Despite headwinds from cord-cutting and cord shaving that helped drive total multichannel video households down about 2%, advertising and affiliate fee revenue remained steady in 2015, according to SNL Kagan, an offering of S&P Global Market Intelligence.

In its Economics of Basic Cable Networks, a 786-page comprehensive network-by-network analysis of the cable industry, total revenue rose 5.3% to $63.63 billion in 2015, driven by a nearly 2% increase in advertising revenue to $28.28 billion and a 7.5% hike in affiliate fee revenue to $37.58 billion.

According to Kagan, total multichannel TV households are declining about 2% per year. On the viewership side, cable news networks like Fox News Channel, CNN and MSNBC are growing ratings while there is some erosion at general entertainment networks.  Sports channels dominated license fees, according to Kagan, while consolidation has given some distributors more leverage in carriage negotiations. On the advertising front, Kagan said the market is eagerly awaiting Nielsen’s “Total Audience” ratings to fully monetize viewership across devices. In the meantime, some networks are experimenting with reduced ad-loads.

Related > Viewer Watch 2017: Download the Complete Report

Though TV has long been a numbers game, hard data showing changes in the way consumers access video remains a hotly debated subject.

It’s not just that there’s considerable disagreement over how to interpret these changes among executives overseeing what Magna calls the $67 billion TV ad market and PwC describes as the $101 billion subscription pay TV business. There is also much grumbling over the kind of data that is available to answer these multibillion-dollar questions.

“I don’t think we’ve made as much progress as we should have made” in measuring the consumption of video on all platforms and devices, Turner Broadcasting System chief research officer Howard Shimmel said.

There also isn’t much agreement on how the growth in multiplatform video consumption will affect pay TV subscriptions. Some contend that the rise of over-the-top streaming options will sharply reduce the pay TV subscriber ranks; others believe the issue is much more complex.

“From its peak in the first quarter of 2012, the major providers have lost about 1.8 million subscribers,” Bruce Leichtman, president and principal analyst at Leichtman Research Group, said. “The industry is clearly saturated and in a slow decline.”

Interpreting those numbers remains controversial, in part because data on the size of the pay TV universe rests on different assumptions. Leichtman, for example, includes data from services like Sling TV in his company’s estimates, while SNL Kagan does not.

Nielsen also provides different numbers. It reports the number of homes that have TVs connected to a pay TV service, which is different than the number of total pay TV subscribers reported by operators, Nielsen executive vice president of research Glenn Enoch said.

“You have to be very careful about the numbers you use and [about] drawing a straight line from those numbers to revenue, because things are much more complicated than that,” he said.

Related > New Normal: Digital Distribution

CORD-CUTTING CALCULUS

A number of researchers agreed. The proportion of “people dropping pay TV subscriptions is now about 2.6%,” Leichtman noted, which is about the same rate as 10 years ago, when the industry was growing.

“The problem is that the number of new customers has declined,” Leichtman said. “We only see 1% [of homes] moving into pay TV. That is down from 3.5% a decade ago and it has had a real impact on the dynamics of the pay TV industry.”

The declines have been smaller than some had expected, SNL Kagan research director Ian Olgeirson noted. “We are seeing a slight acceleration in the decline in subscribers for multichannel services from a roughly 1% decline in 2015 to a decline of what will probably be 1.3% or 1.4% in 2016,” he said.

The causes of those declines are also hotly debated. “Service providers would say that a lot of those declines are driven by price” and economics, Olgeirson said. But that isn’t the whole story, as the economy has rebounded and housing starts have grown over the past two years, he said.

A recent Frank N. Magid Assoicates survey found that 75% of likely cord-cutters said the ability to watch content via the Internet and OTT platforms was a key reason to drop pay TV service, Magid Advisors president Mike Vorhaus said. Only 29% of respondents cited costs.

Research also challenges the prevailing assumption that pay TV and SVOD services are competing offerings, said Howard Horowitz, president and founder of Horowitz Research, who sees them as complementary to traditional pay TV.

Horowitz survey data shows that 52% of whites and 58% of Hispanics have both a multichannel subscription and a subscription VOD service, while only 5% of whites and 6% of Hispanics have just a SVOD service.

STAGNANT AD SPENDING

Much unease also surrounds the ad market. Brian Wieser, senior research analyst, advertising at Pivotal Research Group, said the economy faces considerable uncertainty over the next year.

“I don’t think anyone can say with any certainty what is going to happen next and that uncertainty is going to curtail advertising,” he said.

National TV ad revenue will drop slightly by 0.4% in 2017 to $44.6 billion, Wieser predicted, and remain essentially flat through 2020, when it will hit $45.2 billion.

Magna’s Letang also sees a weak TV ad market combined with bullish prospects for digital media. “In 2017, we see high single digital inflation [in pricing] but high single-digit declines in ratings,” Letang said. “National TV will be up 1% in 2017 from 2016 if you exclude P&O” — meaning the 2016 revenue from political ads and the Summer Olympics — “and down 1% if you include P&O.”

