable companies have been able to negotiate for the right to sell smaller bundles so far. And among the large cable providers only Verizon and Dish Network are really pushing the skinny bundles. There are also a few skinny bundles on the web, like Sling TV, but every time I look their packages are getting fatter.

I can’t help but speculate what would happen if every household was given the choice tomorrow to downsize their cable bundle and monthly cable bill. Leichtman Research Group announced a few months ago that the average cable bill in this country is now $103.10. That’s an astronomical number, and if that is the average a lot of homes are paying a lot more than that. Contrast this with new the Dish Network skinny bundle that offers 50 channels for $39.99 per month.

The skinny bundle that is doing so well at Verizon isn’t even cheap and starts at $55 per month – but it’s a lot less expensive than the big traditional bundles. And the Verizon price is reduced significantly for customers buying a triple-play bundle.

I just wrote a blog last week that talked about how Wall Street is becoming unhappy with cable programmers. At least one analyst has downgraded Discovery Networks and Scripps. We might finally be seeing is a whole host of issues coming to bear in the industry at the same time. Cable bills are finally getting too expensive for a lot of homes. People are becoming more interested in content that is not on traditional cable. And the programmers are losing a little bit of the total lock they have had on the industry.

It’s hard to say when, or even if the industry is going to break in any significant way. There are still just under 100 million homes paying for some version of cable TV. And the overall effect of cordcutting has only been shaving that by a little over 1% per year. But if the Verizon trend becomes the norm and most customers start preferring skinny bundles then the industry will still be transformed. ESPN has lost 10 million customers since 2013, but over half of those losses have been in the last year. The same thing has to be happening to many other of the less-popular cable channels, and at some point the math just isn’t going to work for the programmers.

We’ve seen a similar phenomenon once before. We saw a gradual erosion of home landline telephones after the advent of the cellphone. But after a few years of gradual declines we saw a deluge of people dropping home telephones. You could barely turn on a TV without hearing about how having a home telephone was a waste of money, and so it became the popular wisdom that home phones weren’t needed. The same thing could happen with skinny bundles and the industry could be transformed in a short period of time if tens of millions of homes downsize their cable bundle. It is going to happen, we’ll just have to wait and see how fast and to what degree it’s going to occur.

Wall Street and Programmers

wall-streetIn an intriguing development, analyst Michael Nathanson has downgraded Discovery Networks and Scripps Networks Interactive from ‘neutral’ to ‘sell’. His reason is that he sees a poor future for programmers that don’t carry live TV events like sports or news.

Discovery Networks produces the various Discovery channels along with Animal Planet, TLC, Science, Velocity, OWN and American Heroes Channel. Scripps produces HGTV, the Food Network, DIY Network, the Cooking Channel, the Great American Country, the Travel Channel and TVN.

Nathanson believes that advertising is starting to chase live content and is abandoning other content. There is a major trend in the country for people to skip traditional broadcast ads using DVRs and video on demand. He further recognizes that all cable channels are losing viewers to OTT alternatives like Netflix. This all will add up to a significant drop in advertising revenues for traditional cable networks that stream shows paid for by advertising.

These networks are also feeling pressure from cable subscriptions. We know, for example, that ESPN lost millions of customers since 2015 and one has to think that the same thing is happening to all of the other networks. The ESPN losses seem to be due in part to cord cutting, but even more to cord shaving where customers are downsizing their cable packages. I listen to a lot of radio and I constantly hear ads from DirecTV and others to buy their new skinny bundles. Each time somebody picks a skinny bundle or an alternative like Sling TV, a whole lot of channels lose a monthly subscription.

This might be the first crack in the programmers’ armor. For nearly two decades they have been able to raise rates to cable companies while also enjoying ever-increasing advertising revenues. And this ever-growing revenue made the programmers a favorite of Wall Street which rewards revenues that grow quarter after quarter. But we are starting to see advertising revenues abandoning cable and moving to online venues. This year is the first year when web advertising will eclipse TV advertising.

It seems for these networks we are seeing a perfect storm. Advertising in general is leaving cable – and within that shift, if Nathanson is right, it will leave traditional cable channels much faster than those offering live programming. We are also seeing traditional cable subscriptions shifting to skinny bindles and OTT. There is no doubt that all of this is going to add up to smaller revenues for these networks. And since contracts between programmers and cable companies are for 3 -5 years the programmers don’t have the ability to raise subscription rates quickly enough to make up for these losses. Even if they tried to maintain growth through rate increases it’s likely today that they would get a lot of pushback from cable companies.

