Why Cord-Cutting Continues

Quarterly earnings reports this month were followed shortly by analyst estimates of cord-cutting in the US pay-TV sector. The trend towards dropping pay-TV service continues, with some picking 2016 as the worst year ever for cord-cutting. (See Two-Fifths of US Subscribers to Cut Pay-TV Spend, Finds Study, AT&T Bleeding Video, Data, Mobile Subs and Dish Bleeds More Subs, Faces OTT Rival.)

MoffettNathanson LLC estimated pay-TV providers lost 455,000 subscribers in the third quarter, comparatively flat with the 432,000 lost in the year-ago period. The overall rate of decline, at 1.3%, was also about the same year-over-year. But MoffetNathanson did not include the addition of 204,000 subscribers for Dish Network's Sling TV service. Factoring in those subscribers brings the analyst's cord-cutter estimates for the quarter down to 282,000.

Leichtman Research Group Inc. (LRG) tracked the top 11 operators, which represent 95% of the US pay-TV market, and estimated they lost 255,000 subscribers. This is up from 210,000 subscribers in the same quarter last year and puts the total US pay-TV base at 93.65 million (48.8 million cable subscribers, 34.4 million satellite and 10.5 million telco.)

SNL Kagan estimated pay-TV losses at 430,000 subscribers for the quarter, considerably higher than Leichtman and MoffetNathanson. Kagan said that 2016 has been the worst year for cord-cutting to date, with 1.3 million subscribers lost over the course of the first three quarters.

Meanwhile, BTIG Research estimated that the eight largest providers have lost 926,000 subscribers so far this year, leaving 88.2 million pay-TV subscribers. This is considerably lower than other estimates (probably because BTIG is only looking at the top eight providers.) MoffetNathanson put the total US pay-TV subscriber base at 97.55 million subscribers, and Leichtman at 93.65 million.

However, there were differences between the various provider types: Kagan estimated that cable lost just 94,000 subscribers in the third quarter this year, just about half the losses sustained by the sector at this time last year. Meanwhile, DirecTV Group Inc. (NYSE: DTV) gained 323,000 new subscribers in the quarter, offsetting losses at fellow satellite provider Dish Network LLC (Nasdaq: DISH). But DirecTV's growth is significantly driven by parent AT&T Inc. (NYSE: T) looking to migrate its U-Verse IPTV service subscribers over to DirecTV -- which led to losses of 382,000 subscribers at U-Verse, more than offsetting the gains for DirecTV.

So what is really driving cord-cutting behavior? A new study released by TiVo Inc. (Nasdaq: TIVO) sheds light on the key drivers for cord-cutting, but contains few surprises. According to the survey, 82.4% of respondents had a pay-TV provider; but TiVo decided to focus on those that didn't have a current subscription, and then dig even deeper into the 17.9% of non-pay-TV subscribers who had cut the cord only in the past 12 months. As you might imagine, the main reasons for cutting the cord were:

• 82.9%: Price -- too expensive
• 59.5%: I use an Internet streaming service, such as Netflix, Hulu, Amazon Video, etc.
• 28.1%: I use an antenna to get the basic channels on my TV
• 16.0%: Moved/Relocated, and I do not plan to sign up for cable/satellite service again
• 14.0%: The bulk of my TV viewing was the original series on streaming services, such as Orange is the New Black or House of Cards

If we review the responses, there are two consistent themes that come through: cost and OTT competition/advantages. Pay-TV providers need a two-pronged strategy to address these cord-cutters.

Firstly, target the antenna users and those who dropped the service because of its price with skinny bundles. The actual mode of the service (online or via pay-TV infrastructure) does not appear to be too important; what's important is providing a basic service at a low cost.

Subscribers also need a more robust on-demand experience comparable to that offered by Netflix Inc. (Nasdaq: NFLX), Amazon.com Inc. (Nasdaq: AMZN) and Hulu LLC . Operators must find ways to create better recommendation and navigation, and facilitate a greater volume of on-demand titles to match the streaming libraries. Binge-watching is an important requirement, so it must be catered to with "stacking" agreements. And of course, content must be available across devices.

The challenge for pay-TV providers in this case is not the technology as much as it is content acquisition. OTT providers are simply doing a better job of finding the right blend of content and delivering it at a lower price. Operators, constrained by an existing framework of carriage agreements and channel packaging, are struggling to match them.

This is why Netflix is planning to spend $5 billion per year on developing its own content -- the existing licensing structure simply doesn't offer the flexibility possible when you own your own content rights.

It's also worth noting though, that both analysts tracking the sector and TiVo's survey found that approximately 80% of US households still subscribe to Pay-TV. And while we have focused on those who have cut the cord, we have not looked at those who haven't.

While it's clear that there is a trend towards cord-cutting, the vast majority of the country is still finding some value in pay-TV. We shouldn't lose sight of that fact.

— Aditya Kishore, Practice Leader, Video Transformation, Telco Transformation