With political and Olympics spending included, Magna projects that total TV spending will drop by 4.8% to $64.2 billion in 2017, declining further to about $62.2 billion in 2021.

Digital spending, though, will continue to grow rapidly. By 2020, Magna forecasts that mobile advertising will more than double to $78.4 billion (38.2% of all advertising) and social media will hit $31.8 billion in 2020 (a 15.5% share). TV, meanwhile, will slip to a 32.4% share.

Given the uncertainty over the ad market and pay TV subscriptions, programmers and operators have been rethinking their operations.

NEED TO BE NIMBLE

The drive to adapt to new consumer habits has prompted a number of projects to make operations more nimble, Discovery Communications chief technology officer John Honeycutt said.

For example, Discovery’s recently deployed “On Ramp” project allows about 80% of the content produced by 600 production suppliers to be uploaded to the Amazon cloud, where it can be immediately available to Discovery employees and channels all around the world.

“Going from 0% to 80% makes us so much more flexible and efficient,” Honeycutt said.

Equally dramatic upgrades are occurring in the pay TV infrastructure. After ticking off a long list of new products and initiatives to deliver more content to more devices, Comcast Cable executive vice president, general manager, video and entertainment services Matthew Strauss noted that these efforts are built on major improvements to the MSO’s infrastructure.

“We are rolling out DOCSIS 3.1,” he said. “We are rolling out Gigabit speeds. We are transitioning more and more to all-IP, which will allow us to innovate and deliver more of these newer services.”

Rapid innovation has also become the norm for digital platforms. “In 2016, we launched 30 new products and made hundreds of enhancements on dozens of platforms,” Alex Wellen, senior vice president and chief product officer at CNN, said.

Much remains to be done, particularly in the area of measurement. This year will mark a notable improvement on that front, with Nielsen planning to begin syndicating its Total Content Ratings on March 1.

“But some of the networks have been saying they won’t be ready for Nielsen’s public rollout in March, and it isn’t clear if everything will be ready in time for the upfronts,” Jane Clarke, CEO and managing director of the Coalition for Innovative Media Measurement (CIMM), said. “It is a very complex process to get it implemented in the apps for every kind of player and all the devices.”

Others worry about the TV industry’s ability to maintain its share of ad spending without better data. “Measuring crossplatform video consumption is important, but it is a 2006 problem,” Turner’s Shimmel said. “Today, when we talk to advertisers, what they really care about is outcomes [such as sales] and I don’t see that kind of measurement anywhere in Nielsen or comScore’s future.”

More debates surround commonly held perceptions of the OTT market.

Michael Leszega, senior analyst of market intelligence at Magna, said that “in 2016, we have [more than] 25 million cord-cutters and cord-nevers,” and that this group will continue to grow. By 2020, he predicted, about 28.6% of all households will be outside the traditional pay TV ecosystem. “It is a sizable portion of the population that can’t be ignored,” he said.

That has prompted a number of companies to develop streaming bundles of channels like Dish Network’s Sling TV, Hulu, Sony’s PlayStation Vue and AT&T’s DirecTV Now.

“If you look at the rumors about Amazon or YouTube coming out with OTT bundles, there could be a whole bunch of them, maybe seven or eight by the end of 2017,” Steve Shannon, general manager of content and services at Roku, said.

Tony Goncalves, senior vice president of strategy and business development for AT&T Entertainment Group, described DirecTV Now “as a mobile-first-centric platform” that will deliver the kind of advanced digital features consumers expect from their mobile apps.

“DirecTV Now is pay TV as an app and it opens up a market that has not historically been addressed by pay TV,” he said.

Dish Network also sees great promise in the melding of pay TV packages, OTT delivery and app experiences, Niraj Desai, the company’s vice president of product management, said.

“TV is becoming an app,” he said. “We have been talking about that trend for a while, but 2016 was really the year TV as an app came into its own” with better TV everywhere offerings and the streaming OTT bundles such as Dish’s Sling TV and DirecTV Now.

COMPLEMENTARY PLAYS

Even better, these products open up new markets and are not designed to cannibalize traditional pay TV offerings, he added. “Sling is complementary to DBS,” he said, meaning Dish and DirecTV’s satellite-TV platforms. “Sling over-indexes with urban millennials and DBS resonates with suburban and more rural customers that are more traditional TV watchers.”

Similar views come from programmers that have aggressively targeted consumers without traditional multichannel TV subscriptions.

“We launched HBO Now with the theory that its subscribers were going to look very different from the traditional subscribers,” Bernadette Aulestia, executive vice president of worldwide distribution at HBO, said of the premium programmer’s standalone app.

HBO Now subscribers are 10 years younger than customers of HBO’s premium cable network and typically live in broadband-only households, she said.

