Twilight Arrives for the US Video Market

Brian Sullivan, the current CEO of 21st Century Fox (21CF), is uniquely placed to talk about the changes in the North American pay-TV landscape. As the previous CEO of Sky Deutschland and one of the architects of BSkyB’s rise in the U.K., he has seen changes first-hand, and what this could mean for satellite players. From a broadcasting perspective, he admits he doesn’t see 21CF’s demand for satellite bandwidth increasing.

Sullivan says entertainment has irreversibly shifted to an on-demand model, which is well-suited for IP delivery. “This is invariably going to cause a decrease in demand for the historical satellite services on the entertainment side over time. It probably won’t be as fast as everyone thinks, but it is a one-way path. That should be a triggering for a reconsideration of the best use of this incredibly valuable capacity they have in terms of satellite. Bandwidth is bandwidth,” he says. “There is always a need and demand for it. There must be a way for those organizations to reinvent themselves. They will come up with things we already know about, and they will come up with things that we don’t know about, or haven’t considered. There is going to be demand for that bandwidth. It is just not going to be the model we have seen over the last 10-15 years.”

Ian Olgeirson, the Research Director at Kagan (a research unit of S&P Global Market Intelligence) says that while they anticipated a measured and persistent erosion, the pace of decline in pay-TV subscriptions has somewhat exceeded S&P Global Market Intelligence’s expectations. “Pay-TV providers have been slow to react to changes in consumer habits,” says Olgeirson. “They were late to the game with improved interfaces, their customer service continues to offer a flash point for dissatisfaction and they have been slow to move away from the big subscription package. That said, 70 percent of occupied households in the United States subscribed at the end of the third quarter 2018, so there is clearly still broad appeal.”

Traditional multichannel subscriptions including cable, telecom, and Direct Broadcast Services (DBS) have been declining since 2013. Losses accelerated annually through 2017, and appear to have levelled off in 2018 — though, at elevated rates. Olgeirson anticipates continued losses in the outlook as consumer preferences shift from traditional big subscription packages.

Sullivan believes that pay-TV penetration in the United States peaked in 2009, and then started to show a slow but steady decline, losing roughly two million homes from the ecosystem every year. But, there could be hope for these players. More recently, Sullivan has seen some developments that have given some hope that this is not a permanent trend. “If you look at Comcast and their Xfinity product, they now have a top-class customer experience, with a properly modern user interface, that matches anything in the digital world,” he says. “As I understand it households with the X1 platform have held up far better than the industry average, but other providers, who have not modernized their offerings, have absolutely been seeing declines.”

Frost & Sullivan Principal Analyst Dan Rayburn echoes this somewhat optimistic tone. “The businesses are not in bad shape,” he says. “Companies like Comcast are having record profits in each quarter even if they are losing pay-TV subscribers. Why are they still having record profits? Because prices go up on other services. So, you really have to look at the whole business of what is being offered and what the financials are. The biggest thing is that consumers have choice and flexibility. There are so many different options. Last year, every major streaming service increased prices by $5. Netflix has just raised its prices. The bottom line is that content is very expensive.”

Olgeirson believes traditional providers still have a majority share of U.S. households. But, he warns that it is eroding fairly rapidly. He expects traditional providers to retain a majority share in the five-year outlook, but lose the top spot to alternative services in the extended forecast beyond this timeframe. He also believes satellite players could be vulnerable. “Losses to traditional satellite multichannel services are piling up. Without a broadband bundle they are vulnerable to customer defections. This has contributed to a total drop of nearly 3.4 million subs in the trailing two years ended with the third quarter 2018. AT&T has signaled a plan to move away from satellite distribution for DirecTV and both major satellite players offer virtual multichannel alternatives in Sling TV and DirecTV Now, underpinning expectations for continued losses going forward,” he says.

So, with satellite pay-TV showing significant subscriber declines in North America, what does the future hold, and what does this mean for the satellite industry? Sullivan talks about the emergence of a new category, called Virtual Multichannel Video Programming Distributor (vMVPDs) These are hybrid live and on-demand streamed services, built with modern integrated digital user interfaces, but with a more concentrated content offering, and at a price that sits somewhere between the traditional cable and satellite packages, and low-cost Subscription Video on Demand (SVOD) services. Players in this area include DirecTV, Sling, Hulu Live, and YouTube Live.

“In total they have about seven million customers now, and have grown fast as a category, attracting not just switchers but also bringing back those that have ‘cut’ in the past, or never even had a subscription. When you include these services in the whole pay-TV universe, they have effectively stemmed the decline over the course of the last 18 months,” says Sullivan. “It is early days, but who knows, it could even increase pay-TV penetration in the future. There are some people that think this vMPVD category will get to 20-25 million households. If that happens, we will have a very different landscape in the United States. With that being said, there are a lot of people that like a big triple play bundle, and that will likely be the primary means of distribution for a long time to come.”

