the pay TV industry

The pay TV business in the US has three parts:  cable TV, satellite TV and telecom TV.

cable maturing

Traditional cable TV subscriber numbers peaked in 2001, when the country had 52.4 million basic cable only households and 14.5 million with digital, for a total of 66.9 million.

The overall figure dropped by 800,000 in the recession year of 2002, although the decline was masked in industry revenues by 4.8 million households upgrading to higher-cost digital.  Aggregate subscriber numbers declined from that point, but only by a total of about 1% through 2006 (700,000 households lost over four years).  But any revenue decline from this source was trivial compared with the gains from rapid adoption of digital.  In 2007, however, the combination of aggressive marketing of telecom offerings and economic weakness sparked a sharper rate of subscriber loss.

Overall cable figures, from industry expert SNL Kagan, break out as follows:

2001     66.9 million total subscribers     14.5 million digital, 52.4 million basic only

2006     65.4 million total subscribers     32.6 million digital, 32.8 million basic only

2009     62.1 million total subscribers     42.6 million digital, 19.9 million basic only.

satellite and telecom providers gaining subscribers

Even in 2009, total pay TV industry subscriber numbers rose.  Traditional cable losses of 1.6 million household were more than offset by:

–satellite broadcasters, who added 1.4 million subscribes to end the year at 32.7 million, and

–telecom providers, who added 2.1 million subscribers to end the year at 5.1 million.

a big change over the past six months

Even through the dog days of 2007-2008, the pay TV industry steadily added subscribers, though at a relatively slow rate.  Within the industry, traditional cable steadily lost small numbers of subscribers to satellite and telecom.

In the June quarter of 2010, however, the US pay TV industry lost subscribers for the first time ever. Same intra-industry dynamic as before–cable lost a stunning 711,000 subscribers; satellite added 81,000 and telecom signed up an extra 414,000.  The net industry loss:  216,000 customers. SNL Kagan attributed the cable losses to the economy–high unemployment and the weak housing market.

In the September quarter, whose figures were just released, the story was the same:

— a net loss, the second ever, of 119,000 customers, and

–cable lost 741,000 customers, its worst performance ever; satellite added 145,000 subscribers, telecom 476,000.

SNL Kagan points out that this is normally the seasonal peak for subscriber additions, so what’s going on with cable can’t simply be the economy.

what’s going on?

I think three factors are involved:

1. The continuing sub-par economy is probably the trigger for consumers’ rethinking their spending priorities.   It is a bit unusual, though, that the rethink is coming with such a lag.

2.  Cable has raised its prices to a level that it is providing a pricing umbrella that made the financial decision to enter the pay TV industry easier for telecom companies.  This will likely prove a horrible strategic mistake in a capital-intensive industry.  Even if the telcos eventually conclude they can’t be profitable, they will turn their attention to recovering as much of their invested capital as they can.  In other words, the billions they’ve spent on TV means they can’t simply exit the industry.  So they won’t stop discounting.

3.  New, cheaper forms of entertainment distribution have emerged.  Netflix and Hulu, together costing about $20 a month, are leading examples.  Ironically, both require the high-speed internet that cable delivers.  But they’re the iTunes store to cable’s CD albums.  They’re cheaper; they’re more flexible; and they offer on-demand service.  In addition, buying a $15 cable will allow you to display streaming content on your wide-screen TV.  Newer TV models connect directly to the internet.

More confirming evidence:  look at the resistance cable companies have put up to broadcast networks’ demands for higher retransmission fees; look at the more basic “basic” services cable companies are offering.  Time Warner, for example, is offering basic for the first time without ESPN, to lower the cost.

my thoughts

Cable is in trouble on two fronts.  One is from a kind of “creative destruction,” the emergence of competing technology that’s newer, better, cheaper.  In this regard, it’s somewhat like the music companies were ten years or more ago.  The second is a more traditional kind.  Faced with competition, cable ceded the low-end market to the telcos and preserved profits by moving up-market.  That strategy–the same one GM used when faced with Japanese competition–has backfired.