“We look at it as an entry point to customers that are coming into the category,” Aulestia said.

The growing popularity of skinny bundles and streaming OTT offerings has also helped HBO’s premium pay TV business, she added.

“There was a time, as a premium service, that we were only sold at the top of the bundle,” Aulestia said. “The idea that HBO should be sold at every level of the bundle, and even as a standalone service, means there are fewer barriers to get HBO.”

The rise of OTT and skinny bundles has been more worrying for ad-supported networks.

“Getting more creative packaging of content to create more customized solutions for the consumer can be very challenging for content providers because you have increasingly fragmented audiences,” Joe Atkinson, technology, infocomm, entertainment and media advisory leader at consultancy PwC, said.

Atkinson and others said OTT distribution can also open up a number of new opportunities.

For instance, the growing SVOD market encouraged Turner’s recent launch of an OTT movie service called FilmStruck, Coleman Breland, president of Turner Content Distribution and president of TCM, said.

“As the bundle became tighter, we decided to go direct to consumer instead of trying to launch a linear network and push it through the ecosystem,” which would be difficult in the current pay TV environment, he said.

Turner has also been pushing to expand the content made available on all platforms both in terms of reach and quantity, with the addition of offerings like full seasons on-demand.

“We now have 450 affiliate partners for our TV everywhere products” and have seen usage jump by “triple digits” in the last year, Breland said.

TIME TO TARGET

Many of these newer products can be traced to a more fundamental change in the way operators think about their customers.

“Today, service providers have to figure out how to target different individuals in household,” PwC’s Atkinson said. “That is a tough challenge, but I think it is really the keys to the kingdom.”

One example of such a targeting effort is the development of packages targeted to consumers at different life stages. “College students have different needs than a single-family home with kids, and we are very focused on meeting all those different needs,” Comcast’s Strauss said. He said the Xfinity on Campus product has been a success in that regard.

Operators have also been greatly expanding the content sources via apps on Internet connected set-top devices such as Dish Network’s Hopper. “You can watch live TV with your Dish subscription, or recorded TV on your DVR or you can watch Netflix and YouTube all in one convenient place,” Dish’s Desai said.

Adding more choices has also been a top priority for Cox Communications, Steve Necessary, executive vice president of product development and management at the Atlanta-based cable operator, said. “We have more than doubled our VOD offerings from 50,000 to over 120,000,” he said.

Cox also has revamped its TV app to expand the content available on digital devices and speeded up the rollout of Contour — Cox’s version of the Comcast X1 Internet-connected set-top platform — from 3,000 customers to more than 600,000 in 2016.

Very importantly, such efforts are also beginning to pay off. Both Comcast and Cox are seeing some of their best video-subscriber efforts in a decade.

Programmers are also reporting strong gains from their digital platforms.

“There is a blending of content types and expansion of the platforms,” translating into some record-setting numbers, ESPN vice president of digital media research and analytics Dave Coletti said.

In year when some live sports audiences have declined, Coletti noted that Watch ESPN’s live stream of the Nov. 26 college-football game between third-ranked Michigan and second-ranked Ohio State — which went into double overtime before OSU prevailed, 30-27 — tallied 1,273,000 unique viewers, making it ESPN’s most streamed regular college football game. (The game telecast also aired on ABC.)

“Eight of our top 10 most-streamed regular season college football games have occurred this year,” he noted.

The 2016 presidential election helped CNN set a number of network records, Wellen said, including a record audience level on Nov. 9 with 77 million unique users, 83 million video starts, 483 million page views and 29 million live streams.

Equally notable was social media. CNN racked up 169.7 million video views on Facebook and 47.6 million Facebook Live views, he said.

“Those results show that it has become very important to be both a destination for content and a distributed brand,” he said. “We have apps and websites where people can access our content but, we’ve also seen that we can be very successful on Facebook Live” and other outside platforms.

Additional encouraging news can be found in TV use, Nielsen’s Enoch said. “The decreases that we saw in TV usage that really started to accelerate in the mid-2014 have lessened,” he said. “TV consumption remains at near record level.”

“We are also seeing a shift back to the more traditional way of hooking up a TV” to a pay TV service or an antenna, he added. “The universe of homes that can watch TV or can stream video to the big screen has actually grown,” reversing a trend that began with the digital transition and the 2008 recession.

That said, Enoch said the “fastest growing area of overall usage — not just video — is the smartphone.”

In the second quarter of 2016, Nielsen reports that consumers ages 18-34 spent almost as much time each week with their smartphones (14 hours and 36 minutes) and tablets (three hours and 27 minutes) as they did with traditional TV (18 hours and 27 minutes).

Less discussed but equally important are connected TVs. “TVs connected to the Internet by any device have grown from about one-quarter of all households in 2010 to about two-thirds of all households,” Leichtman said. “There are now more connected TV devices in American than there are pay TV set-top boxes.”

