We’ve long argued that price increases for pay TV packages were making the traditional cable or satellite subscription too expensive for a growing number of Americans. Bernstein Research Senior Analyst Craig Moffett issued a research note Wednesday that not only backs up that claim with some real data, but paints a damning picture of cable affordability in light of larger macroeconomic trends. In short, many U.S. households have less money for discretionary spending than they’ve had in decades, at the same time that the price of TV entertainment has risen dramatically.
No money for food, let alone cable
The latest note references a larger piece of Bernstein research entitled “The Poverty Problem,” which provides detailed data on income and expenditure trends for each of five income brackets. Taking that data into account, Moffett reports that the bottom two-fifths are being increasingly pressured due to the lack of real wage growth and the increase in the cost of necessities. Moffett wrote:
After the necessities of food, shelter, transportation and healthcare each month, the bottom 40% of U.S. households have already exhausted all of their disposable income. There is nothing left for clothing… for debt service… for cable… or for phone.
The inability to pay for necessities — much less home entertainment — threatens to upend an industry that has already more or less reached its saturation point. According to Moffett, approximately 86 percent of U.S. households currently pay for TV services. “Relatively few other sectors have this kind of economic exposure to the bottom half,” he wrote.
Big media companies also will be squeezed
While pay TV providers will be most directly affected by the potential for cord cutting, the trend will trickle down from big cable to the big media concerns. Since “virtually all the big media companies are now cable channel houses,” and since almost all of those are fully distributed throughout cable and satellite distributors, he argues that there’s no room for growth from greater penetration or the addition of new, smaller pay TV packages.
All that’s left to do, from a big media perspective, is to raise carriage and retransmission fees — something that squeezes consumers further and will likely result in even more subscription departures. Moffett notes that from 2005 to 2009, the weighted average revenue per user (ARPU) for cable and satellite companies grew 29 percent, from $59.82 to $77.43. While that increase is due in part to increased adoption of HD TV packages and DVRs, Moffett writes, “the disconnect between this increase and stagnant or falling incomes is striking.”
Online alternatives still a ‘dog’s breakfast’?
Moffett has long been a champion of the pay TV industry’s resilience in the face of competition from online alternatives, which is one reason why this research is so startling. He is, after all, the same guy who said cord cutters were “settling for a dog’s breakfast of Netflix (s NFLX) and short-form video.” The reasons he cites for cord cutting haven’t changed since then; he still believes the average cord cutter is unemployed or poor — but his assessment of the value proposition of digital media for those Americans has changed slightly. Wrote Moffet:
No one would argue that the entertainment choices offered by Netflix are better than what’s available from cable — and neither are those offered by Hulu, nor YouTube. (s goog) But when faced with a choice of pay TV or a third meal, will some customers choose to make do with a back catalog or off-the-run TV shows and movies? Of course they will.