But is it possible for this category to reach 20-25 million North American households? Sullivan believes so, and also in that some these traditional pay-TV operators will play in this vMPVD world. He notes that there is already evidence of this. DirecTV owns DirecTV Now, and Dish owns Sling. He asks, “is there any reason why Comcast or Charter would not do anything on a national basis in the future? There are going to be a lot of models that develop over time. Technology has allowed us to offer services that fit the consumer much better. There are millions of consumers, and therefore, there are going to be multiple services to deliver to their tastes. But, you can have a single service that is customizable to make it a unique service for that consumer,” he says, adding that the industry’s fundamental business model ten years ago was based on forcing the consumer to conform to structures that are no longer sustainable. “We must deliver services that are fair to the consumer and fair to the content creators. That is where we are heading and that is much more sustainable going forward.”

ABI Research Senior Analyst Michael Inouye says there is certainly a growing number of households that have decidedly different viewing habits than those who more closely align with the more customary household. “These households can be referred to as ‘cord-nevers,’ versus cord-cutters who might churn from cable TV services but elect to go with a vMVPD — which provides a similar experience, but perhaps in a way that better fits their needs.” he says.

Content is King — the King is Dead, Long Live the King

Broadcasters may think they need less satellite bandwidth, but the battle for the hearts and minds of the U.S. consumer/viewer shows no sign of slowing down. Rayburn admits that while satellite operators are selling less bandwidth in regards to video, controlling content will be key to a successful future for broadcasters and pay-TV operators. “What all these pay-TV operators and satellite players have realized is that they have to control the content. Why did AT&T buy Time Warner? They realized they just can’t provide bandwidth and pipes. We need to start controlling content, bundling content,” he says. “You are seeing Warner Media and Disney coming out with new things. These companies realize they need to control the content. That is why we are seeing so many acquisitions in the market. That is why in the future we will see a small handful of satellite/pay-TV operators really controlling the market, bundling content with other services.”

There will increased fragmentation in the market from big brands, according to Rayburn. Consumers will have to look at brands such as Hulu, Netflix, Apple, Google, Disney, Amazon, among others, to piece together their own package. “The idea that the industry will have some kind of aggregator where you can pick and choose what service you want [is false],” says Rayburn. “You won’t. It is not going to happen. These companies are competing against one another.”

Sullivan says there has always been an innate consumer desire to watch shows at their preferred timing and consumption patterns, and technology has been trying to deliver this for over 25 years. “It is IP and streaming that has finally got us there. So, whether it is a content company like Fox, or a distributor like a cable or satellite company — if they have not already integrated on-demand into all their models by now, they are going to lose. The consumer finally has all the power,” he says. “They always did, but the technology has caught up to unlock it. That power is never going back. They simply will not be forced to adapt to the outdated paradigms of 5,10, 20 years ago. It is only those companies that adapt their business models to deliver what consumers have clearly voted for with their wallets and their eyeballs that will succeed.”

The Future

ABI Research Senior Analyst Michael Inouye Research believes that in the next few years, we will see continued growth from Direct-to-Consumer (DTC), vMVPDs, and Over-the-Top (OTT) models. The arrival of 5G, at least in the latter part of this timeframe, could encourage more mobile viewing. But at this point, there is nothing too seismic or revolutionary, he adds.

Inouye expects to see more companies looking to make a play to serve as a content aggregator — not in the same vein as a current operator with pre-packaged content, but rather a platform that can serve as a true hub to help connect all of the consumer’s various sources of content. “We might also see stronger integration into new services/features like smart homes. The rise of virtual assistants in particular is an interesting proposition for operators, retailers, and advertisers to find ways to engender new and more lucrative revenue opportunities,” he comments.

But, it could go beyond this in the future. “I would look at things like Augmented Reality (AR) and what some are calling the pervasive or ubiquitous screen,” he says, “Some expect multiple displays throughout the home, office, mobile devices, and in public to show content. Wearables, like AR glasses (when the form factors become consumer friendly) could essentially project virtual screens anywhere and this will completely change when, where, and how we interact and view video content. Again, this is even further out than a few years, but something to keep in mind as some of these foundational building blocks begin to get placed.”

Inouye adds that an increasing amount of attention is being devoted to advertising technology to help narrow the gap in revenue opportunities between OTT video and what is available from traditional broadcasts. “Live streaming however is still comparatively nascent so it will take time before the TV ad dollars significantly shift to digital/online. Even in the U.S., despite declining subscriber numbers, a large number of households are still watching linear programming through traditional means,” he says. VS