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The end of pay-TV?

Spencer Wang, head of US media and internet equity research at Credit Suisse Securities, offers Jonathan Webdale a stark assessment of the prospects for traditional pay-television as ‘over-the-top’ TV spreads.

Spencer Wang

If you’re in the pay-TV business and tried to start the new year with a positive outlook and a spring in your step, stop reading now. The forecast is bleak, according to Credit Suisse Securities. The global financial services firm released a report towards the end of last year predicting the overall US pay-TV subscriber base would fall 200,000 in 2012, instead of gaining 250,000 as had been anticipated previously.

Sadly this is no short-term blip. Rather, it signals the start of a long-term downward spiral that will require pay-TV providers to reinvent their existing businesses and undermine the networks that rely on them, says the report.

Credit Suisse’s head of US media and internet equity Spencer Wang stresses that he doesn’t want to “go overboard” but the warning signs are there. “What you’ve seen in four out of the past six quarters is that pay-TV subscribers have declined,” he says. “The absolute amount of losses varies quarter-by-quarter but on a year-over-year basis the multi-channel video universe is basically not growing anymore.”

For the 12 months ended September 30, the total number of pay-TV subscriptions stood at 100.8 million, according to Credit Suisse. This number was flat compared with the previous year but census data shows a 1.25 million rise in the number of occupied households over the same period. In this context, pay-TV penetration has fallen from 84.1% to 83.2%.

“What you used to see was cable losing subscribers due to competition from satellite and, to a lesser extent, telephone companies entering the video market, but the overall pay-TV numbers would grow. What you’re seeing now is that if you add them all up, they’re either not growing or declining,” says Wang.

It was his colleague, Stefan Anninger, who welcomed the pay-TV business back to work just after Thanksgiving with the gloomy Credit Suisse report. At the same time, Anninger coined a new phrase. The industry has, over the past few years, debated the extent of ‘cord-cutting,’ where pay-TV customers end their subscriptions either because they can’t afford them or have rejected them in favour of cheaper or free ‘over-the-top’ (OTT) alternatives like Netflix, Hulu or simple piracy. But Anninger raised the spectre of “cord-nevers,” denoting the generation growing up now that hasn’t known a world without the internet and is unlikely ever to pay for cable or satellite.

“In prior recessions, yes, maybe people were strapped for cash but the cost of pay-TV was lower back then and you didn’t really have a choice. Now you have lower-cost options, whether that’s Netflix for US$8 a month, Hulu for free or Hulu Plus for US$8 a month, or you can find stuff over the internet for free,” he says.

While the replacement life of a TV is longer than most other devices, in the meantime sets are getting connected to the internet in a variety of ways, whether that’s via devices like Apple TV or Roku or consoles like Xbox 360 and PlayStation 3.

The outlook for traditional players isn’t good from the Credit Suisse standpoint. “In the next 12 months, we’ll likely continue to see disappointing pay-TV subscriber growth. You will also see more and more innovation from internet technology companies around delivering video over the internet to television. Whether that means an evolution of the Apple TV strategy, a better version of Google TV, or one of the cablecos going out of the market, there are going to be a lot of interesting developments.”

From Wang’s perspective, cable distributors are not video companies. Their real strategic asset is the ability to deliver ultrafast internet to the home. “Over time, the underlying trend in the industry is that most of the services that cable offers today are going to become IP-delivered. Things like video and voice will be just applications that ride over the broadband infrastructure.”

In this environment, platforms would do well to get out of the content business, according to Wang. Hence the reason Credit Suisse downgraded Comcast Communications when it bought out NBCUniversal two years ago.

“In the near term, the winners will be the companies that actually own their content who can monetise it via Netflix, Amazon, Hulu, Google or whoever,” says Wang. “The problem for the US entertainment conglomerates is that anywhere between 55% and 100% of their cash flow is from cable networks, and cable networks by and large don’t own their programming.”

While some are making efforts to reverse this situation, this isn’t happening fast enough, says the analyst. “The risk for cable networks is that when subscribers go down, their affiliate revenues go down, their ad revenues go down and they have very fixed operating costs like programming that don’t.”

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