Said CBS Interactive president and chief operating officer Marc DeBevoise, “We are seeing explosive usage in those connected TV experiences.” He added that “time spent on connected TVs with our products has grown by more than 300%.”

As an illustration, consumers in October of 2016 spent about 347 minutes per month consuming CBS news content via desktop computers, compared with 360 minutes via Apple TV and 496 minutes via Roku, per unique viewer, DeBevoise noted.

“That is a lot of usage, and we are spending a lot of time making certain we can capitalize on that by getting those experiences right,” he added.

LINES ARE BLURRING

Connected TVs also offer much more advanced capabilities for search and discovery. For example, the Roku platform allows users to search for TV shows and movies across more than 100 apps, Roku general manager of content and services Steve Shannon said.

Advanced features are helping to blur the line between connected devices, pay TV operators and the new bundles of streaming channels.

Companies such as Hulu and Sling are increasingly bundling their subscription packages of channels with a free Roku, Shannon said. Also, Charter, Comcast and a number of other operators have either launched or plan to launch TV everywhere apps on the Roku platform so that subscribers can access a large bouquet of channels on the pay TV apps, he said.

“You have the normalization of OTT, where you are seeing massive amounts of traditional broadcast style content viewing on OTT platforms,” Shannon said.

Broadcasters continued to eke out double-digit percentage increases in retransmission-consent revenue in the first quarter, despite mounting evidence that the pay TV universe is shrinking.

A look at some of the top broadcast station groups show that retrans revenue, while still rising at a healthy double-digit percentage clip, leveled off a bit from the triple-digit increases of a year ago. But overall growth at the top five publicly traded broadcasters rose a collective 25% in the period, slightly behind the 35% increases in the first quarter of 2015.

SCRIPPS LEADS THE CHARGE

Leading the charge was E.W. Scripps, which boosted its quarterly retrans haul 92% to $53.6 million, behind the 123.8% increase in the same period last year. Sinclair Broadcast Group — the largest station owner with 172 broadcast properties in 81 markets — maintained a high-single digit percentage increase in the period, although it told analysts those raises will taper off in the next three years as its deals mature.

Sinclair said its next big retrans negotiation will be at the end of the year, with Comcast, and it expects 2017 retrans increases to be in the mid-single digits, dipping to the low-single digits by 2018.

The company, which has been aggressively accumulating stations over the past five years — it had only 58 stations in January 2011 — will have some added leverage in retrans negotiations going forward. It agreed to purchase sports network Tennis Channel in January (the deal closed on March 1), adding to its growing stable of cable networks that include American Sports Network, Ring of Honor and Comet TV. While Tennis Channel had little impact on the first quarter — it had only been officially under the Sinclair umbrella for a month in the period — the network is expected to have influence in future negotiations.

The second-largest station owner — Nexstar Broadcast Group, with 104 properties in 54 markets — saw retrans revenue rise 46.2% to $97.3 million in the quarter, less than the 89.5% increase in the same period in 2015.

Of the top six station owners, all except Tegna, the former Gannett broadcasting group, reported a smaller percentage increase in Q1 2016 than in the prior year. That could be in part because of a declining pay TV subscriber base, as total pay TV customers fell by 1.2% in the quarter. But it is more likely tied to the timing of retrans renewals and overall market maturity. Tegna said it expected retrans to grow more than 30% for the rest of the year.

MVPDs reached several retrans deals with station owners in the first quarter, including Cox (with Nexstar), Time Warner Cable (with Scripps) and Dish (with Cordillera Communications), which likely had an impact on revenue growth. Most of those deals — except for TWC and Scripps — also included brief blackout periods, which one pay TV industry group believes has a huge impact on rates.

The American Television Alliance, a group that includes the traditional pay TV distributors such as Charter Communications, Cablevision Systems, DirecTV and Dish Network, said there were 193 blackouts in 2015 — a new record and more than twice the 94 blackouts in 2014. So far in 2016, 26 blackouts have occurred, and more are expected as deals come up for renewal, usually around major sporting and entertainment events.

The ATVA sees a direct correlation between blackouts and higher retrans fees, adding that oftentimes consumers are forced to pay higher rates after a dark period has ended.

“Each broadcaster’s quarterly earnings report is further confirmation that the retrans cash grab is driving the TV blackout crisis,” said ATVA spokesman Michael Hacker in a statement.

Back in July 2015, SNL Kagan raised its estimates for overall retrans revenue growth to $10.3 billion by 2021, a 63% increase from the $6.3 billion in 2015. CBS alone has said it will generate about $1 billion in retrans revenue in 2016, growing to $2.5 billion by 2020.

RETRANS TAKES UP THE SLACK

Retrans fees have been a savior for some broadcasters, taking up the slack in recent years as the advertising market has tanked. But even as ad sales have begun to rebound — Morgan Stanley media analyst Ben Swinburne said in a recent note that the first quarter was the strongest for national TV ads since Q3 2013, with broadcast advertising revenue up between 8% and 10% — retrans fees continue to rise.

