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Health of U.S. pay-TV industry continues to decline

The widely reported drop in pay-TV subs in the U.S. in 2013 is symptomatic of the overall decline in health of the industry. Critical industry indicators continue to look grim, with cable operators bearing the brunt of the damage.

The U.S. pay-TV industry lost subscribers for the first time on a year-over-year basis in 2013. The top 8 cable providers, top 2 telcos and satellite operators dropped, overall, 0.4% of their video subscribers in 2013, down 340,000. Penetration of households continues a long term decline, falling below 2009 levels. 87.1% of U.S. households had some form of pay-TV at the end of 2013, versus 88.23% in 2009 and a peak of 88.7% in 2010.

140324 Pay-TV subs

The brunt of these losses were suffered by cable, which continues its steep decline. The top 8 cable companies shed over 2 million subscribers, falling to 48.3M. Satellite managed a small gain, of 170,000. Telco did much better turning in a strong 16% gain, to reach 10.8M subscribers.

The share of pay-TV subscribers has shifted dramatically over the last 5 years. In 2008, cable had a 62% share, satellite 35% and telco just 2%. By the end of 2013, cable had fallen to 52%, satellite gained a little to 37%, and telco gained a lot to 11%.

At the time of the introduction of telco TV there was much debate as to whether there was room for a third pay-TV options. AT&T and Verizon has proven that there is room for a third provider, and also that there is room for growth in the sector. While growth has slowed somewhat this year, from 19% in 2012 to 16% in 2013, it looks like telco will be able to continue double digit growth for at least one more year.

 

140324 pay-tv mixVideo ARPU (average revenue per subscriber) continued to grow in 2013. Comcast video ARPU was just under $80 a month in 2013, up from $76 a month in 2012. Compared to broadband, it would at first appear that video was doing very well. Broadband APRU inched up just over a percent in 2012, to $42.8 a month. However, the underlying costs of both business are radically different.

Video revenue is, of course, burdened by the licensing costs of the content it delivers. Those costs continued to accelerate in 2013. Consulting DirecTV numbers, we see that ARPU increased 3.78% in 2013 (corrected for inflation) while programming costs increased 6.55%. Over the last 9 years, programming costs have increased considerably more than APRU in every year except 2010. This means that profitability of the business has eroded considerably over that period. Despite the lower increase in ARPU, broadband is a much more profitable business as it lacks the huge costs of content.

Why it matters

Overall, the indicators are that the pay-TV industry is headed toward a period of long term decline in the U.S.

The service continues to become less affordable for consumers, and less profitable for operators.

Until these two trends can be reversed, the best the industry can hope for is to stem the inevitable continued losses.

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