By Keach Hagey and Shalini Ramachandran
The biggest U.S. cable-TV channels are experiencing a troubling
trend: Their reach into American households is shrinking.
Over the past four years, the top 40 most widely distributed
channels in 2010--household names like CNN, ESPN and USA--have lost
an average of 3.2 million subscribers, or more than 3% of their
distribution, according to a Wall Street Journal analysis of data
from measurement firm Nielsen.
Some in the industry point to consumers who are "cutting the
cord," ditching their cable and satellite-TV connections in favor
of more affordable online video options like Netflix and Hulu. But
the numbers don't add up. Last year the pay-TV industry lost
166,000 subscribers, according to research firm MoffettSHYNathanson
LLC. While that was the first annual decline on record, it isn't
enough to account for the subscriber declines of the biggest cable
channels.
Indeed, the data and interviews with a range of cable-TV
industry executives suggest that something else is going on: Many
consumers aren't so much cutting the cord as shaving it.
A growing share of pay-TV customers are signing up for smaller,
cheaper bundles of channels that cost anywhere from $10 to $50 a
month and don't include popular channels like TNT, USA, ESPN, CNN,
Fox News, Disney Channel and Discovery Channel, the industry
executives say.
"What we are seeing is some cord cutting and some cord shaving,"
said Stephen Hasker, global president of Nielsen. "Consumer time
and attention is shifting."
Basic plans that include little more than local broadcast
stations now make up some 12% of pay-TV subscriptions, up from 8%
to 10% a few years ago, according to estimates by some industry
executives. Some consumers are also turning to cheaper, sports-free
and family-oriented packages, executives say.
"We think cord-shaving is a reality going forward," says
AT&T Inc.'s Chief Strategy Officer John Stankey.
The shift of consumers to lower-priced plans is a worrying sign
for media companies, striking at the heart of how they make money.
TV channels are paid by cable and satellite-TV providers on a
per-subscriber basis. Over time, declines in subscribers could dent
these companies' growth. Pay-TV providers face significant risks,
too. If more people downgrade to skinny tiers, it could pressure
revenue, analysts say.
Some media executives say losing a few million subscribers to
their channels doesn't immediately raise alarms. They point out
that they have been able to raise the fees they charge pay-TV
operators for each subscriber more than enough to offset the
declines. Media companies are also optimistic about selling their
channels to new Web-based TV services from companies like Sony
Corp.
But others are doing some soul searching over how and why this
happened. Some executives say media companies have been so eager to
make content available to streaming-video companies like Netflix
Inc.--which pays a lot of money for those rights--that they have
actually undermined the pay-TV ecosystem, encouraging consumers to
think they can find good programming for cheap online.
"We're at a tipping point of consumers thinking Internet first
and TV second," says Bryan Rader, CEO of Bandwidth Consulting LLC,
a firm that advises investors about pay-TV marketing trends.
The precise number of people moving to skinnier bundles of
channels is murky, since cable-TV providers closely guard that
data. Media companies, meanwhile, don't disclose the distribution
of their TV channels, and some of them contest Nielsen's estimates,
arguing that changes in the media measurement specialist's
methodology are to blame.
But data points are piling up to show "cord shaving" is for
real. At least two pay-TV providers say about 10% of gross TV
subscriber additions are customers who are taking a slimmed-down
bundle--in contrast to the bigger ones with hundreds of channels
that can cost upward of $100 a month.
Most of the biggest channels have lost between three million and
five million subscribers since 2010. The two most expensive
channels, which feature marquee sports events-- Walt Disney Co.'s
ESPN and Time Warner Inc.'s TNT--have been the hardest hit, with
subscriber drops of nearly 5%. ESPN this year is expected to
receive average monthly fees of $6.04 per subscriber, while TNT
will receive $1.44, according to SNL Kagan.
ESPN, touting its "35-year history of innovation," responded
that "the demand for live sports will only continue to grow."
There are some limits on how far cord-shaving can go. Big
channels like ESPN stipulate in their contracts with distributors
that they need to be in the most widely distributed tiers or reach
a high percentage of the customer base. That means if too many
people start subscribing to cheaper tiers--ISI Group LLC analyst
Vijay Jayant says the threshold is between 10% to 20% of the total
base--providers may have to start bringing the big channels into
those bundles and they won't be as skinny.
Skinny TV packages have technically been available for years,
but operators barely marketed them. A 1992 law stipulated that
cable-TV providers must offer "basic" tiers, consisting of a
handful of local broadcast stations and public programming. A
mid-2000s push by regulators led to family-oriented tiers, but
pay-TV providers didn't market those packages broadly either.
Operators' thinking has changed. Attracting cost-conscious
consumers and the growing pool of people who have never had a cable
subscription and mainly consume online video--so called "cord
nevers"--is now part of their growth strategy. The hope is that
they can hook those consumers into pay-TV with the skinny plans and
encourage them over time to upgrade to more expensive bundles.
Comcast Corp. last year began marketing a basic tier paired with
high-speed Internet and HBO for a promotional price of roughly $50
a month, although it can vary by market. AT&T recently launched
a similar offer that also comes with a year's free subscription to
Amazon.com Inc.'s Prime streaming video and shipping service.
Meanwhile Verizon FiOS and DirecTV have put more marketing muscle
behind slimmed-down TV bundles.
Some TV executives say that their internal numbers show
shallower declines in their channels' reach than Nielsen's data
does. A big issue, they say, stems from Nielsen's decision last
year to include broadband-only homes in the panel of consumers it
samples to gather industry data. Nielsen warned the change could
affect each channel's household reach estimate by about 1.2%.
But the drop-off in major channels' reach has been going on
since 2010--long before the Nielsen readjustment. Most network
executives said that even if their internal numbers didn't match
Nielsen's exactly, the direction was the same--a steady subscriber
decline that is expected to continue.
Nielsen says the subscriber declines are a real phenomenon.
Cord-shaving may be the biggest near-term threat. But the
industry's bigger long-term risk is that consumers will get so fed
up with rising cable prices that more will cut the cord
entirely.
Craig Moffett, MoffettNathanson analyst, said "investors have
gotten complacent and started to believe that cord cutting isn't a
real risk...precisely at the time that the forces of cord cutting
are starting to gather more momentum."
Write to Keach Hagey at keach.hagey@wsj.com and Shalini
Ramachandran at shalini.ramachandran@wsj.com
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