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Cord cutting, ARPU & ratings spell death for the mega-channel

Content owners, and particularly broadcast networks, find themselves in a world that’s evolving faster than they can, and pressures to rethink the multi-channel business model is greater than ever. Accelerating cord cutting, rising ARPU and the continual erosion of linear TV ratings will see big media firms shaving down some of their content offerings.

Two reports out this week underscore how dire the situation has become for pay TV. Cord cutting is increasing – and in fact is accelerating. US pay TV providers lost nearly two million subs in 2016, according to data from S&P Global’s Kagan. The stunning losses in 2016 follow about another million or more lost in 2015.

ARPU, meanwhile, continues to increase year after year – driven largely by increases in content fees. Pay TV ARPU has risen steadily each year between 6-8% according to estimates, compounding the subscriber losses with cord-shaving. This has created a vicious cycle for pay TV providers and their content partners: In 2009, ARPU averaged $69 per month, but by 2016, ARPU had reached $92, according to data from IHS Markit. And as prices for pay TV continue to climb, while appetites for big bloated channels continues to dwindle, cord cutting and subscriber losses will continue.

And consumers continue to shave off time spent watching live linear TV quarter after quarter, according to Nielsen data. US adults watch about 4.5 hours of live TV per day, as of Q4 2016, a considerable reduction from the heady days of 2010. Fragmentation across audiences, meanwhile, is deepening along cohort lines. Viewers over 50 years old now spend double the amount of time watching linear TV as consumers 34 and under. Viewers under 24 have substantially reduced the amount of time spent watching linear TV; children 12-17, for example, now watch an hour less than they did back in 2013.

Content owners are feeling the pressure from these three trends. Now that the world exists in an anytime, anywhere, on-demand ecosystem, the legacy of 20-channel content stable is facing extinction, as struggling media firms seem to have finally realized they need to adapt to survive.

Viacom, who owns 16 pay TV channels, has become a canary in the coal mine for pay TV. Its younger-skewing target audiences have been the first to abandon linear TV. Even one of the strongest of its 20-something channels – MTV – has lost 30% of its audience over the past three years. In response, Viacom has begun licensing different channels to interested parties. And earlier this year, the company announced it would only focus on six of its core brand channels (Nickelodeon, Nick Jr, MTV, Comedy Central, BET and Spike) in a strategic pivot to keep distributors happy by introducing more flexibility into licensing agreements.

Similarly, NBCUniversal has announced they’re closing two lesser-performing channels, Cloo and Esquire Network. Here’s to betting we’ll see more networks take similar steps in the coming years. In fact, an IHS analyst we spoke to predicted we’ll see “a significant reduction in choice” of content from the traditional providers in the future. “When we reduce the number of people paying these higher ARPUs, we’re going to reduce the number of channels available,” he said. “I think it’s plausible that we move from today’s thousands of TV channels available on cable, satellite and IPTV systems, down to the level of a few hundred main channels, like it was in the early 90s.”

On the Internet, by contrast, content diversity is thriving and traditional content owners are actively pursuing other forms of revenue such as streaming video services and digital video – where all the growth in video consumption resides. This has meant that some pay TV channels, like HBO, Showtime and Starz are now functionally available a la carte to stream. But the efficacy of putting one’s best channels online isn’t quite as obvious as putting one’s most niche channels online. Longtail content easily finds its audience online.

And in a world of fragmented audiences, it may make more sense for content owners to bundle together their genre-specific channels for OTT platforms. That’s what Time Warner-owned properties Turner and Warner Bros are testing with the launch of Boomerang, a cartoon-filled $4.99 per month streaming video service that targets the youngest demos. Disney, incidentally, launched a similar children-geared OTT service DisneyLife in the UK in 2015, but hasn’t seen need (yet) to do so in the US.

Other content owners are turning towards (and at times against) one another. Viacom, AMC and Discovery are reportedly in negotiations now with service providers for a new entertainment TV OTT service. The content owners are interested in excluding sports programming and networks like ESPN from the package. That may be because sports programming is some of the most expensive to license, and consequently tends to drive the price of the package up. The argument Disney uses for charging $8 per subscriber for ESPN is that the content is some of the most popular. But just as Viacom has had to face the writing on the wall, Disney will soon need to as well, as ESPN faces subscriber losses, revenue drops and ever-increasing spots rights fees.

With or without sports, the market for skinny bundles has remained relatively small because the skinny bundles currently available don’t actually address what consumers are demanding: more flexibility and choice in the content they receive. Skinny bundles are just pay TV “lite” options.

“They’re doing the same to us as pay TV: somebody else is arbitrarily making decisions about which channels go in which tier,” said JackDawson analyst Jan Dawson. “But what consumers want is everything in your bronze tier and these three channels from your silver tier. None of this gets solved with these skinny bundles, and in some ways they make it worse because they give you this promise of choice and the better user interface, and they face you with a lot of the same quandaries.”

It’s only a matter of time before a radical revenue remix will be needed for content owners. Traditional media firms are “the next retail,” according to Bernstein financial analyst Todd Juenger. “Our view is that old media is indeed the next retail – but media’s demise will be slower because pay TV is a subscription model whereas retail is a transaction model,” he said in a report last week. “It won’t be long before an increasing number of investors begin thinking of TV network companies as another sector that is largely ‘un-investable’—at least until valuations come down and yields come way up,” Juenger said.

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