Pay-TV execs are clearly 'disconnected from reality:' Change isn't 5 years away, it's now

Daniel Frankel, FierceCable

Sifting through the pay-TV and programmer earnings reports that triggered a three-day, $60 billion Wall Street bloodbath last week, a theme emerged: From Disney's Bob Iger to Cablevision's James Dolan to Time Warner Cable's Rob Marcus, the pay-TV ecosystem's top executives were trying to buy time.

Like, five to 10 years ... that should do it.

Sure, they all agreed that consumers were inexorably migrating to over-the-top consumption habits. But the pay-TV bundle still has half a decade -- maybe even a full one! -- of dominance left in it.

"I don't think that we're going to see a landslide of consumers move from one to the other," Dolan told investors. "And my own prediction is that it will be at least five years for 10 percent of the market to move, and 10 years for 30 percent of the market to move."

Iger also put the need to migrate ESPN to an OTT-based direct-to-consumer platform at least five years away.

"Overall we believe the expanded basic package will remain the dominant package of choice for some years to come, because to the quality and variety it represents for a price that is generally considered fair and appropriate," Iger said to investors. "So when we look at the universe, we don't really see dramatic declines over the next say five years or so and therefore we are not taking what I would call radical steps to move our products into over-the-top businesses to disrupt that business because we don't think right now that is necessarily the greatest opportunity. We just don't think it's necessary."

For their part, media investors looked at ESPN's economics -- around 3.2 million lost subscribers in a little over a year and sky-rocketing programming costs -- and logically second-guessed Iger's 60-month pitch.

Likewise, they looked at the nearly 560,000 subscribers lost in the pay-TV ecosystem in the second quarter, and they hammered that sector, too.

To analysts like BTIG Research's Richard Greenfield, the chief executive commentary amounted to what he called "cognitive dissonance": How could these guys be looking at the same data and not come to the same conclusions their investors did?

"Based on the reported results and guidance commentary from programmers (cable networks), there is clear and convincing evidence that consumers are increasingly cutting the cord or shaving the cord," Greenfield said. "In turn, some of the executive commentary makes you wonder how disconnected from reality they are."

Deutsche Bank's Remy Marin, for example, isn't buying Iger's claim that ESPN's subscriber losses are part of the overall erosion of pay-TV subscribers and not also the result of operators downgrading ESPN's tier to an add-on component of so-called "skinny bundles."

"We think pay TV industry subscribers will be unchanged for full-year 2015 (including SlingTV), just as it has been for the past two years," Marin said. "However, within the base, there's been a modest shift to 'light' packages. For example, Dish's and DirecTV's bottom tier packages (out of 5 and 6 total packages, respectively) don't include ESPN, nor do retention packages and Internet+ tiers … We see ESPN as one of the more vulnerable networks in an environment of significant pay-TV subscriber declines or spin-down to lower tiers, should such a scenario play out, given its high price and high fixed cost structure."

MoffettNathanson's Craig Moffett, meanwhile, said the video subscriber losses in the pay-TV industry in the second quarter are a clear indicator that erosion of the pay-TV sector is accelerating. 

"Cord cutting did indeed accelerate markedly in the second quarter, just as we were afraid it would," he said to investors. "And no, this is not about seasonality. The industry always loses subscribers in the second quarter. This is about the rate at which the industry has lost subscribers over the past year. A year ago, the pay-TV sector was shrinking at an annual rate of 0.1 percent. A year later, the rate at which the pay-TV sector is declining has quickened to 0.7 percent."

And for his part, Jefferies analyst Mike McCormack doesn't envision a quick recovery of these lost subscribers. He thinks operators are resigned to trying to keep existing customers, and will limit promotional activity and raise credit standards in order to increase profitability. 

McCormack does foresee a new paradigm for the pay-TV industry, one that will be here sooner than five years from now. 

"We can envision a time in the near future that operators will simply be selling a username and password to access their respective video apps," he said. "We believe this is incredibly cost effective, eliminating truck rolls, and costly CPE. We expect the most cost effective bundle will be the app that is aligned with the customer's broadband provider, offering a presumed discounted bundle rate as opposed to cobbling together a synthetic, more costly bundle." --Daniel