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Media: Streaming Cuts Cable Deeper Than Ever

Cable companies have had to accept declining customer bases until they come up with a counter-punch against the rise of streaming and other cord-cutting services. From the beginning of 2015 through the end of last year, nine million Americans have either cut the cord or chosen not to buy a traditional cable package when moving into new households. Now, recently released earnings figures may foreshadow a more vigorous than expected move toward cutting the cord.

Charter Communications, which offers cable service under the Spectrum brand, announced on Friday that it lost 122,000 TV customers in the first quarter of 2018, exceeding projections of only 40,000 lost subscribers ahead of the earnings report. Comcast announced it had lost 96,000 customers for the quarter, its fourth straight quarter of subscriber losses, and slightly worse than analyst projections. AT&T’s DirecTV satellite service lost 188,000 customers in the same period, driving down video revenue by $660 million despite growth of its own online streaming service. Total cable subscriber numbers declined 3.4% over the course of 2017, a faster decline than in 2015 and 2016. Meanwhile, cable’s major antagonist, Netflix managed to net 1.96 million new subscribers.

Other services continue to capitalize on the trend too. Amazon now has more than 100 million customers for its Prime subscription service, which includes an offering of live NFL games available to stream. Google Inc. is ramping up its YouTube TV streaming service, an online bundle of cable channels that competes with the likes of Hulu Live and Sony PlayStation Vue. And Facebook and Apple have each set aside as much as $1 billion for original programming meant to lure more viewers away from traditional TV. HBO, the top video service for global subscribers, has begun implementing plans to secure loyalty in international markets by developing local, foreign-language shows from Spain and Scandinavia.

While the average household spent $106 a month on pay-TV service last year, up 3% from 2016, penetration of multichannel pay-TV services among households with broadband has fallen below 80%, a seven-year low. However, higher bills are probably bad news for the cable industry. Back when consumers began to complain about high costs and annoying ads, cable and broadcast executives responded by trying to stuff more ads into every viewing hour by speeding up or editing down programs. Instead of trying to cut down consumers’ bills, the average cable bill increased in price by 74% since 2000, even adjusted for inflation. All while the average income saw either tepid growth or remained flat. During this period, cable companies continually fomented distrust against themselves with opaque billing, rising fees, and bad service. In 2017, companies like Comcast and Charter, and Dish were voted to be among America’s most hated companies by their own customers.

On a positive note for the industry, big cable is in the process of changing its ways. Cable companies and other providers are finally working to offer “skinny bundles,” mobile-friendly packages that offer fewer channels at a lower price. While many of those offer the same additional tiers as their larger predecessors, consumers are instead supplementing with Netflix or other streaming services instead of replacing cable outright.

They’ve also begun cutting ads, whether by choice or necessity. National TV ad sales peaked in 2016, when they exceeded $43 billion, but sales fell 2.2% last year, and the firm estimates that they will fall at least 2% each year through 2022. By contrast, digital ad spending reached an all-time high of $88 billion in 2017 — a 21% increase over the previous year. Even in the face of declining sales, networks have actually raised the cost of advertising on their airwaves in recent years, but the strategy has been relatively ineffective since ratings continue to decline sharply. More pain could already be loaded into the pipeline, as the hottest shows on TV networks — which command the highest ad prices — are attracting mostly older viewers. This season’s top-rated show, the revival of “Roseanne,” has a median viewer age of 52.9 years. The network show with the lowest median age is “Riverdale” on the CW, at 37.2. Traditional TV is already well behind the curve in picking up younger viewership to sustain their future.

A final threat to the television industry is the ballooning content bubble; what insiders are calling “peak TV”. This year, an estimated 520 scripted series will be produced for broadcast, cable and over-the-top internet services in the U.S. That’s up 7% from 2017 and nearly 50% from just five years ago. As Disney and Apple prepare to launch their own streaming services, crowding the field with even more content, the threat of a shakeout could become very real. While this would threaten traditional TV and streaming services alike, the content war could pose a more significant threat to the former since their model is contingent on access to entire channels as opposed to digital streaming services that focus on access to the best individual series and content.

It may not be too late for cable companies to save themselves, considering they own most of the broadband that alternative services stream on. The response to a decreased customer base for TV could be to raise prices for internet service, but that could end up backfiring, as some are just beginning to have some success with their own streaming services. The most impending question going forward for big cable is whether customers will want to stick with the same providers that many have garnered a distaste for over the last two decades.

Investors can gain exposure to streaming services via the Dynamic Media ETF (PBS) and telecoms via the Telecoms ETF (IYZ). Some publicly listed cable companies that will be effected by the transformational changes in the multimedia entertainment market are Comcast (CMCSA), Charter Communications (CHTR), and AT&T (T).

 

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