It’s hard to feel any sympathy for the programmers because it is their greed that has made cable too expensive for many homes. Programming rates in recent years have increased nearly 10% per year – many multiples faster than general inflation. Those rate increases were clearly done to please Wall Street, but it didn’t take a crystal ball to see that the increases were not sustainable.

The way that we value large companies in the US is perverse. These networks make a lot of money. And even with all of these changes they are going to continue to make a lot of money for a long time to come. But companies that fall out favor with Wall Street generally have huge problems. These companies are going to be pressured to somehow fix the situation, but there doesn’t seem to be any way for them to do that. We are likely to see them start ditching unprofitable channels. The companies might be sold or split up into smaller companies. It’s unlikely once Wall Street abandons a company for it to just sit still.

The programmers have held almost all of the power in the industry for a long time – but maybe we are starting to see a change. That can only be a good thing for the industry.

The Changing Face of Advertising

advertiseherebillboardmedThere has been talk for a number of years of advertising dollars shifting from television to the Internet, and it looks like maybe this is finally starting to happen. Consider the recent advertising revenues from Viacom and Facebook.

Viacom is one of a handful of the big programmers and owns such channels as Comedy Central, MTV, and Nickelodeon (along with Paramount Pictures). This has always made Viacom one of the powerhouses in attracting advertisers along with other large programmers like Disney, Fox, Comcast, Warner Brothers, and a few others. Viacom’s ad revenues in the first quarter of this year were $1.123 B, down slightly from $1.172 B a year ago.

But Facebook’s ad revenues were $5.201 B for the first quarter of this year, up from $3.317 B a year ago. It’s pretty obvious that the big web companies are starting to win the advertising battle. For all of 2015 the total advertising for television was $80.4 B, down slightly from $82.0 B in 2014. But in 2015 the advertising revenues for just Facebook and Google had grown to $84.5 B and is still growing rapidly.

This is not particularly surprising since ratings for television as a whole are plummeting. People are watching traditional television less and are watching more and more video on the web. It seems like the battle between television advertising and web advertising has passed a milestone and that web advertising is now dominant for the first time. I have no idea how fast (or by how much) television advertising will fall, but it looks inevitable that it will.

What does this trend mean to small cable providers? I think it matters a lot because advertising revenue is a major source of revenue for programmers. To the extent that advertising revenues drop for them there is going to be more pressure for them to raise programming rates to cable companies even faster to make up for the revenue difference.

But that could lead into a classic death spiral. Rapidly rising cable TV rates is one of the major factors in driving people towards alternate programming. Many cord cutters and cord shavers cite the cost of traditional cable as a big reason they are looking for alternatives. The more that programmers raise rates, the more eyeballs they are going to lose, and one assumes the more revenue they will lose.

Programmers are also starting to get some pushback from small cable operators. There are a handful of smaller cable systems with less than a million customers in total that have dropped Viacom completely in the last year due to the unreasonable rate increases the company is demanding. I have a number of small cable clients who – when they do the math – realize that they are either losing money on cable or are getting close to the time when they will lose money. Once a company gets to that point then dropping programming is a natural response. It’s better to cut costs and lose customers when you are losing money rather than to keep shoveling money out the door to the programmers.

The programmers are also facing an FCC that is leaning more and more towards giving customers more choices in programming. You can see this in the recent NPRM for settop box reform where they want the cable companies to include ‘channel slots’ for alternate programming like Netflix. The FCC has yet to act on the open docket that is looking at the rights of companies to put content onto the Internet – but it’s clear that the FCC favors consumer choice.

And all of the big cable companies are now implementing or looking to implement skinny bundles. These are smaller packages of just the channels that people want to watch, at a much lower cost to consumers than the big traditional packages. The cable companies want to get off the treadmill of paying huge amounts for programming, and skinny bundles reduce and reset the bar. The cable companies also want to offer an alternative to people to stop them from totally dropping the cable company.

It’s a tough time to be a cable company because margins on the cable product keep tumbling. But it’s starting to also be a rough time for the programmers. Probably the best thing that can happen to the programmers is for Wall Street to lower their stock price to reset the expectations for earnings performance. At that point maybe the whole industry can take a pause and see if they can salvage what is looking like a slowly sinking ship.

TV a Decade from Now

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I recently heard another consultant say that traditional cable TV as we know it will still be a very strong product a decade from now and that it’s far too soon for small cable providers to worry about the future of cable TV. That got me to thinking about everything that is going on in the industry and I come to a very different conclusion. I think TV a decade from now is going to be very different than today. There are so many major changes changes happening today, and while it’s hard to see through it all, I can’t imagine TV still be anything like what we have today a decade from now.