While overall percentage growth appears to have slowed in the first quarter, Pivotal Research Group CEO and senior media and communications analyst Jeff Wlodarczak said it probably won’t last long, adding that it could simply be a result of the “law of large numbers.”

“As they keep getting bigger, the growth is going to slow,” Wlodarczak said. “I see broadcasters trying to push through higher fees on distributors to offset lost revenue from cord cutters/shavers, which will of course only exacerbate the problem.”

A proposed set of new set-top rules might not necessarily set the stage for a new (and much more vibrant) retail era for video devices that can support pay TV services from cable operators, telcos and satellite providers alike.

Though there’s still much work to be done, it’s crystal clear that Federal Communications Commission chairman Tom Wheeler and backers of the rules, such as Google, firmly believe that new regulations will open the retail floodgates.

On the other end, the cable industry, led by the National Cable & Telecommunications Association, claims that the market for retail video devices is doing just fi ne on its own, free of mandates and driven by an apps-based economy.

As for the retail device makers, Google, which is still trying to establish Android TV’s market presence, has been successful with the Chromecast streaming adapter. The $35 device accounted for 35% of the 42 million streaming devices shipped last year, followed by Apple TV, Roku devices and Amazon’s Fire TV products, according to Strategy Analytics.

Of that group, Roku is in trials with Time Warner Cable and Charter Communications on IP-based pay TV offerings that rely on retail streaming devices.

Comcast, meanwhile, has pushed its own leased products harder than ever — with about 40,000 X1 boxes being deployed per day at last count — as the MSO continues to accelerate the rollout of its next-generation video product, aiming to deploy it to about half of its video base by year-end.

But the new rules, if they come to pass, aren’t exactly trying to leap over the highest of bars.

By the National Cable & Telecommunications Association’s last count, the nation’s nine largest incumbent cable operators had deployed 55 million operator-supplied set-tops with CableCards, versus just 589,000 of the security modules in TiVo boxes and other devices sold at retail.

Industry observers and a CE company that’s been close to the retail set-top mix since the early CableCard days say it’s too early to know if the FCC’s new proposed rules will have a meaningful impact, given that they could change during the comment process and will require new standards. Plus, the FCC anticipates a two-year compliance window.

“This is going to take a long time to hash through — not only to set the technical standards, but to see if anything actually happens [amid] coming changes at the administration, and possible changes of the chairman and other members of the FCC,” Mike Paxton, senior analyst at SNL Kagan, said.

Assuming the rules are executed, Paxton doesn’t believe that they’ll have as big of an impact as Wheeler and others who desire a successor to the CableCard expect.

“Our feeling is this is only going to have a modest impact at most on how consumers access … and consume video,” Paxton said. “This is by no means a slam dunk … that millions of consumers in the U.S. are going to go out and do this.”

TiVo has championed the retail distribution model, but it’s had limited success in that area since the original CableCard rules took effect almost a decade ago. Of TiVo’s 6.8 million subs, 5.47 million come way of cable-operator partnerships.

“I think it’s too early to make a guess right now” with respect to the impact of the FCC’s rules, Matthew Zinn, TiVo’s senior vice president, general counsel and chief privacy officer, said. “I think things will change during the comment process.”

TiVo has plenty of questions about the rules, but it also has a goal in mind: “We are looking for something that is workable.”

By that, Zinn means a successor to the CableCard that uses standards, but doesn’t require TiVo and others to adhere to an excessive number of technical approaches.

A major challenge is for the FCC to balance MVPDs’ desire for flexibility while assembling standards with which to build a vibrant retail ecosystem that enables device portability across different pay TV operators, he said.

The FCC’s rules will aim directly at incumbent suppliers with plenty of turf to protect. The global set-top business is fragmented, with Technicolor, Arris, Huawei, Skyworth and Pace comprising 40% of the market, at the end of 2014, according to SNL Kagan (it hasn’t released 2015 market share data yet). Arris, which acquired U.K.-based Pace in January, is now the largest set-top box maker in the world and has a dominant position in the U.S., so it has the most to lose.

But it isn’t losing a lot of sleep — yet. “We’re not terribly concerned about this FCC drama,” Bob Stanzione, Arris’s chairman and CEO, said March 16 at the company’s investor day.

Should the rules establish a stronger retail market for set-tops, “it’s one we’re very well-positioned to support,” Larry Robinson, president of customer premises equipment at Arris, said, in a reference to Arris’s current retail efforts around cable modems and its previous (but brie_) experience selling set-tops at retail after buying Paul Allen’s Digeo in 2009. Paxton also said he doesn’t think Arris and other incumbents have a lot to worry about, viewing the proposed rules as “moderately negative” on their set-top box business. They could pose the potential for losing some business on the lower end of the set-top box market, Paxton said — the sub-$100 area where retail video products will generate the most success. Devices on the higher end of that range — DirecTV’s Genie and Dish Network’s Hopper 3, for example — will continue to be leased.

