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Summary:

A weak economy is putting pressure on the pay TV industry, but a bigger issue is the number of young people opting for online services instead. That’s an issue faced by Dish Network, which is trying to figure out how to win over those possible subscribers.

baby ipad
photo: Steve Paine

A weak economy is putting pressure on the pay TV industry, as it struggles to get new users to sign up for cable, IPTV and satellite services. But the short-term issue around the affordability of cable is hiding a bigger trend of young people who are choosing not to pay for TV. The latest evidence of this comes from statements made by Dish Network Chairman Charlie Ergen, who’s trying to figure out how to keep pay TV subscribers who are increasingly watching over-the-top video.

While there’s still some debate over how many users are ditching pay TV in lieu of cheaper online options, Ergen said on Monday’s earnings call that there’s a bigger macro trend developing, with young people choosing to forgo pay TV subscriptions altogether:

“Young people who move to an apartment or get a house for the first time don’t subscribe to any MVPD (multichannel video programming distributor) and they just… get their network programming from Hulu and they get Netflix… As an industry where people pay between $70 and $92 a month, that’s a lot of money to a young person today who is getting their first job when they can go out and watch Hulu for free and Netflix for $7.99. So it’s a threat.”

We’ve written about this phenomenon before, as operators must convince these so-called “cord nevers” — recent college and high school grads moving into their first homes and paying their own bills for the first time — that subscribing to pay TV services is worth it. For many of these users, who likely grew up watching content online — on mobile devices and on their own time — the concept of paying close to a hundred dollars for access to linear programming might not be a winning formula.

Pay TV is not giving up on young people

But pay TV providers are going to great lengths to win over this demographic. That means lower-priced packages of content, and in many cases, it can involve pitching broadband services ahead of TV. Take Comcast, for instance: In meetings at Comcast headquarters in Philadelphia last week, execs said the company has benefited from a number of marketing programs aimed at college students and recent grads that push data-first packages. Other cable providers, like Time Warner Cable, are also focusing on broadband as their core selling point.

That’s fine for cable and IPTV providers, which have the infrastructure to roll out broadband Internet offerings, but for a satellite provider like Dish Network, the lack of an Internet offering of its own can be a roadblock to acquiring customers that way.

Premium services take a bigger hit

While Netflix and Hulu are eating into potential new customers in the younger segment of the market, they’re also decreasing revenues that Dish gets for premium channels like HBO and Showtime. Online services are largely still seen as complementary to pay TV services for most consumers, except when it comes to paying more for premium packages of TV content.

“One reason our premium business is down is… when someone can buy Netflix for $7.99, do they really want to pay $14.99 for HBO? And so when people look at their pocketbooks, obviously, every time somebody subscribes to Netflix, it’s probably 1/2 of a customer that our industry loses from a premium perspective,” Ergen said. He also noted that about 20 percent of Dish subscribers also pay for Netflix, which cuts into its potential premium network revenues.

That said, there’s the possibility that the streaming business model might not hold up, particularly as broadband service providers move to more usage-based pricing models. Ergen noted that a $7.99 subscription to Netflix might not be as attractive if the cost of broadband increases. If broadband goes up $20, that’s the equivalent of a $27.99 service, he argued, which is something streaming video providers can’t control.

Photo courtesy of Flickr user Steve Paine.

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  1. There’s an easy fix that no one seems to bother mentioning – they could stop raising prices and put together some lower-priced options. Sure, it’ll eat into their margins, but it’s either get $30/mon from me or get zero (which is what the TV operators are getting from me right now). The choice is theirs.

    I cut the cord to Uverse several months ago and couldn’t be happier. I can watch most of their programming on Hulu the day after (which is usually when I would watch it anyways, thanks to DVR), and movies are covered off by Netflix. That’s ~$22/mo ($8 for Hulu + $16 for Netflix) versus the nearly $65 that I was paying for the mid-level package on Uverse.

    1. Yes, but didnt the “internet” part of your bill increase substantially ???

      1. DSL is 20 dollars a month where I am, fast enough to stream most content. and DSL is the most basic internet available these days. so no, it doesn’t increase the cost.

  2. Steven Esteban Tuesday, November 8, 2011

    I like Leo Laporte’s metaphor, I don’t know if he originated it or got it somewhere else – the cable subscription is like the CD/album of the music industry where you were forced to buy a dozen or so songs, most of which, sucked, to get one or two.

    I’d be tempted to go back to cable if it offered an a la carte option like I have with iTunes/Amazon now, buy a season at a time for a discount or a show at a time for a little more. No d*mn commercials. Watch as many times as I want, jump to anywhere I want. Watch from a variety of devices.

    But cable still has the connection hassle, the ugly always on STBs with interfaces from hell, channels that take forever to change, boot times several times worse than the most crud infested outdated corporate PCs.

    1. I agree, the cable subscription *is* like the CD/album of the music industry. But I’m not sure the cable companies have the technology to allow you to have the a la carte option you mentioned. Seriously.

      1. The reason MSOs sell in bundles is because they are forced by the content owners to buy from them in bundles.

    2. You got it. An a la carte option. Let customers opt-in. We appreciate cable for those all-too-frequent occasions when local programming sucks. Especially when the local PBS is in its “beg week”, soliciting contributions, and interim showing two-hour-long shows such as the history of unknown facts about Herbert Hoover.

      But to get the two-three-four cable channels we watch, we have to tolerate getting the ones we DON’T. We don’t care for the Jewelry Channel or the “What Dress to Wear” channel or “Say Yes to the Dress” or “Mecum Auto Auctions” or “Gilmore Girls” or “Enjoying Everyday Life with Joyce Meyer”. Gimme break!

