Now that all the major cable and satellite TV providers have reported their Q2 2020 earnings, we know the exact amount of damage cord-cutting inflicted on traditional TV through the start of the summer.
In the second quarter of 2020, more than 1.3 million homes dropped traditional cable or satellite TV service, and most of those cord-cutters didn’t replace their standard bundle with a streaming one such as Sling TV or Hulu + Live TV. The industry as a whole lost roughly a million pay TV subscribers last quarter, and over the last year more than 5 million households have opted out of pay TV bundles, presumably in favor of cheaper streaming services and antennas.
It’s hard not to feel a tinge of schadenfreude for the TV industry. The downfall of expensive bundles was obvious years ago to anyone who was paying attention, but instead of providing more choice and flexibility, TV networks doubled down on more bloat at higher prices.
The strategy amounted to a dare: Sure, quit cable TV, but what will you do without your favorite sports team or that one other channel you like? As the pandemic continues to jeopardize live sports, and cost-conscious consumers decide they’d rather just keep the money or spend it elsewhere, the industry’s plan is now backfiring in spectacular fashion.
Cable’s game of chicken
The raw decline in pay TV subscribers only tells part of the story. One of the more interesting tidbits to come out of this quarter’s earnings was the news that Philo, a $20-per-month bundle of streaming TV channels, now has 750,000 subscribers, up 300% year-over-year.
Philo is notable because it doesn’t include any channels that carry sports, including local broadcast channels,and it has no content deals with Disney, NBCUniversal, Fox, or WarnerMedia. As such, it only charges about a third of what other streaming bundles cost, and has only raised prices once, when it eliminated a cheaper tier for new subscribers. Although Philo is booming, most major TV networks aren’t benefiting from the service’s success because it’s not carrying any of their channels.
Philo didn’t reveal its own subscriber numbers, though. Instead, they were announced by Discovery CEO David Zaslav, whose company is a Philo investor. By revealing Philo’s numbers, Zaslav showed how the excessive costs of live sports and broadcast channels are dragging down the entire pay TV enterprise. (He’s made the point more explicitly before, saying in a previous earnings call that the company’s subscriber numbers might turn around if more sports-free options were available.)
TV networks, however, have been unwilling to offer their sports, news, and entertainment channels in separate packages. If Disney were to allow for TV packages that didn’t include ESPN, for instance, many of the 78 million people paying for TV bundles today would probably stop paying for ESPN overnight. So instead, networks have decided to play a game of chicken with customers, wagering that most people won’t abandon big TV bundles if it means losing a particular channel, even at higher prices.
It’s a bet they’re now losing as the best non-sports content becomes available outside of cable bundles on services like Netflix. While streaming TV has soared during the pandemic, TV bundle subscriptions are sliding, and networks have finally reached the point where they can’t just keep raising prices to compensate for the lost revenue.
“[W]e suspect the entire industry will be in negative territory by the end of calendar 2020,” Lightfield analyst Rich Greenfield wrote in a research note earlier this month.
For TV networks, the reality of the situation is finally setting in, and they’re starting to pack more sports into their standalone streaming services. ViacomCBS is adding UEFA soccer coverage to CBS All Access, joining its existing coverage of the NFL, PGA Tour, and National Women’s Soccer League. NBC’s Peacock will carry 175 Premiere League matches, along with an NFL Wild Card playoff game and coverage of the U.S. Open. During Disney’s latest earnings call, CEO Bob Chapek said the company was “certainly open to any and all options” for distributing sports to customers and would have more to share at its investor conference in a few months.
There is a sense, however, that these companies are just trying to stretch out what will inevitably be a long slide in profitability. In an interview, Greenfield estimates that ESPN would have to charge between $20 and $30 per month directly to consumers—at least double what they’re paying for ESPN channels as part of a bundle—to match its current cable earnings. That assumes all of ESPN’s current viewers become subscribers, and that no one drops the service during the months when their favorite teams aren’t playing.
Greenfield believes that while an unbundling of sports is likely, that content will never make as much money as it did with cable and satellite TV. In the same way that streaming services like Netflix must constantly battle one another to retain subscribers, ESPN and its rivals will have to contend with a much more fickle audience.
“My guess is that these networks are going to have to price it cheaper and deal with high churn, and it will be a meaningfully worse business,” he says.
Whether TV networks could have done anything differently to avoid this fate is harder to say. In a sense, the original sin of TV bundles in the United States was to make expensive sports programming mandatory in the first place. While this model was lucrative for many years, it became untenable once streaming services like Netflix started putting out cheaper entertainment for non-sports fans. Now the companies in charge are stuck with no way to sustain those highs.
“In this country, sports has always been baked into the base package,” Greenfield says. “Once you’re addicted to that drug, it’s hard to get off of it.”
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