Secular declines are undeniably happening in the U.S. pay TV industry and it’s causing conflicting views among distributors and programmers about the future of the big bundle.
Programmers like Discovery are trying to balance their existing distribution and affiliate businesses with their more future-looking direct-to-consumer strategies. Distributors like Charter are trying to keep the focus on connectivity while maintaining their traditional video products to preserve some broadband stickiness and customer choice.
Differing opinions between the two sides of the equation about traditional pay TV’s place in the streaming world have been swirling around for years. Distributors want to keep some semblance of video margins but programmers want to keep growing revenues while streaming scales. But this week, it seemed like those opinions boiled over a bit and became challenges.
During the MoffettNathanson Media & Communications Summit, Charter CEO Tom Rutledge said that traditional MVPD distribution deals can still be lucrative for programmers but that affiliate fees may need to shrink to avoid blowing up the bundle entirely.
“…If [programmers] keep their rates low or don’t raise them or make them go backwards, they are still going backwards, it doesn’t feel very good and it’s hard to do as a business, but it’s better than the alternative,” he said, suggesting that continuing to push affiliate fee increases could result in non-carriage.
Discovery CEO David Zaslav spoke later that day at the same conference and seemingly dared a distributor like Charter to just try and drop his company’s channels. He conjured a hypothetical where a consumer finds that Discovery, HGTV, TLC and other channels are gone from the bundle and panics while thinking about how they’re going to keep getting their lifestyle programming.
“The reaction of customers would be extremely negative,” he said. However, if customers left the bundle and picked up Discovery+, Zaslav argued his company would be better off. He said Discovery earns about $7 a month per pay TV subscriber but does the same or much better with Discovery+, particular with the ad-supported product that draws higher CPMs than TV.
“If we lost a million subs…all we need to do is pick up 650,000 subs in order to be making more money,” he said.
For now, it seems like Discovery is staying ahead of pay TV subscriber losses with its streaming gains. Altice USA, AT&T, Charter Communications, Comcast, Dish Network and Verizon combined to lose approximately 1.6 million pay TV customers across both residential and business subscriber bases. Discovery added 2 million streaming subscribers in April and said the majority came in through Discovery+, but that figure also includes its international services.
On the other side of that, though, Charter’s video subscriber base is declining at a much slower rate than its peers. Charter lost 138,000 video subscribers in the first quarter of 2021 while Comcast lost 491,000 subscribers and AT&T lost 620,000 video subscribers.
So, both companies have reasons to be confident and the standoff could simmer for a long time. MoffettNathanson estimates that total consumer spending on video will reach $142 billion in 2021, ahead of $140 billion in 2019, as more SVOD spending will more than offset declines in pay TV.
“Longer-term, we anticipate a slight +1.5% CAGR in annual U.S. consumer spending on video as subscription streaming growth modestly outpaces the declines in pay TV,” wrote Michael Nathanson in a research note.