“I don’t think [the rules] will have a huge impact on Arris and Technicolor, but it certainly won’t have a positive impact,” Paxton said.

Cable broadband infrastructure spending dipped by 3% in 2015, compared to 2014 levels, thanks in part to dropping DOCSIS downstream channel prices and record shipments of super-dense converged cable access platform (CCAP) products, SNL Kagan found.

Shipments of total DOCSIS downstream channels rose 41% during 2015, topping 6 million, as cable operators continued to build out capacity amid growing deployments of FTTP networks by Google Fiber, municipal providers and other ISPs, SNL Kagan said.

But revenues did not keep pace with shipments as the rise in software licenses helped to push down the average price per downstream channel. Despite that boost in channel shipments, revenues in the category dropped 3%, to $1.74 billion, SNL Kagan found.

Among vendors, Arris ended 2015 as the market leader, holding 53% of total revenue among suppliers of cable broadband infrastructure, aided by key customers such as Comcast and Time Warner Cable.

Update: Jeff Heynen, senior research analyst for SNL Kagan, said Cisco Systems followed with 26% share of the market by year-end, while Casa Systems collected 15%. He said Cisco has been picking up momentum in recent quarters as its new flagship CCAP, the  cBR-8, gets into the field, and the company continues to line up customers for the product.

All three will benefit from cable’s transition to DOCSIS 3.1, Heynen said, reiterating that he does expect spending to remain relatively strong as MSOs add capacity amid competition with other providers. 

“The imminent availability of DOCSIS 3.1 linecards and full-spectrum channels won't slow the continued purchase and deployment of current DOCSIS 3.0 channels as cable operators must continue to increase throughput to reduce the likelihood of churn among their broadband subscribers,” Heynen said, in a statement. 

Comcast, Arris’s largest customer, is among those being most aggressive with DOCSIS 3.1. Last week, Comcast announced an “advanced consumer trial” of a DOCSIS 3.1-powered offering in Atlanta that pairs a downstream that maxes out at 1 Gbps with a 35 Mbps upstream.

Comcast has also announced that it plans to offer residential and business-class gigabit broadband using DOCSIS 3.1 in Nashville in “early 2016,” and follow with launches in Chicago, Detroit and Miami in the second half of 2016. Arris announced last month that its flagship CCAP, the E6000, is supporting the rollout in four of the initial five DOCSIS 3.1 deployment markets identified by Comcast.

The bulk of the nation’s MVPDs have yet to integrate Netflix and other over-the-top apps at the set-top level, but  about 20% of them do, and the net effect of those integrations remain “inconclusive,” SNL Kagan analyst Ian Olgeirson found in new study.

Examples of MVPDs that have taken the OTT plunge --  Dish Network (with offers Netflix and will soon add YouTube to its Hopper HD-DVR platform), WideOpenWest (using Arris’s Whole Home Solution), as well as several TiVo partners, including Suddenlink Communications, RCN, and GCI, among others.

Cablevision, the report points out, “has taken a decidedly different path, touting access to services including Netflix and Hulu LLC as part of its non-multichannel video cord-cutter options,” plus announced deals involving CBS All Access and Showtime’s new OTT offering. Charter Communications, meanwhile, has not yet outlined its apps plan for its new Worldbox and cloud-powered Spectrum Guide.

But are any of these OTT integrations moving the pay TV needle one way or the other? Are they helping MVPDs gain and retain subs, or encourage cord-cutting?

“The impact of opening the door to OTT competition remains mostly inconclusive,” Olgeirson wrote. “While it's clear that the group has generally suffered larger subscriber losses than the industry at large, we are unable to draw a direct line to the introduction of integrated OTT offerings.”

And he said that’s partly due to a market that is not acting on uniform strategies – while Cable One and Cablevision put less emphasis on video growth, Dish has “clouded the picture” with Sling TV.

“Caveats in place, it is interesting to see that with two exceptions — Midcontinent Communications’ decrease of 1.2% and Atlantic Broadband Group’s increase of 9%, which was due to an acquisition— all of the MSOs on our list offering integrated OTT access posted subscriber declines that were greater than the analogous declines for the full industry.”

Without that acquisition (of MetroCast of Connecticut), Atlatic Broadband would have seen a decline of 0.9%, “still well below the industry’s comparative 3.6% drop during the period,” Olgeirson said. 

The domestic set-top market has been tough sledding of late for suppliers, but the picture looks a tad rosier when viewed through a global lens.

Based on its latest data, global shipments of set-tops were on track to reach 253.1 million units in 2015, up marginally from 248.6 million in 2014, SNL Kagan found, attributing that small rise to demand in emerging markets such as China and India.