Skinny Bundles. While talking about cord cutting is interesting, last year new cord cutters were at most something like 2% of all cable viewers – that is not yet a revolution. The really big change in the industry is going to come from skinny bundles. These are the small packages that cable TV providers are assembling as an alternative to the 200-channel bundles. The cable companies are assembling packages of the most popular channels and are pricing them at $30 and $40.

I think skinny bundles are going to be wildly successful. Assuming that the skinny bundles contain a lot of what people want to watch, they will be a better option for most people than going to a pure OTT product like Sling TV. It’s easy to forget that people pay a huge penalty from breaking the cable company bundles and becoming a cord cutter can cost a family a $10 to $20 increase in their broadband price.

Skinny bundles are going to be significant because they mean that there are going to be a whole lot less viewers paying for the less-popular cable channels like the Tennis Channel or Discovery Health. I don’t think we should underestimate how much Wall Street is going to punish programmers if they start losing customers and revenues. We saw a little bit of this recently when it was reported that ESPN had lost 7 million viewers and Disney stock took a beating. I predict that as skinny bundles take off that we are going to see a number of lesser-viewed networks disappear.

Mega-Bundles. I think the OTT industry is going to have to consolidate in some way to be long-term successful. Already today it can cost more to buy the individual OTT offerings you want rather than just stick to a traditional cable package. In the long run, if each OTT package stands alone then many of them will fail from lack of viewers.

But I already see talk about the creation of the OTT bundle – a service that brings various OTT offerings together under one umbrella package. There are an incredible number of companies now making or planning to make original content. As somebody who only watches OTT content, it is already confusing and hard to find what I want to watch. So I expect that there will be bundlers that will bring original content from many sources together under one search engine – sort of like a TIVO for OTT content. I don’t really care if content is created by Netflix, Apple, YouTube or somebody else. If I could buy a service that would bridge the current OTT content into one package I’d buy it today.

Drop in Live Viewing. The continuing trend people watching less live television is going to feed into the above two trends. People are getting retrained to be less loyal to networks and are instead become fans of specific series or types of programming. Binge watching (or even just delayed watching) is becoming more the norm and there will be less and less programming that people insist on watching live.

The Trend. All of these trends together means that people are going to become less loyal to a given network and more loyal to specific content. And that is the change that will transform the industry. The programmers today have all of the power because they can force the cable providers to buy all of their networks. But if people elect options that avoid much of that content then the driving power in the industry will change from the programmers to the viewers.

Programmers are not going to able to sell things that people won’t pay to watch. The amount of new original content available today already provides an amazing alternative to traditional programming. And when you just look at the original content planned for the next year or two you can see that quality content might become the new driver in the industry.

The cable companies are not going to resist these changes, which might be a shock to the programmers. There is a decent chance that cable companies can make as much margin from skinny bundles as they make today from the huge bundles. And no cable company is going to be sorry to see the power of the big programmers get diluted by the change in people’s viewing preferences.

Is Cord Cutting Real?

2000px-Scissors_icon_blackNow that the 2015 cable numbers are final, we can take a fresh look at cable customer trends and at how real cord cutting might be. The best place to start to understand the number of cable customers has always been Leichtman Research, and they found that cable providers lost 385,000 cable subscribers for the year. This is more than double the 150,000 customers lost in 2014 and nearly quadruple the 100,000 loss for 2013. Leichtman says that number represents about 95% of the industry and they have no reliable way to count customers at many of the smallest providers.

The interesting thing about that number is that it differs from many other industry reports that report that the industry had turned around the losses from the year before . For example, right after the end of the year there were reports that the biggest cable companies had a net gain of customers for the year – and they did. But if one looks at those gains closer, it’s obvious that Comcast and Time Warner and a few other large companies put a major emphasis on adding cable customers after their stocks got pummeled in the spring of 2015 when Wall Street reacted negatively to news of cord cutting. Those companies spent a huge amount of advertising dollars last year to get their customer counts up slightly by the end of the year.

But outside of the biggest companies there were plenty of other companies with significant losses for the year. Cablevision and Cable One each lost 87,000 customers for the year and Mediacom lost 35,000. The private companies of Cox, Bright House Networks and Suddenlink together lost over 153,000 customers.

The satellite providers were interesting as usual. Dish reported losing 81,000 customers for the year and DirecTV gained 167,000, for a net gain of 86,000 customers for satellite. But Dish included Sling TV in their counts, and without that the combined loss for the two companies would have been 450,000 for the year. It’s really quite ridiculous to count an OTT service like Sling TV the same as a cable subscription since that is the type of service that cord cutters are changing to. And so, if we subtract out Sling TV from the national counts, the actual loss of cable customers for the year was actually over 900,000.

