Change is coming to the pay-TV business. It’s going to be a bloodbath — and not everyone will survive.
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There will be blood. A lot of it.
Last week made clear — between HBO and CBS announcing plans for a streaming service that bypasses pay-TV distributors and Netflix's failing to meet subscriber targets — that the television industry's "Red Wedding" is here. Change is coming to the pay-TV business; we just don't know what it is going to look like. And a Game of Thrones level of blood is going to be shed before we do.
There are still a few rusty arguments in support of the "bundle" of channels that you're stuck buying from your cable company — it's cheaper, they say, to get CNN, MTV, Animal Planet, and Food Network, whether you want them all or not. Choosing individual channels would be more expensive. Networks aren't going to blow up their extremely lucrative relationship with distributors. It is unwieldy for consumers to manage multiple individual subscriptions.
But these arguments all presuppose the same thing: Pay-TV distributors and network operators just absolutely have to — as a kind of law of nature — make the same amount of money they do now. The truth is that they won't. Some of the weaker distributors and networks are going to die, others will shrink considerably. A lot of financial pain is ahead.
Needham & Co analyst Laura Martin wrote in a widely read report last year that most consumers receive about 180 channels under a typical pay-TV subscription, though they only watch about 18 of them regularly. To maintain all 180 channels under an "à la carte" system, consumers would have to increase their annual spending on TV to $1,260, up 75% above the $720 per year they currently spend.
Consumers aren't going to pay that. Viewing habits, particularly among younger generations, are shifting to computers and mobile devices, making a smaller, cheaper, streaming-only video bundle inevitable. But inevitable doesn't mean imminent. It's not like distributors can randomly choose networks to put into a smaller bundle and start selling them. And it's not like programmers can just start handling all the billing and customer service and administrative functions that distributors currently take care of for them. As a result., distributors and programmers are headed for a messy fight, with contracts and hit shows (or lack thereof) among the leverage points each side will use to keep the balance of power in their favor while managing the transition.
The music industry offers an imperfect analogy for what is about to unfold in the television business. Surely the major record labels, which gouged consumers for years with $18 compact disc prices, would have loved to maintain their level of revenue and profit generation after Napster and iTunes and Pandora and Spotify and all the other digital delivery services came along and unbundled the album. Instead, music sales in the U.S., the industry's largest market, have shrunk by more than 50% in the last decade, from nearly $16 billion in domestic revenue in 2003 to what will likely be around $7 billion this year. The major record labels dwindled to three from five. EMI, home to The Beatles and Beastie Boys, vanished after more than 80 years in existence. New deals with artists and radio and concert promoters grew from the technological changes, as did new revenue lines, but they are far from replacing what was lost, and it is unlikely that they ever will.
The only reason the television business has been able to hold off the digital insurgency for so long is because, unlike in music, distributors and programmers have a reason to work together. Their businesses are built on a virtuous flow of money from one side to the other. Networks charge distributors increasingly higher carriage fees, and the distributors pass those costs along to consumers, one reason for the standard 5% increase in cable bills annually.
But there's no reason to believe that the television industry can reverse its current trajectory any better than the music industry. Lots of reports, like this one and this one, have suggested that part of the reason HBO and CBS went over the top is to actually strengthen the status quo and extract more money from pay-TV distributors.
That may be true in the short term, but in the long run, once consumers get a taste for not just a new but also a better way of getting what they want, you've already lost the war. Empires can only be defended for so long after the people rise up before they fall. Now it's just a matter of how many casualties there will be. In terms of the battles, here's a look at what's ahead in the coming years.
A recent comScore study found that one-third of all television viewing done by 18- to 34-year-olds happens on a computer or mobile device, not a traditional television screen. Twenty-four percent of people polled in that demographic don't subscribe to a traditional pay-TV distributor, yet 61% of them are paying members of a digital video streaming service like Netflix or Hulu Plus.
What this means is that there isn't a lot of content, other than sports, compelling consumers to watch television on a scheduled date and time. Younger consumers, whose viewing habits are going to become the norm rather than the exception, are perfectly happy to delay viewing watching something when they want and how they want, ad-free.
"There is no doubt that Netflix has caused a meaningful change in consumer TV consumption behavior," wrote BTIG analyst Richard Greenfield in a report last month. "Time previously spent watching live, linear television is now being spent on Netflix, Amazon, Hulu or other binge watching vehicles (such as VOD). Consumers are now building their own personal TV 'bucket lists' of what they want to watch, when they want to watch it and on the device(s) they want to watch the content."
Put another way, the TV business is becoming an on-demand business, not just for companies like Netflix, but also the traditional pay-TV distributors. Comcast, for instance, is happy to tell anyone who will listen that its subscribers have viewed on-demand content more than 30 billion times on its platform.
Other data points, among them the continued ratings erosion for primetime programming, the push among network owners for delayed viewing up to seven days after a show debuts to be counted in the ratings, a weak broadcast and cable upfront advertising market, and a decline in pay-TV subscribers for the first time ever last year despite what many are calling a "Golden Age" for TV programming, also prove that streaming is becoming the dominant form for TV viewing.
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