Finance

Study: Cord-Cutters, Nevers Keep Rising

Comfort, not Competition, Drives Flight From Pay TV providers 4/20/2015 8:00 AM Eastern
TakeAway

The ranks of cord-cutters and pay TV-nevers will continue to rise in 2015, per research firm Convergence Consulting.

The number of cord-cutters and cord-nevers grew in 2014 and their ranks are expected to grow even stronger in 2015 and beyond, according to a study by Canadian research company Convergence Consulting Group.

 

About 22.77 million U.S. homes did not have a pay TV subscription in 2014, up from 21.5 million in 2013, according to the firm’s report, titled “The Battle for the American Couch Potato.” This year, Convergence Consulting estimated the ranks of cord-cutters and homes that never had a pay TV subscription will grow even faster, to 24.08 million (19.9% of U.S. households).

 

The increase isn’t necessarily because of new entrants into the OTT space like Sling TV and Sony’s PlayStation Vue, Convergence CEO Brahm Eiley said, although those players could be a factor down the road. Rather, existing OTT services like Netflix and Hulu are more than enough to fuel the rise, while some will be attracted to good, old-fashioned cost savings, he said.

 

The average monthly revenue per unit for pay TV video service is about $83 per month, he said.

 

“People are paying more than $1,000 a year for TV and about $43 per month for Internet,” Eiley said. “You may not get everything you want, but you’ll save yourself a chunk of money.”

 

COMFORT LEVEL

 

That said, price isn’t as much a driving force for cord-cutting as is preference, according to Eiley. “This generation is getting a little more comfortable with that,” he said.

 

Pivotal Research Group principal and senior media & communications analyst Jeff Wlodarczak said he believes the price for standalone broadband is much higher. Non-promotional prices (including modem rentals) from some operators can reach as high as $91 per month, he noted. Couple that with thin offerings from existing OTT services, and that’s enough to keep most content consumers on the sidelines, he argued.

 

“I think all this stuff ends up being nichey,” Wlodarczak said. “The bigger draw away from pay TV is not only the emergence of Netflix, but Facebook, Instagram, etc. They are simply multiplying Internet-based alternatives to people’s time and, as the content guys keep raising the price aggressively, these relatively cheap alternatives become more attractive.”

 

Eiley hasn’t predicted the downfall of traditional TV either. While OTT offerings are getting all the attention, he said, it will be years before those services catch up to linear viewing levels.

 

“TV is going to have the bulk of viewers for decades,” Eiley said. “It isn’t like linear has given up. The hourly cost of TV is still pretty low. That’s why they have 100 million homes. And the declines are not that radical, given the choices.”

 

Convergence’s estimated 24.08 million cord-cutters and cord-nevers in 2015 represented about 19.9% of total U.S. homes, up from about 22.7 million (or 19% of U.S. homes) in 2014.

 

“We’re talking about [a] 1% [difference],” Eiley said. “At this run rate, it’s going to take decades for this to change.”

 

Adding to pay TV’s advantage is that traditional distributors spent about $49.9 billion on programming last year, compared to $5.2 billion for OTT services such as Netflix, Hulu and Amazon. Those expenditures are expected to rise to $53.3 billion and $7.2 billion, respectively, in 2015.

 

“The TV-access guys are spending nine times what the nonlinear players are spending,” Eiley said. “What’s more interesting is, can the nonlinear guys like Netflix keep it up?”

 

COSTLY CONTENT

 

Netflix and other such services can’t keep raising the original programming bar without raising prices, in Eiley’s opinion. And he has been right before — in 2013, Eiley predicted Netflix would have to raise its prices to keep afloat and, last May, it announced a price hike for new subscribers to $8.99 per month from $7.99.

 

Netflix’s operating profit margins are notoriously low — they were about 7% in 2014, compared to 20.3% for Time Warner Cable — and are expected to fall to 3% in 2015, according to Eiley. Those low profit margins leave little room to increase programming spending without raising prices, he said.

 

Wlodarczak disagreed, likening Netflix to the early days of satellite TV, when providers like Dish Network and DirecTV added millions of new subscribers as their subscriber-acquisition costs soared. Netflix’s investment in original programming could help in terms of driving more subscriptions and reducing churn, he added, as will its investments to expand its international reach.

 

“All of these depress short-term results, but if they succeed in driving their subscribers towards where HBO is today globally and an increasing percentage of their content is much-higher-margin original programming, relative to purchased movies,” Wlodarczak said. “When growth begins to slow, partly driven by the launch of fewer markets, they should begin to see a significant increase in margins, [meaning] no need to take additional price hikes.

 

“That being said, I think they will take price hikes and they will still appear to consumers to be a relatively cheap addition to their entertainment alternatives,” he added.

 

On the other hand, pay TV providers have more wiggle room in pricing their broadband service. The average monthly charge for high-speed Internet service is $43, according to Convergence, leaving room for increases. But raising prices comes with risks.

 

“Broadband growing will hurt TV, which isn’t growing,” Eiley said. “But if one player decides to raise prices and the other doesn’t, it may not work out for the one who raises prices.”

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