Broken down further, worldwide cable STB shipments were expected to hit 75 million last year, flat with 2014 totals. Satellite STB units, the market’s largest segment, were on track to account for 47% of all global unit shipments in the category in 2015, the firm added.

Shipments of set-top boxes, meanwhile, are trending lower over cost concerns and the introduction of new cloud-powered DVR offerings, SNL Kagan said, adding that HD-enabled boxes accounted for 76% of global STB shipments in 2015.

But even demand in emerging markets won’t help the STB avoid an overall decline. Looking ahead, STB product revenues will reach $14.55 billion in 2019, down from $17.5 billion at the end of 2015, SNL Kagan predicted. 

In addition to gunning for more global scale, the closure of Arris’s $2.1 billion acquisition of Pace last week will ensure that Arris retains global pole position in the increasingly tough cable set-top box market.

Arris held that slot following its purchase of Motorola Home in 2014, and will now expand its lead while also buying share among satellite-TV and telco service providers in key European markets. By most analyst estimates, Arris will be home to about 25% of global revenues in the set-top sector, staying ahead of such rivals as Samsung, Humax, Technicolor (which just bought Cisco’s set-top business), EchoStar and Advanced Digital Broadcast, among others.

Pace and Arris will also share some key clients. Both supply Comcast with the primary HD DVR that powers the operator’s next-generation, IP-based X1 platform. Comcast ended Q3 2015 with a 25% penetration of X1 while shipping about 40,000 X1 boxes per day.

Arris’s acquisition of Pace was opportunistic and, in some ways, necessary, SNL Kagan senior research analyst Jeff Heynen said.

“Pace was winning share at Comcast and DOCSIS CPE (consumer premises equipment),” he said. “I think that spooked Arris quite a bit. And financial analysts watch Arris very closely now.”

The deal also gives Arris a way to shore up its share in the optical node arena, and perhaps give the company means to balance things out amid a declining set-top box market. Arris is also somewhat insulated via its partial ownership of ActiveVideo, which virtualizes many set-top box functions in the cloud.

During the vetting process there were concerns that regulators might require Arris to divest part of its optical business, but the deal ended up sailing through without such conditions.

“I’m surprised the deal went through without more scrutiny,” Heynen said.

Arris now faces the difficult task of integrating Pace and achieving the deal’s anticipated financial synergies.

CEO: SMOOTH SAILING

Bob Stanzione, Arris’s chairman and CEO, believes that integration will be easier to achieve than the one Arris went through after it acquired Motorola Home almost two years ago.

“I think we’ll be able to move faster on this one than we did with Motorola Home,” Stanzione said. In the case of Motorola Home, Arris was not assuming the IT or the financial infrastructure, and had to build it all from scratch. Plus, there were some complicated transition service agreements in the Motorola deal that are not needed with the Pace merger.

Stanzione isn’t predicting when the Pace integration will be completed, but he does expect the “big milestones” to occur in the first half of 2016.

One area of early focus will be combining the sales teams. That’s already happening under the establishment of a new executive team that has former Pace executive Tim O’Loughlin now in charge of North American sales and Ron Coppock now running a new dedicated international sales organization.

“The first thing we’ll do … is combine the sales organizations,” Stanzione said. “We don’t want there to be any confusion in front of the customers; we’ll move most quickly on that.”

The longer-term focus will include back-office integration and the merger of product roadmaps where there are overlaps. In addition to the Comcast X1 example, Arris and Pace have also been supplying similar set-top products to AT&T.

“We will combine [set-top] product lines,” Stanzione said. “But it will take time, because we have to collaborate with customers … If they want us to manufacture two products for the next year, we’ll manufacture two products for the next year.” Those conversations just recently got underway, as they were restricted from occurring before the deal was consummated.

Overlaps in other areas will also force Arris to make some moves with respect to its employee base, which is now at about 8,000, Stanzione acknowledged.

“We have nothing to announce at this point,” Stanzione said in regard to that, but said Arris will update the market on those activities in February during its normal quarterly earnings call while also keeping employees up to speed.

EYEING OVERLAPS

“There are some overlaps and we’re going to work through them as quickly as we can and keep everyone in the loop as to what our thinking is,” he said.

Though the mergers with Motorola Home and Pace aren’t apples-to-apples comparisons, Arris reduced its workforce by about 500 employees about two months after closing the Motorola Home deal.

As for the grander strategy behind the deal, Stanzione still believe it “gives us an incredible boost in scale” and the opportunity to grow internationally, particularly in markets such as Australia, where Arris and Pace were working with different customers and can now combine those efforts.

“We’ll want to see both [the U.S. and international markets] grow,” he said. “But I think the opportunities for us to grow internationally are greater.”

Even though Arris has its hands full integrating Pace, don’t count out more M&A moves.

“We want to be prepared for that, we need to be prepared for that,” Stanzione said, noting that Arris closed the Pace deal with a strong balance sheet intact. “Any company that kinds of gets itself painted into a corner in this world and this environment that is fast-moving will regret it.”