But even that is not the end of the story. Statistca reports that there were about 1.1 million new housing units added in 2015 (meaning single family homes, condos and apartments). If you assume that nationwide cable penetration is around 75% you would expect the cable providers to have added about 825,000 new cable customers for the year from those new housing units. And if they did so, then those additions would mask losses of cable customers elsewhere. So this would mean the industry lost an additional 800,000+ customers or a total of over 1.7 million customers for the year. I’m not sure why the people that count cable customers never account for the growth of the overall market.

Not counted in all of these numbers are the cord shavers and I don’t think there is any way to count them other than perhaps by nationwide surveys. All of the big cable companies have either added or plan to soon add a skinny bundle that to deliver over the cable system. While this is a really new phenomenon, the early reports are that these packages are really popular. For example, Verizon had one of the first skinny bundles and reported that a majority of their new FiOS cable customers in the fourth quarter of 2015 chose the smaller, cheaper bundle.

The skinny bundles are the cable company’s attempt to keep cord cutters connected to their systems, and it’s likely to be fairly successful. If the cable companies can come up with meaningful alternatives to the giant bundles then many people will opt to downside their cable bill.

But I doubt any of the cable companies are going to share the cord shaver numbers and the only place we might see it is by watching the average cable revenue per customer. But the cord shaving phenomenon is just as significant as cord cutting if customers are bailing on the multi-channel bundles and picking plans with a much smaller number of channels. That is going to drastically reduce the number of people watching many of the less-popular cable networks.

I guess my conclusion this year is that cord cutting is real and that it is accelerating. Cord shaving is probably going to quickly become a much more significant phenomenon as people decide to try to only pay for what they want to watch. And while cord cutting is not nearly as significant yet as the number of people that have fled landline telephones, the combined cord cutting and cord shaving is already large enough to start causing real disruption in the industry – and there is no reason to think it’s not going to get a lot bigger.

Video and Cable TV Trends

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

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

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

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

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

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

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

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

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

FCC Issues for 2016

Alexander_Crystal_SeerIn what seems to be the new normal the FCC has a lot of issues on their plate at the end of this year. Following are the regulatory issues that I think will most affect small telcos, cable companies, and ISPs in the coming year.

Net Neutrality: Assuming that the courts don’t completely overturn this, this is liable to be at the top of the list for several years to come. The ink is barely dry on the new rules and companies like Comcast, T-Mobile, and Verizon are pushing new products that will test the FCC’s resolve to implement net neutrality. And if the courts uphold the law, expect to see a slew of arbitrations between content providers and ISPs. If the courts overturn parts of the new rules, expect the FCC to take one more shot at fixing the parts that don’t pass court muster.

TDM to IP Conversion: This is an ongoing process that is looking at modernizing the backbone telephone network to IP. The large telcos like AT&T and Verizon have commandeered the docket to try to use it as a way to get rid of rural copper lines. The FCC has been micromanaging this process so far and there should be a lot of activity in 2016.

USF Reform: The FCC wants to transition the Universal Service Fund from paying for rural telephone lines to paying for high speed data connections. This process has already started but there is still a lot to be decided. Further, the FCC is facing a crisis in funding the USF and the latest USF contribution factor, representing the ‘tax’ on interstate telecom services, is up to an astounding 18.2% for the first quarter of 2016. The FCC is going to have to find some other ways to help fund this as interstate telecom revenues keep shrinking. This is becoming a big burden on carriers that are buying interstate special access.

Lifeline Reform: Lifeline is another part of the USF that is used to help pay for telecom services for low income households. The FCC decided last year that this should cover both telephone and data expenses for low income households and there is not enough money in the fund to do that. So this year they need to figure out a way to make it work.

Skinny Bundles and OTT: There has been a docket open for most of 2015 that asked for comments on how the FCC ought to regulate video services on the web. There hasn’t been a lot of talk about this for a while, but it’s likely that the FCC is going to have to do something with this in 2016, and anything they do will be groundbreaking. Further, the FCC is in the process of cleaning up their operating rules and Congress is also mandating that they resolve dockets sooner, so this is liable to be forced to come to a head in 2016.

WiFi versus LTE-U: The large wireless carriers really want to dip into WiFi to make cellular data connections using a technology they are calling LTE-U. In places where cellular data is already overloaded this would almost certainly swamp WiFi, making it hard for anybody else to use. The FCC is going to have to decide if and how cellular carriers might be allowed to do this. In a related area, the FCC is also likely to look at opening up new public spectrum next year.

Federal Legislation: While this is nothing to count on, there has been a lot of noise about seeing a new telecom act of some sort out of Congress. If that happens there is no way to predict what Congress might tackle. If a new law passes expect the FCC to get swamped with implementing new law like they did after the Telecom Act of 1996.