Speaking at today’s FierceVideo Stream TV show, MoffettNathanson analyst Craig Moffett said there’s some relatively good news for pay TV. The rate of decline of subscriptions is decelerating, “probably to 7.4%.”
“The third quarter, from an operator’s perspective, is clearly going to be less bad in that the rate of decline has decelerated,” said Moffett. He said the decline is still faster than a year ago, but now, for the first time in a while, there’s a positive inflection.
Moffett also said there’s a noticeable divergence between large and small operators in terms of their response to defecting video subscribers. He said that about 12 to 18 months ago, it became apparent that large operators were taking a different approach than smaller operators. The rate of declines at large companies stayed small – in the range of about 2%, while the rate at small operators was larger.
“Smaller operators decided it was no longer worth trying,” said Moffett. “Smaller operators had come to the conclusion that they weren’t making money in video anymore. Trying to save those subscribers no longer made sense.”
When the research firm noticed this trend, it postulated that large operators would soon start to pursue the same strategy. “We’re seeing that now,” said Moffett. He noted that Charter’s CEO Tom Rutledge has remarked that it’s just not sensible to throw $60 of video to a customer for $40.
In fact, big operators may have reached a point of “indifference” in terms of the loss of video subscribers, especially since their gross profit margins for broadband are so good in comparison.
He said not only is video cost-intensive for programming but also for non-programming expenses as well, such as network maintenance and repair.
As an example, he said, “Comcast has gotten to a place, where they’re at a point of indifference to losing video subscribers.”
The not-virtuous cycles
Computer programmers and engineers on the technical side of networks often talk about the “virtuous cycle” where an improvement in one area creates a chain-reaction of improvements that eventually feed back to the source of the improvement, embellishing the whole cycle even further.
Today, Moffett talked about two scenarios in pay TV that could be likened to “non-virtuous cycles” or even destructive cycles.
One of these cycles relates to sports programming. As video subscribers leave the basic subscription platform, programmers like ESPN with high fixed-costs have no choice but to raise prices. Then, operators in turn have no choice but to pass those price increases along. This only makes the subscription product less attractive, especially for non-sports subscribers.
He said there’s a similar cycle in entertainment. As capital markets reward successful streaming platforms such as Disney+, that creates an enormous incentive for programming execs to take their best content and move it onto streaming, which only impoverishes pay TV platforms even more.
“Because cable operators are increasingly indifferent between keeping and losing subscribers, you can expect to see an acceleration in cord cutting,” he said. “Those marginal subscribers who were kept with these enormously lucrative packages, are simply not going to be part of the landscape any more.”
Finally, MoffettNathanson expects to see sports and non-sports ecosystems diverge in pay TV.
“Sports programmers have fought tooth and nail to ensure particularly RSNs never get put on a sports-only tier,” he said, but this has caused a lot of subscribers to leave pay TV and go to an SVOD or AVOD, instead. Customers are saying "If you won’t ala-carte sports for us, we’re going to do it ourselves."
“The value proposition of those platforms is less and less,” said Moffett. “As those entertainment platforms get impoverished you get left with a defacto sports tier, no matter how hard you try to fight against it.”