The reality of “cord cutting” in North America
TMT Media Predictions 2013
Deloitte predicts that in 2013 almost all North American households that pay for TV through multichannel video programming distributors (MVPD) 1 will continue to subscribe. Less than one percent of subscribers will discontinue their pay TV subscription (also known as ‘cord cutting’). That small number of cord cutters will likely be driven by a mix of: macroeconomic conditions, a perceived lack of value of pay TV, growth in over-the-top (OTT) video services and changing TV consumption habits.
This reality is likely to contrast starkly with various apocalyptic headlines suggesting imminent, significant cord cutting. These headlines will often be based on online surveys whose responses – however honest when given – do not always equate to outcomes. In one 2012 survey, 31 percent of respondents said they were either planning to or seriously considering cancelling their subscriptions, primarily because of the availability of OTT services 2. Similarly, a 2011 survey found that nine percent of US customers had already cut the cord, and another 11 percent were planning to do so 3.
However survey data can be wrong: reported subscriber numbers from the various MVPD providers show a net rise in subscribers in the last two years.
OTT Internet TV services and pay TV are often characterized as mutually exclusive competitors; the reality is that they are often complements 4. US MVPD subscriptions were up 135,000 in the four quarters ending the third quarter of 2012, an increase of 0.1 percent 5. Canadian broadcast distribution undertaking (BDU – the equivalent of MVPD in the United States) subscriptions increased by about 136,000, or 1.2 percent, in the same period 6.
However, the pay TV market contains many moving parts which vary: over time, by geography and by delivery technology. Individual cable, telco or satellite providers gain and lose subscribers to each other every quarter. Individual subscribers may cancel a service, then rejoin only a few months later, either with their original provider, or another pay TV player. The focus of this Prediction is on total net subscriber numbers for all forms of pay TV.
It is important to stress that in 2013 and most likely for several years to come the North American pay TV market will be substantially different from other TV markets. What happens or fails to happen in the North American market may or may not provide lessons for other markets. Outside of North America, over-the-air (OTA) TV viewing hours are lower 7 and there may be national TV license fees8. Most importantly, rates of pay TV penetration vary widely around the world: in the United States and Canada about 90 percent of homes pay for TV, whereas in EU countries the proportion is 35 to 60 percent. In South Korea the rate almost 100 percent and in Brazil is less than 30 percent9. But if there is no evidence of cordcutting in 2012, is there any reason to think that it could happen in 2013 or beyond? And if so, how large could it be?
Predicting pay TV subscriptions in North America is complex. Key variables include economic growth and consumer confidence10, the rate of household formation11, content deals for the forthcoming season, the propensity of some consumers to have more than one kind of pay TV service at the same time, and competition/substitution from other formats, such as OTT pure plays.
Extrapolating a view on cord cutters from this complex mix is challenging. However, based on the most recent quarterly data from the United States and Canada, and assuming the variables have been more-or-less constant, the rate of subscriber additions has been slowing. Growth in US subscriptions was running at more than 1 percent year-over-year in 2009 and 2010, but fell to 0.1-0.2 percent in 201212. In Canada, growth was about one percent for most of 2010 and 2011, but has fallen to 0.3-0.4 percent in the most recent quarters13.
Based on the trend lines, and if there is no dramatic increase in household formation, it seems probable that the number of total pay TV subscribers could be flat, or even fall in North America in 2013. Further, some have speculated that a proportion of young people creating new households are doing so without traditional pay TV: not cord cutters, but possibly ‘cord nevers’14. The size of this group is unknown, but if significant could lead to a fall in the percentage of homes paying for TV, even if the absolute number of homes is more-or-less flat.
Still, subscribers who do not renew their subscriptions are likely to be drawn from a very narrow pool. In North America the categories of live spectator sports, news, reality TV, first run drama and comedy constitute the ‘four pillars’ of pay TV and are generally not available through third-party OTT alternatives. The proportion of households in North America with at least one family member willing to pay for TV sports is estimated to be more than 80 percent15. Further, those who don’t watch a lot of sports tend to watch a lot of reality, news and first-run comedy and drama. Few households watch none of the categories.
