Full year results for key TV operators in the US have shown that subscriptions to linear pay TV services are continuing to decline. Subscriptions to TV and online video services are estimated to have fallen by 675,000 subscribers over 2017 – a year-on-year decline of 0.7%. This represents an improvement on the previous year, which saw declines of over one million pay TV subscribers. The year did see growth in broadband-delivered live TV services such as DIRECTV Now, Sling TV, and PlayStation Vue, however. Total subscribers of these services, along with newer entrants Hulu Live TV and YouTube TV, amounted to more than 5.3 million by year-end 2017; the services grew by 2.6 million or 161.8%.
Total customer losses for traditional pay TV operators (cable, satellite, and IPTV) are expected to exceed 3.2 million for the year – a decline of 3.3% compared to the 2.3% drop seen in 2016. Without exception, traditional pay TV operators in the US all suffered video subscriber losses in 2017.
DirecTV ended the year with 20.5 million satellite subscribers, a 2.6% decline compared to 2016. However, Directv Now grew 333% year-on-year in terms of subscribers, with the service’s base coming in at over 1.1 million OTT subscribers.
Meanwhile, U-verse dropped 60,000 video subs in the fourth quarter – a fraction of the total loss in video subs for the year of 622,000. While its competitor Verizon added 47,000 Fios Internet net connections, it lost 29,000 Fios Video net customers, as streaming offerings like Hulu Live TV and Directv Now gained popularity. Broadband was also a significant source of sales growth for Comcast, with the operator adding 350,000 broadband customers during the quarter – although this fell short of its 385,000 net additions in Q4 2016. However, 33,000 video customers churned during the quarter, with Comcast ending the year with 151,000 fewer video subscribers - a change the operator attributed to more "aggressive" offers from traditional and emerging competitors.
In Q4 2017 Charter added 2,000 residential video subscribers – a marked improvement on the previous year’s Q4, when the operator lost 51,000 video customers. However, a total of 292,000 video subscribers churned in full year 2017. Charter continues to add internet subscribers; a total of 263,000 residential high-speed internet customers in Q4, and more than 1.1 million throughout the year.
The fact that the growth of live OTT services has not offset the decline in traditional pay TV subscriptions seems to confirm a loss of appetite for linear television in the US. This change in viewing habits poses a real threat to not only the business of pay TV, but also to the business of content creation in the US – both major and minor studios - and the general flow of first run content worldwide.
The short term winners of a change in viewing habits will not only be cost-conscious cord-cutters, but companies like Netflix and Amazon who have built large and loyal subscriber bases. Similarly, in the short term, despite the move away from linear viewing we expect, OTT linear pay TV companies like Sling TV and DirecTV Now will still see success. However, as subscribers transition from pay TV linear services toward lower ARPU OTT VoD services, content creation is likely to suffer. With the shift in the way that Americans consume video content, ARPUs will be driven down. Even with all of Netflix’s estimated 59.8 million subscribers in 2021 paying an average ARPU of $11.45 per month, there will be a significant loss in money flowing into the pay TV ecosystem if linear pay TV video declines are worse than expected.
The crux of the problem is the circular nature of fee increases. The US has the highest pay TV ARPU in the business – the average US pay TV subscriber paid an average of $95.40 in 2017, with that figure expected to rise to $104.31 by 2021. Driving this ARPU growth are the rate increases being imposed on pay TV operators by networks, in the form of carriage fees. While this previously translated to revenue growth, with pay TV video revenue growing at nearly 4% each year from 2013 through 2015, video revenue growth in 2016 and 2017 was barely positive. In the coming years, IHS Markit expects to see the first years of negative video revenue growth in the history of the business, thanks to cord-cutting.
Although the reality of cord-cutting doesn’t affect pay TV operators’ obligations to pay contractual rate increases for carriage for the most popular linear channels, these carriage fee increases must be passed through to video subscribers. As a result, US pay TV video ARPUs are pushed up. This presents a vicious circle, as subscribers who are unwilling to pay more cut the cord, leaving fewer households to bear the burden of rate increases; thus accelerating rate increases for these remaining households.
For content creators this trend is worrisome. Fewer higher value pay TV subscribers present a threat to the pool of money which fuels the content creation economy. Fewer pay TV subscribers could also mean pressure for already high carriage fees, and lower ratings and advertising revenue, which will inevitably lead to less content being created.
This vicious circle not only affects US households, but those of the rest of the world as well; as a significant portion of first-run content consumed worldwide is produced in the US. However, there may be a silver lining, as cheaper international content may become more prominent as US content producers are forced to focus on quality versus quantity of local output.