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Faced with rapidly changing consumer habits, programmers and multichannel video providers have spent much of the last five years bulking up their offerings to provide more content on additional platforms.
Like the inhabitants of a besieged medieval town, they’ve hunkered down inside the traditional pay TV ecosystem, devoting enormous resources to building up their defenses by adding new products like TV everywhere or by improving existing bundles with faster broadband speeds or even Gigabit offerings.
All of that changed in 2015. With over-the-top video usage doubling on an annual basis, a growing number of programmers and operators decided it was time to step outside traditional pay TV distribution methods and take the fight directly into enemy territory by offering new over-the-top services such as Dish Network’s Sling TV or HBO Now.
Much of this can be traced to the subject of Multichannel News’s annual Viewer Watch survey — changing video-usage patterns that have produced a slump in TV ratings and slight declines in pay TV subscriber numbers.
“There is a new generation that is consuming TV differently,” Magna Global executive vice president and director of global forecasting Vincent Letang said. The New York-based firm has forecasted a 6% drop in pay TV subscribers and flat or sluggish TV advertising in upcoming years.
“We have been talking about cord-cutting for a few years, and it wasn’t really happening,” Letang said. “But now it is happening, because young people are adopting MVPD subscriptions at a significantly lower rate than previous generations.”
Horowitz Research president Howard Horowitz added, “You can look at it as a glass and say it is half-full or half-empty, depending on your PR objective of the data.” Though the number of cord-cutters remains small, “the market changes aren’t trivial,” Horowitz said. “Complacency is out. You have to take the market seriously and pay attention to millennials by providing them with the kind of services they want.”
Companies must also carefully parse these video-industry developments to better understand the forces that are changing consumer habits, Horowitz and others said.
CORD-CUTTING CONFUSION
Two of the thorniest topics are cord cutting and the habits of the millennial 18-to-34-year-old set.
“We’ve spent a lot of time talking about and reacting to cord-cutting,” Bruce Leichtman, president and principal analyst of Leichtman Research Group, said. “But I think that is a dangerous term that leads people to bad assumptions, bad conclusions and bad decisions, because they are really nonsubscribers.”
The ranks of those nonsubscribers are clearly growing, though not at the precipitous rate some had predicted. Total multichannel video subscribers fell from 100.7 million in the fourth quarter of 2013 to 100.5 million in the fourth quarter of 2014, according to SNL Kagan.
Those declines, however, accelerated in the first nine months of last year, falling by more than 1 million subscribers to 99.4 million in the third quarter of 2015, SNL Kagan principal analyst Ian Olgeirson noted.
Some of this has been attributed to economic issues. The U.S. housing base has increased by about 4.5 million, according to Leichtman, but home ownership is actually down by 1 million and there are 5 million more renters.
“Renters tend to be younger, they tend to be more mobile and all of these things have always correlated a with a lower likelihood to subscribe to multichannel TV,” Leichtman said. “The number of people dropping subscriptions is about the same as it was a decade before we started talking about cord-cutting. The difference today is that fewer people are coming into the top of the funnel.”
Satellite-TV and telco providers have been also more cautious in pursuing new subscribers given the high cost of hook-ups, Leichtman and Olgeirson said.
The declines also have occurred during an economic recovery, Olgeirson said, so other factors are also at work. “A more likely source of erosion than economics comes from changing viewing patterns and the fact that [viewers] can find programming from other sources,” he said.
Millennials can’t be viewed as a monolithic group, researchers have cautioned. For instance, a recent analysis of millennials by Nielsen found 30-to-34-year-olds living in their own home with children had a pay TV penetration rate of 81.4%, versus a 72.4% rate among 18-to-24- year-olds living in their own home with no children.
MILLENNIAL DIVERSITY
“People talk about millennials as if they are a unified group, but of course they aren’t,” Nielsen senior vice president of audience insights Glenn Enoch said.
Nielsen’s study also analyzed how these households changed their pay TV subscriptions over time, Enoch noted. “Our data shows that householders aged 18 to 34 are more likely to drop cable, but they are also the most likely to add it,” he said. Lower-income homes were also “more likely to add and drop a multichannel subscription,” he added.
That’s due to the fact that younger and lower-income households are more likely to rent and drop their pay TV subscriptions when they move. But that doesn’t mean that viewing patterns, particularly among the young, aren’t changing dramatically.
“The big theme that we are seeing in video consumption is how expansive and immersive the viewing ecosystem has become with so many devices and options,” Viacom executive vice president and chief research officer Colleen Fahey Rush said. “It used to be that you had to wait to watch a show one night a week and wait until work the next day to talk about it.
“Now, you can follow the characters and cast on Twitter. You can watch shows on apps and go back and watch all the old seasons on so many different places. Everyone has a TV in their hands, a smartphone, which is an amazing tool for discovery and loyalty,” she said.
“Most of the growth is on mobile, OTT devices and the connected TV,” ESPN senior vice president of global research and analytics Artie Bulgrin said. For example, the WatchESPN app set viewing records in September with 11 million unique visitors — up 50% from a year earlier — watching 2.2 billion minutes of video for a 92% bounce rate.
That trend has been particularly evident with younger viewers. In the third quarter of 2015, TV viewing by 18-to-24-year-olds fell by 2 hours and 4 minutes from a year earlier, per Nielsen, while viewing on multimedia devices such as Roku was up 34 minutes, to 1 hour and 25 minutes a week.
Not surprisingly, these shifts are have affected digital and TV ad spending. “In 2016 digital advertising will overtake TV in the U.S. for the first time ever.” Magna’s Letang said.
Despite this, TV advertising was stronger in the second half of 2015, so spending in 2016 and 2017 isn’t likely to see the type of declines that occurred in 2013 and 2014, Letang and others noted.
“There is a pretty significant amount of truly premium TV viewing just not being included in current ratings definitions,” Pivotal Research Group senior research analyst for advertising Brian Weiser said. “Viewing is not anywhere near down as much as people think it is. It might even be up, but I’ll go with flat.”
The TV-advertising picture also isn’t as bad as some believe. “The third quarter came out reasonably well and the fourth quarter looks even better,” Weiser said. “Based on the idea that digital is eating TV’s lunch, the overwhelmingly dominant view of TV advertising is pessimistic. But TV still remains the most efficient way to build awareness.
“The problem has been that ad spending has been weak, not that we are seeing a secular shift of TV money to digital.”
