Another Expense for Cord-Cutters?

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By: Kim Bailey and April Terry, Media Planners

Much has been made of the recent trend of cord-cutting to the detriment of cable TV, so much so that people are regularly predicting its demise. And while there have been advances based on consumer needs and psychology, the death of network TV is exaggerated. The economic realities of the TV landscape are fighting against consumers’ need for economy and choice as well as the networks’ desire to control their own destinies. This should keep the current method of delivering programming alive for quite some time, even if some adaptations will be required.

The cord-cutter phenomenon has been remarkable to watch, particularly among longtime observers of the TV landscape. After 20-plus years of growth in households receiving cable TV, penetration reached its peak in 2013 at 87 percent, and that number has continued to slip every year since. Many consumers, particularly younger ones, feel that cable TV is too expensive and inflexible with its tiered packaging structure. Over-the-top (OTT) services like Netflix, Amazon Prime, Hulu, and HBO Now purchased a la carte satiate these consumers’ need for instant gratification and provide the variety, value and convenience they find lacking in cable TV. In addition, these streaming services allow users to view content on multiple devices, including their phones, enabling them to watch these programs from anywhere, at any time. Today, people can shop from the comfort of their couches, so it’s no surprise they want to view content the same way.

Many of the biggest networks find the concept of delivering their programming direct to consumers appealing as well. The compensation they receive from cable TV providers is often far less than they could charge consumers individually to receive this content OTT. For example, the average compensation from the cable providers for ESPN is $6–7 per subscriber. In theory, if ESPN can sell OTT subscriptions for more than that, say $10 per subscriber, it would seem that ESPN would be better off going direct to consumers. But here is the issue: According to MoffettNathanson research, if ESPN were unbundled from cable TV packages it would have to charge cable providers about $36 per subscriber to compensate for the lost revenue from people who would opt out of ESPN programming if given the choice. Assumedly that would raise the OTT subscription price once those would no longer be subsidized by the cable TV mass subscriber base as people drop out or migrate. Remember, too, that ESPN makes money by selling ads as well as subscriptions, and the loss of casual viewers who aren’t willing to shell out $36 or even $10 to watch ESPN will also hurt the bottom line. Although a la carte pricing, whether via cable or OTT, may on the face of it seem like a good deal for consumers and some networks, the current arrangement may work better for both.  

With more and more streaming services entering the marketplace, enjoying OTT programming may become costlier and less convenient for consumers. ABC has recently decided to remove its Disney content from Netflix and other streaming carriers by 2019 and start their own platform. Intermark Media believes this trend will continue as more networks test the waters and launch their own streaming services. The more individual subscriptions cord-cutters have to purchase, the less they will save. Cost savings won’t be the only casualty, as convenience will also suffer. Viewers who were attracted to the simplicity of streaming services may find themselves flipping through various platforms and log-in screens to access their favorite shows. For example, while the most current season of New Girl lives on Hulu, users will have to navigate to Netflix to watch seasons 1–5. Now imagine if the Scripps Network decides to sever its Hulu partnership. Instead of having access to all of Scripps content on Hulu, you will need to pay Scripps an additional streaming membership. Ultimately consumers, to enjoy the variety of programming available in their 120-channel cable package, might need to pay for 120 separate OTT subscriptions, not to mention having to swap between 120 platforms, killing convenience.

The reality is that while everyone hates the bundling and tiers of cable, it’s this mutualistic system that keeps prices down for everyone by making me subsidize the networks you want while you subsidize the networks that I want. And the added effort decreased choices and higher costs of the potential OTT landscape of the future will tend to offset the benefits that hooked cord-cutters in the first place. So while we can expect more changes in TV and content distribution, they may not be as quick or as complete as many may think. Networks are still producing content that people want to watch. The only question going forward will be “at what price?” Consumers may well decide that the tyranny of tiers is an acceptable tradeoff for lower costs once the full impact of a la carte streaming pricing sets in. The networks are unlikely to move away from cable distributors under the current system because they would suffer a significant income loss from advertising and affiliate fees that would not be recoverable through individual subscriptions if they were to completely remove themselves from cable and distribute their content directly via their own platforms. Our thinking is that we will see some hybridization that allows the cable providers to offer additional services to appeal to the cord-cutters while maintaining traditional linear delivery of programming from the networks and other content producers. In the meantime, stay logged in, tuned in, connected and uploaded during this bumpy ride or you might just miss the latest episode of GoT!