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Richard Windsor
13 December 2017

Broadcast TV - Sword of Damocles pt. IV

Cable TV looks finished while OTA has another chance

The nominations of the Golden Globes have revealed further gains for the OTT players over the traditional content creators also signalling the coming demise of cable TV. The nominations for the 2018 Golden Globe awards have been published where the TV section makes interesting reading. Out of a total 55 nominations, 15 (27%) went to TV shows that were exclusively owned and distributed by streaming services. This is a big increase from last year where 10 (18%) out of 56 nominations went to shows owned by the streaming services.

However, 2017 has seen real differences emerge between the streaming players with Netflix pulling away from its competitors Amazon and Hulu. In 2016 Netflix and Amazon were neck and neck on 5 nominations each but this year Netflix has gone up to 9 (behind HBO on 12) while Amazon has fallen to 3. We suspect that this is a reflection of the big increases in content spending that Netflix has made which grew to $6bn in 2017 and $8bn in 2018. However, while Netflix is gaining ground on the traditional content creators, its catalogue is really suffering as other content creators are increasingly pulling their content from its catalogue and going on their own.

The latest is Disney which aims to start its own streaming service in 2019. Netflix started life as a distributor of DVDs and was early into streaming, but as it has rightly identified content as the future, it earned the ire of the rest of the entertainment industry. The result could end up being a series of streaming services all with exclusive content from which consumers can pick and choose their subscriptions. To us, this is the death rattle of the cable TV industry. A standard cable TV subscription in 2016 cost on average $103.10 per month for which a large number of channels come as a prepaid package. However, in reality, most users watch only a few of those channels meaning that it if they could subscribe to those channels individually, they would be in a position to save a lot of money. With the content creators all fragmenting into their own streaming services, this is exactly what seems to be happening and we suspect that the amount of money spent on premium TV in USA is going to fall meaningfully.

This is likely to be a death sentence for both the cable TV companies and the smaller channels that ride on the coat tails of the big channels. This is because they are receiving income from the all in one subscription payment despite having very few viewers. At the same time there appears to have been a substantial recovery in the number of households making use of OTA (over the air broadcast). According to a Nielsen study commissioned by Ion Media, OTA only households has grown by 41% over the last five years to 15.8m households although this may have slowed significantly since 2015. Furthermore, this is not limited to older generations as the median age of households using OTA and not cable is lower at 34.5 years than the total households using TV at 39.6 years. Although the total number of households switching back to OTA-only may have slowed, there has been real growth in households that also have a fast broadband connection. This leads us to believe that users (young and old) are increasingly switching off cable and replacing it with a combination of premium streaming services and OTA TV.

This allows the user to have access to a wide range of channels representing almost all the content he was watching on cable at a much lower price.  Consequently, while commentators are cautious on the outlook for TV advertising revenues in 2018 and beyond, we think that they could easily witness a recovery having been stalled for some time. We suspect that this is a temporary trend as the spectrum that OTA currently occupies could be re used for much more valuable services as there is no reason why OTA cannot be streamed just like everything else. The obvious move is to make the entire selection of channels available on a single, free, ad-supported streaming service.  If it is really sharp, OTA will also seek ways to make its offering available in emerging markets which are highly price sensitive and willing to consume advertising in lieu of paying a subscription.  Hence, we think that the era of one big subscription is coming to an end and consumers are likely to end up spending less money while still getting exactly the channels that they want without having to indirectly pay for any more. We see cable cutting accelerating significantly in 2018 with real industry change coming in 2020 and beyond.

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