US OTT rise countered by pay TV massive fall during 2017

Every time you see a headline which suggests that everything’s okay in the TV market and that broadcast TV and traditional DTH and Cable, will continue to be the dominant forms of TV – pass it by. It’s not right. OTT is on the rise.

Whatever happens with the rise of OTT video in the USA, it will have at least some bearing on the rest of the world, although for the most part, many markets are somewhat differently developed in OTT video than the US.

Take for instance the dominance in Europe of free to air TV catch up video, which is almost universally free, whereas it is paid for in the US, at relatively high rates. In Asia, free to air catch up is also free, but TV Everywhere is not, instead a small premium is charged unlike Europe or the US, and in those markets data is never zero rated when video travels over cellular networks.

There are similarities however in the rise of OTT video, and the most significant fall in Q1 2017 of pay TV customers is the biggest indicator yet of what the future holds for pay TV in the US, and therefore the world.

We have extrapolated this fall in the graph above, with a simple linear forecast, which shows what happens if the Q1 2017 fall, of some 812,000 pay TV customers among the top performing pay TV operators (MVPDs), continues at the current rate of decline.

In the whole of 2016 pay TV operators only lost 629,000 customers, and back in 2015 there were actually gains of over 88,000. This is somewhat confused by the practises of some of the reporting companies – like Dish Networks and Comcast – as these continue to count TV Everywhere customers in among their traditional pay TV customers, while AT&T separates them out.  Without guessing and applying only the published numbers, this fall is bad enough. If the OTT TV Everywhere numbers were reversed out, then the subscriber losses are already well over 1 million a quarter, certain to make things worse than the official figures suggest.

If each of the following quarters in pay TV in the US perform in much the same way, and there is no worsening, then some 3.2 million total subscribers will cut the cord during 2017. At the rate of change (and the rate may accelerate) in 2018 we will lose a further 5 million pay TV subscribers, and each year after that the losses will be a rapidly increasing percentage of a falling number – 8 million in 2019, 9 million in 2020, then a further 10 million in 2021. That would leave the US with just 53 million paying subscribers to traditional broadcast pay TV.

People keep saying that revenue is still rising, and that traditional TV carries most of the advertising revenue. At present, rising ARPU is concealing the falling ARPU in OTT services, among a small percentage of cord cutters. As the percentage of cord cutters rises, this will become highly visible.

The flip side of the coin, which is why there is such rabid investment in OTT video in the US, is that the 110 million OTT customers, made up of 86 million SVoD subscribers and another 24 million TV everywhere regular users in 2016 would begin growing rapidly.

Faultline’s research arm Rethink OTT Intelligence (email [email protected] for subscription details) forecasts that this will rise to a combined 195 million by 2021, made up of 147 million SVoD subscriptions and 48 million TV everywhere subscribers – almost all US pay TV subscribers would by then be regular users of TV Everywhere at this point,  and somewhere during this period – off-footprint TV Everywhere style services will become a paid offering to a wider audience – as in an internet MVPDs, so that the total number of customers can go beyond those reached of the MVPD. So, Comcast might sell Stream to AT&T broadband customers and so on and still have 100% of its footprint on X1 boxes, so have 110% of customers taking its TV Everywhere. Those not taking traditional cable would therefore not get it for free, it would be a paid option.

At present pay TV operators think that offering such an OTT service is just a precursor to bringing customer into the cable fold. By the time we get to 2018/2019 this will be such a huge proportion of the MVPD’s business, that it will be considered a replacement revenue – in the same way that digital cable was considered a replacement for analog cable.

We actually think this fairly linear forecast is simplistic and does not take into account lower pricing in the coming video price war, zero rated data, the emergence of mobile first TV, the drift into cellular by Comcast and Charter, and their future ability to offer zero rate video on their OTT services and the launches, as yet untried, of both YouTube TV and next gen Hulu. Chances are that SVoD subscriptions will rise faster than we have forecast, although the fall in MVPDs subscription is unlikely to be any faster than this forecast.

Faultline Online Reporter’s ROI service offers an OTT research service, which will publish a global OTT report over the next few months, and which today is launching our 2017 Asian OTT Report and Forecast to go alongside our recent European Report and Forecast, which came out during March.

One of the big questions in the Asian report is how well Netflix will fare given that it is overpriced for Asian markets, and up against multiple rivals who have not waited for it, but gone out and grabbed half of the Asia Pacific market. Here is a sample graph of the Rethink Asia OTT 2017 Report and Forecast, which shows how the only major Netflix success is likely to be in Australia, where it is already exceptionally successful, partly due to the dominance of the English language in that market, although it will see some improvement across the board.

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