At first sight the latest bout of churn afflicting almost all legacy US pay TV operators is just more of the same and the next chapter in a long-term story of decline that began in 2012. But this time there are two other worrying factors for operators, one being that now long-term revenues are falling as well and the other that large numbers of remaining pay TV customers indicate they may churn in the near future.
Until quite recently operators such as MSO Comcast, as well as DTH DirecTV, even until after its $49 billion acquisition by AT&T completed in 2015, were able to console themselves that revenues were still increasing. This reflected early deserters being the lower tier customers lured by skinny bundles, leaving the more profitable customers with the effect of actually boosting ARPU. This trend continued for some operators at least into this year, with AT&T reporting video entertainment revenue up 2.1% at $9.15 billion for the year up to Q2 2017.
But that trend has now gone into reverse, with OTT or SVoD operators like Netflix and Amazon taking up some of the slack, but not enough to stem an overall revenue decline. In 2010 total US pay TV revenues were just short of $90 billion, with the then emerging OTT and SVoD players accounting for just $1 billion of that. Overall revenues were still growing quite strongly at that stage, reaching $106 billion by 2014 with the OTT/SVoD category by then $3.5 billion. It now looks like overall US pay TV revenues are peaking at $114 billion in 2017, with OTT plus SVoD taking around $11 billion. We are then into forecast mode, but a consensus of predictions indicates revenues just easing down to $114 billion in 2020, with the decline then accelerating to $103 billion in 2022. By then OTT plus VoD will be above $20 billion, but even then, only about 20% of total revenues, which serves as some reality check. This compares with online services accounting for 8% of US subscription video revenues in 2016.
Of course most of these forecasts assume that the rate of movement towards OTT video does not accelerate, and it may well.
It is also worth noting that while this trend of revenue and subs decline is less evident in the rest of the world, the US still accounts for about half of total global pay TV revenues. That share of course is also declining in line with the US pay TV slump and in fact during 2016 slipped below the 50% mark for the first time in the industry’s history. This trend will continue but even so on current projections the US will still account for at least 45% of global pay TV revenues in 2022.
Apart from revenue decline the other concerning trend for legacy US pay TV is growing softness among those customers that have so far abstained from cord cutting. A recent survey by RBC Capital Markets of 1200 US consumer sampling the whole population including those without pay TV services found that 21% of current cable, satellite or IPTV customers were considering switching to a lower-cost online TV service such as Hulu’s Live TV, Sling TV or DirecTV Now. It also found that only 55% of all consumers expressed long term commitment to legacy pay TV.
Given there are around 126 million US households this equates to an ultimate floor of about 69 million subscribers for traditional pay TV on the basis of current intensions, compared with the current total of 99 million. This does suggest the current exodus, which numbered 2 million in 2016, is likely to accelerate. It is worth noting that 119.6 million or about 95% of US households have a TV, according to Nielsen’s National Television Household Universe Estimates, so already a lot are combining FTA content with OTT.
In fact, the latest numbers are concerning because they indicate this acceleration is already occurring. The top 10 US operators, excluding Cox Communications which does not report subscriber numbers, lost 835,000 or almost 1% of their total over Q3 2017. That would translate to about 4 million a year for the whole US legacy pay TV sector, about double the rate of 2016. All of the big four lost a lot with AT&T’s DirecTV faring the worst, down 251,000 to 20.61 million. Comcast lost 134,000 to 21.34 million, Charter Spectrum 104,000 to 16.54 million and Dish Network 129,000 to 13.2 million. The fifth biggest, Verizon FiOS, was the least bad performer but even so shed 18,000 subs to end the quarter at 4.65 million.
These figures do indicate that the profile of decline has changed. In terms of penetration the decline can be traced back as far as 2010 rather than 2012. In 2010 penetration in terms of households peaked at 88.7%, slipping to 87.1% by the end of 2013 as total subs stalled while population continued to grow. But in those early days MSOs bore the brunt of the decline while satellite operators, especially DirecTV, held up well, as did IPTV providers. During 2013 the top 8 cable companies shed over 2 million subscribers between them, while satellite edged up 170,000 and IPTV was still rising strongly by 16% to reach 10.8 million.
But now satellite is being squeezed the most with DirecTV and Dish Network losing higher percentages of subs than Comcast or Charter Spectrum. IPTV is also suffering, for while FiOS fared not too badly, AT&T U-verse was down 134,000 over Q3, the biggest percentage loss of all. This particular trend, a swing in loss momentum from cable to satellite and IPTV, reflects how the early losses were those lower net worth customers concentrated mostly across the MSOs. Now losses are eating into the firmer subscriber base across all sectors and also the coming of age of OTT for delivery of linear as well as on demand content. These operators are mostly enjoying some of the OTT dividend, although neither revenues nor profits atone for the loss of legacy subscribers as business continues to erode to stand alone OTT or SVoD operators.
AT&T is suffering on multiple fronts, since the once all-conquering DirecTV in Latin America is also under pressure. The Latin American pay TV market exhibits marked country differences in penetration, ARPU and dominant distribution medium, but growth in subs has generally ground to a halt after years of steady growth. Currently the region as a whole has just over 74 million subs according to Dataxis, with America Movil now top at 30%, followed by AT&T through DirtecTV at 27% and Televisa Group third at 25%. This dominant big three have been fairly flat recently, but signs of decline have emerged with America Movil losing 1.3% in Q2 2017 alone and AT&T down 0.6%, while Televisa managed 0.3% growth.
The greater concern for AT&T is pressure on subs, which in most of the region’s countries have historically been remarkably high compared with other relatively developing regions. AT&T still enjoys the highest ARPU of $35, while America Movil’s is $27.3 and Televisa, which is competing hard on price to gain market share, on just $13.5. ARPUs have been drifting down in Latin America and pressure on them is increasing.
Europe has also been spared the ravages of cord cutting so far with pay TV subs still rising and set to continue to do so until 2022 according to almost all analysts. Two things are certain, firstly that Western Europe passed the 100 million subs milestone around the middle of 2017 and secondly overall subs growth is being sustained by countries, including Germany, Italy and Spain, where pay TV penetration has been lower. Looked at another way, subs growth is also being driven by IPTV, which is putting on well over a million subs a year at the moment, at the expense of satellite which is shedding around 200,000 a year. Cable is rather flat but with a migration from analogue to digital in those countries where switchover is occurring.
However the European market is much more like the US in terms of revenue, reflecting downward pressure on package prices. Most forecasts see European pay TV revenue being flat at just under $30 billion annually over the next few years.
This leaves Asia Pacific as the principle engine of revenue growth. Ovum has issued the most bullish forecast, predicting that annual pay TV subscription revenues in Asia Pacific will soar by 49% to scale $70 billion in 2022. Other estimates are more conservative, but strong growth is a given, with the big three markets of China, India and Japan accounting for around two thirds of revenues. ARPU is another matter with little sign of much growth from the very low levels prevailing in China and India especially, although in Japan and also the more affluent countries such as Singapore and South Korea, it is more in line with Western Europe and the US.
Common to all regions is a swing towards online platforms and the most successful pay TV operators will be those that exploit that most effectively without cannibalizing existing legacy revenues too rapidly.