    3. A la carte is the only way cable survives. And I do mean ‘survive’ as the option to thrive is no longer built into their approach! Netflix and Hulu ruined their business model every bit as effectively as Napster and itunes ruined the music industry business model. The sooner they embrace that the better chance they will have to jump on the bandwagon and find new ways to offer value that can be monetized.

      The cable package is just as dead as the music album!

      What they offer now isnt going to to do it, thats a forgone conclusion!

  3. Mathew Halpern Tuesday, November 8, 2011

    They can’t raise broadband prices in order to get people to pay for TV, what we have learned in this recession is that folks will cancel TV before internet. The cable companies are screwed anyway you cut it.
    1. Their product is hard to use and understand.
    It used to be that the you plugged a wire into your tv and got extra channels. Now you have a box and it has software, it updates, it crashes, it takes a long time to change the channel, and there are too many remotes.
    2. Linear content is an artifact of an earlier technology, that doesn’t make sense anymore, they need to stop offering it.
    3. Channels don’t make sense when there is no more linear content. There are shows, and there is search.
    4. Netflix works because its easy to use. Consumers want everything in one place, cable needs to do that, no channels, just shows.

    1. Your #3 is most interesting. Cable channels could/should evolve into well-curated filters for content, both original and 3rd party. That’s what TBS has more or less become, only specific to the television as a device.

  4. I think the other shoe will drop when there is a generation that never even purchases full-sized TV’s–just uses tablets and other devices for video consumption.

    1. I don’t think the big TV will go anywhere. Just like the big cinema screen was never threatened by TV or home video. It serves a very important social function. Think of the family using the big TV toplay games, the guys watching a game on game night, or a couple cuddling on the couch to watch a movie together. No tablet can replace that.

    2. this is my point – i would never buy a tv. I have two fantastic computers.

    3. And currently it’s much cheaper to buy a larger TV than a larger monitor. For example, I used a 32″ TV as a monitor for a while, and it was good enough – although limited to 1080p.

  5. Which will hurt more….1) Traditional cable revenues continue decreasing, cutting off the flow of development dollars to network programming OR 2) The Comcasts of the world crank up the price of broadband causing a dip in those subscribers which would then cut into the flow of development dollars and access of the independent “micro-casters” of the world (like TWiT).

    Or are both inevitable as Comcast ruins life for everyone?

  6. For those pondering the idea of cheaper packages or a la carte some info.

    Using 2009 data for the wholesale fees cable networks pay to the various channels, out of approx 170 channels, 13 cost more than 50 cents and the rest less.

    If you took the most expensive 13, including ESPN1&2, Fox Sports, Fox News, TNT, Disney, together they add to just over $13. The bottom 150+ come to $21 an average of 14 cents each. You could pick a personalized bundle of 100 channels for $14 wholesale which could probably be delivered to you for no more than $35-40. 50 channels could go for $25 or a little less.

  7. One thing cable cos can do right away to save consumers a few bucks is offer a service without a STB. I.e. PC, iPAD, PS3…

  8. The reason I cut the cord is because I am sick of 20 minutes of commercials per hour of programming. Plus huge ads DURING shows that cover 30% of the screen. I am willing to watch ads or pay for content, but I’m not willing to do both. So I cut the cord and have a netflix account, watch some content over the air, contribute to PBS, and pirate a good majority of programming. I also think that the rates iTunes and Amazon charge for tv programs is ridiculous. A tv show should cost around 25 cents to buy for 480p, 50 cents for 720p. And at those prices I would gladly buy hundreds of dollars worth of programming a year. I am already getting it for free, just give me a chance to buy them at a reasonable rate and access it anywhere and anyhow I please. My two cents.

  9. It’s such an easy choice. I was spending $90 a month to get maybe 20 shows (at most) that I watched regularly, 10 or so channels that I would flip to if nothing else was on, and 40 channels that I never even touched. Now, I can purchase ever show that I want to watch on Amazon.com VOD. For every series that I want to watch, my total cost for the entire year is less than two months worth of cable TV. If cable offered an ala carte option where I could pick just the stations that I want to watch, and pay a reasonable price for them, I might consider going back. But since the Devil will break out his winter coat before that happens, I’m happy right where I am.

    1. One thing no one seems to be remarking on is that the economics of mainstream TV production do not support the drive to cord cutting. Put simply, if consumer habits favour the alternative access models, then either production costs must plummet or mainstream TV will stop. You cannot produce the shows everyone loves to watch without the economics of the cable and satellite ecosystem. So if you want to live in a ‘free’ world then prepare yourselves for low-grade dreck as the only content available.

      1. I don’t see it, the content is already shitty, out of the thousands of offerings a couple dozen are worth the time to watch. When the cable co’s die, the production houses will die or actually start focusing on a few good programs and scrap the drivel.

        Then there is the fact that most of these budgets are either for the actors, or marketing, two things that could be easily replaced with lower cost alternatives at the same quality with today’s tech and more 6 figure actors and less 7, 8, or 9 figure actors.

      2. We are already receiving low grade dreck. It’s called prime time programming. You must not have noticed the reboot of Charlie’s Angles or PanAm didn’t last nearly as long as Kim Kardashian’s marriage.

  10. I love some of thoes ideas in the comments but the cable companies have lined their pockets with greed and so have the networks but we all know what happens too greedy people in the end and it will hit them where it hurts most and its coming in their lifetime too

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