Skip to main content

The Pressure on Pay-TV

Tom Butts is the Editor in Chief of TV Technology.

Even though we have more options than ever before, Americans still consider television their first choice in home entertainment. According to Nielsen, television viewing increased 22 minutes per person over the past year, with the heaviest viewers averaging nearly 10 hours a day.

Behind the numbers though, lies a stark reality for the pay-TV industry: viewers are opting out of expensive cable and satellite subscriptions and opting for more choices via broadband, through dedicated streaming boxes like Apple TV and Roku and, more increasingly, game consoles, especially Microsoft's Xbox 360.

It's likely that those Xbox users could be counted among a newly identified and growing market sector, recently defined as "cord avoiders" and "cord nevers." This is the next generation of media consumers that disdains the idea of paying for a schedule of programming they see as becoming less relevant in their lives. A recent report from Credit Suisse spelled out these characteristics in sobering detail.

The researcher predicts that subscriptions to multichannel providers will contract by approximately 200,000 in 2012, whereas it had previously expected subscriptions to increase by nearly a quarter million. And although the size of the pay-TV market has grown by 1.25 million over the past year, the total number of multichannel subscriptions has remained flat.

By now, we're all familiar with the recent debates over "cord cutting," whereby budget conscious consumers are dropping pay-TV subscriptions in favor of a video environment that includes a mix of IP-based video options and over-the-air TV. The fact that pay-TV subscriptions haven't dramatically declined (the so-called "churn" effect), has led cable and satellite executives to scoff at the idea that the trend is a threat.

But Credit Suisse doesn't attribute the lack of growth to churn, but rather what it identifies as an "anemic" level of new subscriptions. And it blames this development on the fact that fewer and fewer younger consumers are signing up for pay-TV services.

"The real challenge to the pay-TV business model are behaviorally-driven 'cord-nevers,'" the researcher said. "These are tomorrow's householders that are in their teens (and younger) today. They are growing up in an Internet-based video culture in which the mantra of 'why pay for TV?' and 'pay-TV is a ripoff' develop. As they age, some of these consumers will choose pay-TV substitutes (imperfect as they may be) to satisfy their video needs, potentially damaging tomorrow's pay-TV gross adds stream." Credit Suisse concludes that "other than content rights protection and content cost growth, we view the generational culture shift surrounding video consumption as the biggest challenge pay-TV will face over the next 10 years."

Since their broadband offerings are limited in comparison to cable, it would appear that the satellite industry could be most threatened by this trend. Increasingly, younger consumers are looking to companies like Comcast and Time Warner as broadband providers that offer a scheduled programming service "on the side" that costs too much. Cable operators, also under the gun for failing to control higher costs imposed by ESPN and regional sports networks, are responding with cheaper programming packages. Is a la carte far behind?

Where do broadcasters fit in this scenario? Despite the tenuous relationship broadcasters have with their cable and satellite brethren, we should not be encouraged by this trend—our two industries are closely aligned and depend on each other more than we perhaps realize. Sure, some "cost nevers" and "cost cutters" are finally discovering the economic freedom that comes with getting free TV over-the-air, but the size of that audience is still fairly small when compared to the entire television universe. Consumers not only want more programming choices, they want it cheaper and on a variety of platforms, and satisfying that demand will be the main challenge going forward.

* * *

Up until a decade ago, the term "multiscreen" meant you had a second or third TV set in the household. Now, with viewers watching TV and simultaneously using tablets, smartphones and laptops for their entertainment, the term means so much more.

Acknowledging this increasingly important trend, we're introducing a new column in this issue, "Multiscreen Views." Penned by noted industry analyst, and frequent TV Tech contributor Gary Arlen, the monthly column will explore and debate the issues surrounding the multiscreen phenomenon and where broadcasters fit in this market.