Moffett: Video Just Doesn’t Matter

ATLANTA — Video customers are worth substantially less than their broadband counterparts as viewership and focus continues to shift away from providing pay TV service and more towards broadband connectivity, MoffettNathanson principal and senior analyst Craig Moffett said at the National Cable Television Cooperative Winter Education Conference here Monday.

In a session titled “Cable 2019: Time for a New Playbook?” Moffett pointed to the increasing number of programmers that are readying direct-to-consumer products to bypass traditional distributors. But to make those services worthwhile, the programmers need to increase their size substantially. He pointed to The Walt Disney Co.’s pending purchase of 21st Century Fox assets and AT&T’s purchase of Time Warner as examples of the reshuffling of the value chain.

In the past, Moffett said, the navigation and packaging function of programming was performed by traditional distributors, but that is being stripped away. Now the value chain in the media business is being shifted to the studio layer, a move that was prompted by Netflix’s entrance into the content creation business several years ago.

“Netflix made the pivot to producing its own content,” Moffett said. “What it really did was set the stage for, on an ongoing basis, what is going to have to be an enormously large business. Because if you can’t syndicate the risk of the studio layer by distributing your content to lots and lots of distributors, than the only way to syndicate that risk of volatility in the production business is by becoming really, really large. So large that you‘re producing so much stuff that the probability that all of it sucks in a given year is reasonably low. In a nutshell, it’s all about that race for scale and that race for scale is all about mitigating risk at the studio layer.”

That in turn has diminished the value of a pay TV subscriber versus a broadband customer. Moffett estimated that the market values a video customer at a multiple of about 2 times cash flow, while a broadband subscriber is attached a value of between 12 and 13 times cash flow.“Video just doesn’t matter much anymore,” Moffett said.

That holds true for some virtual MVPDs as well, the analyst noted. In the fourth quarter, AT&T shocked the market with its revelation that its DirecTV Now vMVPD lost 267,000 subscribers in the period, substantially less than most analysts had expected. Dish Network’s Sling TV vMVPD added just 50,000 customers in Q4, well behind analyst expectations.Moffett said those declines, compounded by the precipitous drop in satellite-TV subscribers, has forced programmers to chase customers directly, further eroding their relationships with traditional distributors.

“Virtual MVPDs didn’t grow nearly fast enough, but the decline is actually worse if you factor in new household formation,” Moffett said, estimating that the pool of cord-cutters is about 18 million homes.

Programmers have no choice but to engage those 18 million homes, and as they sell their content directly to them, further weaken the ties to the existing ecosystem. That in turn makes the cord-cutter pool larger, accelerating the decline of traditional pay TV customers and forcing programmers to be more aggressive with DTC offerings.

“You can start to see now the point at which the whole system is starting to unravel,” Moffett said.

While broadband has been the savior for cable operators, that growth engine is also starting to slow down, Moffett added. He estimated that broadband subscribers had been growing at a 4% annual clip for about seven years, but now are growing at a 2.7% rate. That means net additions are about 30% fewer than they were three years ago, but that is mainly a function of increased penetration.