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22 June 2017

Pay TV glory days are over – US loses $1.8 billion

A barrage of more bad news for the traditional pay TV industry came out this week, as a new report found that the growth of global pay TV revenues slowed significantly last year, topped by losses in the US, which coincided with a major equities research firm dealing a blow to the cable industry by downgrading its valuation. The price of cable stocks has soared over the past few years, most of it justified, which has seen the value of cable smash through its ceiling of potential. Now it has finally leveled out, and will eventually have to make its dignified descent.

The report from Digital TV Research found that North America hit its pay TV peak two years ago when revenues reached $108.58 billion, but in 2016, these revenues declined by $1.77 billion in the region – the largest drop in revenues globally. The US is the trend setter, so what we can take from these findings is that in several years down the line, the rest of the world will catch up, reach its peak, then begin to fall. This may happen in some regions rather sooner than most people think.

The US is still the single largest pay TV market by some distance, but last year it slipped below the 50% mark for global pay TV revenues for the first time, accounting for 49.5% of global revenues in 2016. Back in 2010, the US accounted for 54.5%.

North America was hit hardest, according to the data, but while other regions fared better in 2016 for pay TV revenues, there was a slow-down in growth across the board, with only $1.23 billion in pay TV revenues added in 2016 for 138 countries, compared to the $32 billion that was added between 2010 and 2016, to total $202 billion.

An interesting takeaway from the data shows that MENA was the only region other than the US to see pay TV revenues decline from 2015 to 2016, dropping 0.2% to $3.52 billion, despite it supposedly being a key growth area. However, separate data from IHS Markit shows that MENA added 5 million pay TV households last year, resulting in record revenue growth. Turbulent economic conditions may have made accurate data collection difficult. So that number in 2015 was perhaps just a blip.

Of the $32 billion added in six years, the US brought in $7 billion, followed by China with $4 billion, Brazil with $3 billion, and India with $2 billion. Over the six years of pay TV glory days, Latin America has seen pay TV revenues grow healthiest, rising by 78% to $18.44 billion between 2010 and 2016.

However, revenues in Latin America grew just 3.65% between 2015 and 2016. In Sub-Saharan Africa revenues grew by 9.7% in the one-year period, while MENA was down 0.2%, Asia Pacific grew 5.3%, Eastern Europe grew 1.85%, Western Europe grew just 0.4%, and North America was down 1.6%.

The report conveniently came out in the same week that analyst firm MoffetNathanson downgraded its valuation of the cable industry to Neutral, applying the same rating to Comcast and other cablecos.

Comcast is a perfect example of the rise of cable, as its stocks have risen impressively over the years, shooting up by 169% over the past five years and 21.1% just this year. Second-placed US cableco Charter Communications, meanwhile, has seen stocks rise in value by around 54% in the past five years. However, shares have unsurprisingly dipped by around 3.4% for Comcast and 2% for Charter, following MoffetNathanson’s downgrade. We must remember that Comcast is also a studio, and has theme parks, which has helped it grow faster than most cablecos, and Charter has plenty of potential profit growth in squeezing more profit out of the previously badly run Time Warner Cable operation.

Company analyst Craig Moffet said, “Most bear cases we’ve heard for cable over the years have bordered on the apocalyptic. The video business will be crushed by the internet. The broadband business will be replaced by wireless. And so on. None of these bear cases are particularly persuasive, a more credible argument is much more pedestrian – the rate of broadband growth will inevitably slow, and likely at precisely the same time that video growth rates are also under pressure.” Not going to get an argument out of us, but we would add that they will enter cellular and grow market share, at the expense of the major MNOs, who are under all the same pressures.