The recent results of major pay TV operators in Europe and North America have not been a great reading. Their investors in particular are getting concerned about the lack of video subscriber growth, while Netflix and Amazon post forecast beating figures.
For sure, many providers reported decent mid-single digit total revenue growth, but this was driven in most cases by price increases, broadband access growth and advertising sales. Most providers have sought to de-emphasise their negligible, and in some cases negative, growth of pay TV customers. Sky was probably one of the best performers with only 2% video customer growth year-on-year (YoY) by March 2018 across all of its European operations. By contrast Liberty Global customer growth was virtually zero YoY at the end of 2017 across its 11 European markets.
In the US Comcast and Charter Communications have both reported small declines in pay TV customers in their Q1 2018 results released last week – events that have shocked their investors who sent their share prices down by up to 10% in the last week alone. AT&T did a little better – with overall flat YoY video customer growth – though it is also seeing a decline its higher priced linear packages, which are being plugged with lower cost ‘skinny bundle’ customers.
While the pay TV markets are maturing, the pay TV customer growth slowdown is in part due to the impact of the video strategies of the FANGs players – the Wall Street acronym for Facebook, Amazon, Netflix and Google. These players are taking advantage of the rapidly reducing cost of online video delivery to establish gigantic consumer video businesses in the space of just a few years. Netflix is key in this group; not just because of its 27% YoY customer growth in the year to March 2018 (to 125m customers), but also because it is becoming one of the biggest original content producers in the world, with plans to spend over $10 billion in cash on content in 2018 alone, up from $8bn in 2017. (It is borrowing at least $3 billion this year to fund this investment, but that is a separate story).
Amazon is also becoming a consumer video giant, set to spend about $5bn in cash on content in 2018 (and unlike others, this includes major sports content rights), having recently announcing that it surpassed 100m subscribers of its Prime service that combines video streaming and free home delivery. Google already has 1.5 billion users of its add-funded YouTube video platform, while Facebook is reported to be investing $1 billion in original content in 2018 to keep its 2 billion users engaged.
Each of the FANGs has a very different strategy, business model (i.e. subscription versus add-funded) and video value proposition, but it is clear that they are all succeeding in rapidly growing their video customer base, particularly among the younger generation. As a result a growing number of these users are deciding not to get a traditional pay TV subscription once they set up home, or that they can live without their existing one (i.e. cut the cord)– and this trend is at the core of the numerous other challenges facing traditional pay TV operators.
Traditional pay TV providers need to wake up to the fact that their business is at inflexion point, and that their value propositions need a major rethink. They need to respond now to the slow and grinding, but ultimately existential, threat posed by the FANGs. Simply put, I strongly believe the days of large, scatter-gun, 200+ channel, $80-100 packages of all-you-can eat offerings – delivered in linear packaging that are also stuffed with long advertising breaks – are getting numbered. When users contrast these with the clean, focused, easy to use, lower cost (or free) FANGs video services, for many it is an easy choice.
Moreover, the traditional pay TV service is increasingly leaving not just consumers, but also advertisers less than delighted versus FANG and other over-the-top (OTT) alternatives. Users resent the advertising (and now often skip it with catch up TV) especially when they pay large subscription fees for their top-tier service. These packages are often stuffed with lots of mediocre, linear (and time limited) content among the gems, which users never get round to watching, so for many this feels like a waste. As a result, advertisers increasingly compare their TV ad targeting and measuring with the equivalent digital options – mainly Facebook and Google – and are flocking in greater volumes to the latter platforms; increasingly instead, rather than in addition, to TV advertising.
To be fair, many pay TV operators have sought to counter these trends with the launch of ‘skinny bundles’ (for movies) and day passes (for sports content). In reality, these efforts are just tinkering around the edges. Pay TV operators need much deeper, in effect a radical, rethink of their value propositions. This effort needs to address both the key consumer frustrations with current pay TV bundles, as well as close the gap versus the more attractive OTT value propositions. The new pay TV value propositions need to be designed around the principles of persona based content tailoring, simplicity, flexibility, content discovery – as well as value for money.
Some would say that such a radical redesign would be excruciatingly difficult to even consider for established pay TV providers. They are locked into multi-year content and channel deals, as well as being mindful of protecting existing revenues and margins. Sure, this situation is a classic dilemma that incumbents face when faced with disruptive challengers, as Clayton Christiansen’s elaborates so well in his innovation work. By the same token, it is also clear that by doing nothing pay TV providers risk a fate of slow and painful slide towards oblivion.
Angel Dobardziev is a Founder and Director of Whitebridge Insight, an independent research consultancy, and is a judge of the 2018 World Communication Awards (organised by Total Telecom) He can be contacted at firstname.lastname@example.org
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