Hidden amid the flurry of praise that surrounded AT&T over its relatively strong first quarter performance, mainly for growing its streaming business, was a sentence from one analyst report that kind of brought the whole media transformation narrative home for me in a compact 23 words: “If DirecTV continues to bleed subs at its average pace over the last year, there will be no subs left in 5 years.”
Now, at the risk of showing my age, after reading that sentence, all I could think about was Ziggy Stardust.
But then again, a lot can happen in five years.
What was almost a throwaway line in Bernstein media analyst Peter Supino’s report on AT&T, a line that would have seemed impossible to utter 10 or 15 years ago when DirecTV was still considered to be the gold standard for pay TV, is now considered to be even a little conservative. Now, even after attracting a new investor in TPG Capital -- which arguably gets an interest in the satellite company at a bargain price -- DirecTV, in many minds, has been relegated to little more than a cash flow play.
And what’s more, no one seems to care. Cable operators gave up on video growth years ago. Consumers just want to stream now and once old folks who cling to their pricey cable TV subscriptions, like me, begin to smarten up or die off, there won’t be anyone left to pay for so-called traditional TV.
Supino, in an email message, clarified his take on DirecTV, which he said was a “uniquely bad story,” adding that Bernstein believes that “the NFL inclusion of the broadcast associated streaming channels in the league’s new TV deals is a harbinger of accelerated change. As such rights move to streaming, soon there will be no reason to receive TV in a scheduled, broadcast format. In this context we think the broadcast networks and general interest cable channels, which commonly benefit from real estate in the legacy TV bundle that helps them monetize marginal programming and sub-scale channels, had better take more risk with the amount of programming they invest in their streaming ventures.”
I’ve written a lot about AT&T’s approach to distribution, so I won’t bore you with those details again. But one interesting note from the Supino report -- of the 2.7 million HBO Max additions in Q1, about 1 million to 1.5 million of them were likely people who are receiving the service via AT&T Mobility and/or Fiber bundles. In other words, they are getting HBO Max for free.
But it is becoming pretty evident that the industry is moving toward an app based future that doesn’t include a traditional pay TV relationship. That shouldn’t really come as a surprise, except for the speed at which it is happening.
Earlier this month, at a conference run by Fierce Video, Major League Baseball chief operations and strategy officer Chris Marinak said he was encouraging teams and regional sports networks to accelerate their plans to go direct-to-consumer. A lot are already doing it. Bally Sports Networks -- formerly Fox Sports RSNs -- have said they plan to offer a DTC option next year. YES Network, home of the New York Yankees and partially owned by Sinclair and Amazon, launched their authenticated app this season, but it could easily accommodate a DTC offering when the team deems to do so.
The idea is that the RSNs would eventually offer a hybrid -- linear distribution as well as DTC. But in the end, it’s likely that the model will shift entirely to DTC after awhile, and that would be the final nail in Pay TV’s coffin. Sports, especially exclusive sports, has been the glue that held the pay TV bundle together. Without that, and with ESPN Plus and Fox Sports Go and the like already available via app, the reasons to hold on to a traditional pay TV subscription are quickly fading.
DirecTV lost 620,000 subscribers in Q1, and since Q4 2018 it has shed about 7.1 million. Once the largest pay TV company in the country with 20 million customers, DirecTV now has about 13 million. The pace of those losses has picked up over the past 12 months to about 2.5 million a year, so yes, Supino is right, at that rate there will be no subscribers left by this time in 2026. Dish Network, which has about 8.8 million satellite TV subs, loses about 1.5 million TV customers per year, so using that math it won’t have any subscribers in about the same time frame, five years.
Now, I’m not so sure that pay TV is going to disappear in five or 10 years, but it definitely won’t look the same. It’s not like all those subscribers will suddenly just stop watching TV, but they will find another way to watch it. DirecTV and Dish aren’t strictly satellite companies either. AT&T has an IP video offering, (AT&T TV), a streaming option (AT&T TV Now, formerly DirecTV Now, but they aren’t taking any new customers). Dish has an OTT service with around 2.5 million customers, Sling TV.
And the rest of the industry isn’t immune to cord cutting either. Cable operators have seen their video dominance erode greatly over the past decade. And that got me thinking as to how much time cable has left.
While the narrative in the cable industry has shifted dramatically in the past couple of years toward broadband, the fact is that cable is losing video customers too at a pretty high rate. In the past two years, according to MoffettNathanson, cable companies shed 4 million customers as their collective hold on the industry fell from 51 million in 2018 to 47 million in 2020. At that pace, 2 million lost cable subscribers per year, the industry will have 0 video customers by 2045.
But chances are it happens a lot faster than that.
“The old adage in tech is that things change less in five years, and more in ten, than anyone could ever imagine,” Moffett said in an email message. “I think that’s the rule that will apply here. Will there still be a linear video business in five years? Absolutely. Will there still be one in ten? I’m not so sure.”
Moffett added that waiting for pay TV subscribers to totally disappear isn’t the way to gauge the industry either.
“I don’t think extrapolating current trends all the way to zero is the right way to think about it,” Moffett continued. “That might be the way the demand side works – a gradual decline in the number of older ‘traditionalists’ might translate to a similarly gradual decline in demand for linear video – but it’s not the way the supply side will work.”
Moffett said there already is evidence that both broadcast and cable networks are “strip-mining” their channels for fodder for their streaming services. Just look at the most recent National Football League rights deal for evidence of that.
“There will be a point of no return when the whole linear ecosystem simply unravels, and it will be supply rather than demand that unravels it,” Moffett said. “That’s more than five years away, but it may be less than ten.”
So distributors won’t kill cable, networks will. That seems right. When it really comes down to it, any video distribution service is only as good as its programming. Satellite used to claim better pictures and superior programming to cable and they were right. Then, when it launched Sunday Ticket out-of-market NFL packages, it one-upped cable sports offerings and customer growth soared. Now, some pundits are predicting that with DirecTV’s customer base declining rapidly, Sunday Ticket could go to another distributor, perhaps Comcast or its streaming service Peacock.
With every programmer either with an app or planning one, a future where all programming is obtained via some direct-to-consumer relationship is not so far-fetched. In fact, distributors may prefer it that way.
Because while juggling separate subscriptions to Netflix and Disney Plus and HBO Max and Amazon Prime and Paramount Plus and Discovery Plus all may be fairly manageable to the average consumer now, once every channel goes the DTC route, it could quickly become a nightmare.
Having cable operators serve as “app aggregators,” bundling different programming apps based on genres or prices or something else, while they are selling broadband, would seem to solve a couple of problems. Content companies could stick to what they know best -- creating programming -- while leaving the nuts and bolts of distribution -- billing and customer service -- to the segment that counts those functions as key components of their respective wheelhouses.
Cable operators could bundle apps in packages for consumers reminiscent of the way C-band satellite programming used to be sold, moving the charges collected -- minus a little fee off the top -- to the respective programmers. Practically every analyst I’ve spoken to over the past few years thinks this is the direction the industry is heading. When I proposed the same scenario to one long-time cable guy about a year ago he had one caveat: “It won’t be a little off the top.”
It’s just that now it may happen sooner, rather than later.
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