2013, given the exclusive content ownership by MVPD and BDU distributors of the four pillars, a maximum of ten percent of North American households would contemplate cancelling pay TV, and still be able to watch the shows they really want to watch16. That is not zero, but neither is it as large a pool of potential cord cutters as most articles speculate.
MVPD and BDU providers should note that the loss of a small number of subscribers may not necessarily lead to a fall in revenues or profitability: pay TV providers might be able to increase average revenue per subscriber faster than they lose (usually less profitable) cord cutters. While cord cutting surveys may generate headlines, pay TV operators should probably be more focused on the 99 percent of their customers who are likely to stay, and look to increase average spend and design packages to please them, rather than attempting to appease the small but vocal group of subscribers who threaten to cancel – at least when answering surveys.
Further, MVPDs and BDUs have significant power to minimize cord cutting itself and to mitigate the impact of cord cutting: they are often the Internet Service Provider (ISP) that the cancelling subscriber requires in order to access to the services of the OTT provider.
They can price a bundle of pay TV services and Internet access such that there is negligible financial incentive to cord cut, even without factoring in additional data usage due to increased streaming. One analysis across multiple operators and in certain regions found that cancelling pay TV offered savings of just $5 per month, relative to an average $90 pay TV bill17. In some cases, cord cutting could end up costing $20 more18. Aggressive pricing of bundles could help minimize cord cutting.
Second, many pay TV/ISPs expect cord cutters to increase their data consumption such that they require a bigger, more expensive data plan with faster speeds and/or more data. If cord cutters resemble the overall TV-watching population, and have two people in a household watching 35 hours per week OTT, that would amount to in the region of 700 GB of data per month19. This increment would require most households to pay more for data and/or speed20. In this way cord cutting may be revenue neutral - and possibly even net positive - to bottom lines. Broadband services in North America tend to be higher margin since they do not have the pass through content costs of pay TV.
On the other hand, not all North Americans watch the same amount of TV: the lightest quintile watches about a fifth as much TV as the average viewer (and 90 percent less than the heaviest quintile21.) In such a household, and assuming again that they move all their TV viewing to OTT solutions, they would consume only an additional 150GB per month, an amount that in many regions may not require them to pay more for data under the most common plans.
Finally, the growth in OTT providers has benefitted content creators: OTT has been a new bidder for content rights, enhancing the value of that content. Given the very small numbers of cord cutters and cord nevers who are substituting OTT for pay TV, it seems likely that the vast majority of money made from selling content will come from the traditional broadcasters and distributors. OTT is a delightful incremental source of revenue, but unlikely to be in the same league.
1 A multichannel video programming distributor (MVPD) is a service provider delivering video programming services, usually for a subscription fee (pay TV). These operators include cable television (CATV) systems, direct-broadcast satellite (DBS) providers, and wireline video providers such as competitive local exchange carriers (CLECs) using IPTV. In Canada these same players are called Broadcast Distribution Undertakings (BDUs). There are just under 100 million pay TV subscriptions in the United States, and 11.5 million in Canada.
2 One survey found that that 31 percent of current mobile/connected TV viewers were either planning to cancel their pay TV service in the next year or seriously considering cancelling. Of those, 81 percent saying online over-the-top video options are the primary reason. Source: Tremor Video Study Finds Increased Mobile Video Consumption In The Home, Business Wire, 30 May 2012. See: http://www.businesswire.com/news/home/20120530005878/en/Tremor-Video-Study-Finds-Increased-Mobile-Video
3 Source: Deloitte: 9% have cut cable, another 11% are considering it. GigaOM, 4 January 2012. See: http://gigaom.com/video/deloitte-cord-cutters/
4 Source: OVER-THE-TOP SERVICES ARE FAR MORE LIKELY TO APPEAL AS COMPLEMENTARY, RATHER THAN PRIMARY, PAY-TV SERVICES, Analysys Mason, 21 July 2011. See: http://www.analysysmason.com/About-Us/News/Insight/Insight_payTV_Europe_Jul2011/
5 It is important to use a four quarter number: there is pronounced seasonality in pay TV additions and cancellations, with Q1 and Q4 being positive, and Q2 and Q3 being negative. Source: Cord-Keeping: Pay TV Shrinks for the Quarter, Stays Steady for the Year, All Things D, 7 November 2012. See: http://allthingsd.com/20121107/cord-keeping-pay-tv-shrinks-for-the-quarter-stays-steady-for-the-year/