McGraw-Hill Financial has agreed to acquire SNL Financial, the Charlottesville, Va., parent of SNL Kagan, for $2.225 billion in cash.

"We are enthusiastic about SNL because it is a fast-growing, highly complementary subscription-based business that will enable us to accelerate our strategy to be the leading provider of transparent and independent benchmarks, analytics, data and research across the global capital, commodity and corporate markets," said McGraw-Hill CEO Douglas Peterson in a statement. "This transaction provides unique opportunities to provide our customers with end-to-end data solutions and to develop exciting new services, enhance existing offerings and expand into attractive adjacent markets. Adding SNL to our portfolio creates a high-growth market data and analytics business that will leverage the power of the S&P Capital IQ and Platts global platforms to realize the full potential of SNL's financial and commodities products."

SNL Financial provides proprietary research and data for the financial, media, energy, Real Estate and metals & mining industries. In the media sector, its data is known as the industry standard, and its research regarding affiliate fees, advertising, retransmission consent and pay TV subscribers are widely cited by top media and research companies.

Founded in 1987, SNL Financial has about 3,000 employees based in 10 countries. It purchased Kagan Research in 2007.  

SNL has more than 5,000 customers with deep relationships across banks, insurance companies, corporations, asset managers, power companies and other users. SNL's areas of coverage include:

• Financial institutions: asset and branch-level analytics; financial, industry, demographic, employment, trade area, and branch data; and  global bank and insurance company news;
• Real estate: data on 500+ global REITs, nearly 500 global property companies, and more than 100,000 unique properties and development projects;
• Energy: financial coverage of 225+ public companies; industry forecasts; operational stats for nearly 5,000 electric utilities, natural gas companies, and coal producers; data on interstate pipelines, new power projects and mines, and energy-related emissions;
• Media: hundreds of listed companies, US and European TV networks, global databases including detailed pay TV subscriber information and programming history, and extensive radio coverage;
• Metals and mining: data on more than 60 countries, 300,000+ drill results, nearly 40,000 properties and nearly 3,000 active companies.

McGraw Hill Financial is expected to fund the transaction, which should close in the third quarter this year, with about $525 million in cash and $1.7 billion in new debt.  

Evercore and Goldman Sachs acted as financial advisors and Wachtell, Lipton, Rosen & Katz and Clifford Chance LLP acted as legal advisors to McGraw Hill Financial.

 "This is an exciting day for our clients, employees and shareholders and a true milestone event in our 28 year history," said SNL Financial CEO Mike Chinn in a statement. "New Mountain Capital has been a tremendous partner for us over the last four years. The team there provided excellent guidance and supported numerous growth initiatives that enabled us to double our revenues over that period.  We believe McGraw Hill Financial, Doug Peterson and his leadership team are ideal partners as we relentlessly pursue our mission of providing the highest quality sector-specific data, news and analytics to our clients.  We're thrilled to continue this journey with the McGraw Hill Financial team and join their portfolio of market-leading brands."

Following the closing of the transaction, Chinn will report to Peterson.

"We're fortunate to have had the opportunity to partner with such a special company and its outstanding management team,” said SNL Financial chairman and New Mountain Capital managing director Peter Masucci in a statement. “We are confident that SNL is well-positioned to continue its strong growth as an integral part of McGraw Hill Financial and wish Mike Chinn, Doug Peterson, and their management teams great success."

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Retransmission consent fees are expected to climb to $10.3 billion in 2021, up from $6.3 billion in 2015, according to SNL Kagan.

According to Kagan, U.S. TV station owners have continued to secure higher retrans fees in recent negotiations, with strong advances made at year-end 2014 from renewals and annual step-ups in existing contracts. The gains in retrans fees extracted from distributors also comes as broadcast networks are also expected to grow their reverse retrans fees from stations.

For 2015, Kagan projects reverse retrans could increase from $1.65 billion to $3.69 billion. SNL Kagan shows reverse retrans payments back to the networks growing from 42% to 60% of affiliates' retrans payments over that time.

Although the level of reverse retrans paid back to the networks is rising, both stations and broadcasters are finding room to cooperate, particularly with over-the-top offerings like CBS All Access. These OTT initiatives enable stations to further monetize TV content and act as a hedge against potential retrans disputes and loss of multichannel subs via cord-cutting. 

On average, stations will receive retrans fees of about $1.53 per subscriber per month by 2018, according to Kagan, putting them in the neighborhood of the priciest cable channels. According to Kagan, stations will be ahead of all but five cable networks in terms of affiliate fees by 2018 -- ESPN ($8.80), TNT ($2.16), FOX News ($1.67), FOX Sports 1 ($1.57), and Disney Channel ($1.56). Most RSNs are projected to be significantly above this average retrans fee benchmark for broadcast stations.