6 BMO Capital Markets proprietary research, November 2012.
7 Less than 15 percent of North Americans get any TV from terrestrial broadcasts.
8 For example in Germany there is license fee of about €18 [$47] per month, in the UK there is a license fee of £145 [$190] per year. Source: German TV licence fee to remain stable, Rapid TV News, 18 January 2012. See: http://www.rapidtvnews.com/index.php/2012011818885/german-tv-licence-fee-to-remain-stable.html; Source: TV Licence types and costs, TV Licensing. See: http://www.tvlicensing.co.uk/check-if-you-need-one/topics/tv-licence-types-and-costs-top2/; Source: Television licence, Wikipedia. See: http://en.wikipedia.org/wiki/Television_licence .
9 Source: Connected-TV and pay-TV operator partnerships: Harnessing market disruption for mutual gain, informa telecoms & media. See: http://www.informatandm.com/wp-content/uploads/2012/02/ITM-CES-Connected-TV-White-Paper.pdf
10 In North America, pay TV rates have tended to drop when the economy is weak and rise when it recovers. Globally, the relationship is less clear: even during recent European economic weakness, pay TV penetration has been increasing.
11 Source: New households growing in the U.S., 7 November 2012, Business First. See: http://www.bizjournals.com/louisville/blog/morning_call/2012/11/new-households-growing-in-the-us.html; New household formation is a complex topic. In between national censuses, it is an estimate based on smaller samples, and subject to frequent revision. Since 2008, levels of household formation have been much lower than historical rates, but seem to be accelerating in late 2012 to over 1.15 million households year-over-year, more than 70 percent higher than the average following the recession.
12 Source: Cord-Keeping: Pay TV Shrinks for the Quarter, Stays Steady for the Year, All Things D, 7 November 2012. See: http://allthingsd.com/20121107/cord-keeping-pay-tv-shrinks-for-the-quarter-stays-steady-for-the-year/
13 BMO Capital Markets proprietary research, November 2012.
14 Source: Time Warner CEO: Cord cutters not an issue, “cord nevers” might be, paidContent, 16 November 2012. See: http://paidcontent.org/2012/11/16/time-warner-ceo-cord-cutters-not-an-issue-cord-nevers-might-be/
15 Based on interviews with multiple North American broadcasters and distributors.
16 Based on interviews with multiple North American broadcasters and distributors.
17 Source: The NPD Group: Average Monthly Pay – TV Subscription Bills May Top $200 by 2020, The NPD Group, 10 April 2012. See: https://www.npd.com/wps/portal/npd/us/news/press-releases/pr_120410/; Average US pay TV bill was $86 in 2011, and assumed to grow at six percent, so over $90 in 2012.
18 Source: Cord-Cutting: Cable's Offer You Can't Refuse, The Wall Street Journal, 13 November 2012. http://online.wsj.com/article/SB10001424127887324073504578109513660989132.html
19 The exact amount would depend on the bit rate and the amount of shared watching. Different ISPs have different data caps, speeds, and pricing plans. Potential cord cutters may not be the “average” North American TV watcher, and therefore need or not need to pay more for data
20 Assuming 2.5GB per hour and two people per household, requiring 1.2 Mbit/s downstream. Bandwidth requirements vary by provider. Some services have variable rate throughput, with bandwidth dynamically variable according to the speed of the broadband connection and/or the device on which video is being used.
21 Source: The Cross-Platform Report, Nielsen, 15 June 2011. See: http://www.slideshare.net/genarobardy/nielsen-crossplatform-report-q1-2011