The children are our future, and they don’t pay for TV

34 Comments

Credit: 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 (s DISH) 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, (s TWC) 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 (s NFLX) 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 (s TWX) and Showtime. (s CBS) 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.

34 Comments

Jeff Lawrence

The future is online video and as this new generation of “Cord Nevers” grows, they will begin to influence friends, family, peers, and colleagues – only accelerating the move away from the traditional high cost, linear programming model to a mobile, time-shifted, place-shifted streaming marketplace. My company, with PlayOn and PlayLater, is betting on this future, and have tuned our service to meet the needs of this growing demographic. It will be interesting to see how the industry, and specifically the premium content owners, will adjust their models to ensure they continue to capture their revenue from this growing segment of viewers, because they don’t get a piece of that broadband fee… yet.

Martin Molloy

Um, I’m nearly 40 and I cut the cord. Why? Because I couldn’t justify paying $100 a month to watch local channels, HBO, and flip through channels. Why on Earth would I pay an increasing amount of money every year for more and more reality shows about crappy jobs or exotic pets or dumb pseudo celebs who get divorced after 94 minutes?

If the programming were better I might actually pay for cable or satellite.

a1icey

Good job missing the point. The point is 1) young people have to move more frequently because of the bad economy and uncertainties in life and longer education – in NYC this means once a year. 2) young people would pay for HBO, which is what most young people actually care about, if it was a separate package, but since you have to pay for a television, a cable box, monthly cable and HBO just to have HBO, why bother?

Jesse Skeen

I haven’t seen any logical reason to get cable for more than 20 years. I’ve NEVER understood why I should have to pay for channels that already get paid to show commercials- many now show as much as regular TV stations that I’ve always gotten for free. MTV was still so cool I’d almost overlook that, but of course now they hardly ever show music videos.

I was getting FREE cable for a while and couldn’t find a single thing to watch on it- the shows that looked interesting had constant channel logos on the screen, a practice I have ZERO TOLERANCE for (I’ve stopped watching network TV and any broadcast stations that do this- what the hell have they GAINED from it??)

The picture and sound quality of Netflix leave a bit to be desired, but they have an ideal model- you have thousands of choices of things to watch, and you only see the ones you want, WHEN you want and they’re shown with NO interruptions of any sort. THAT’S worth paying for- on the other hand I can’t find ONE cable or satellite channel I’d want to pay for.

patricia

Yes but they’re paying for internet access and soon the internet will replace broadcast TV as a platform and they’ll be paying for TV in the end.

HiGuy

I am a 35 year old, who makes good money. I don’t subscribe to any multi-channel… whatever you called thems either.

My wife and I started watching netflix occasionally. Then more often, then almost always, and now exclusively. At first we were still attached to some of the network shows, but over time, we each found series we like on netflix, and just stopped switching back to regular television. Now we are totally disconnected from any current series.

We also subscribe to hulu. Throw free Crackle in the mix, and Amazon Prime (free in our case due to business shipping) and there was just no reason to subscribe to cable.

Heck, via our five rokus we even get all the sports we can eat. I get every game HD live.

We didn’t choose to cut the cord. In our case, it just happened. It was the natural evolution. Why pay so much, to be forced to watch what they want to show me? When for far less money, I can watch whatever I want, commercial free?

Steven Mandzik

I dunno. The original cable business worked because of ESPN. Which is still the heavyweight on pay TV.

Unless sports goes online (like MLB) I think pay TV will win. The only loss will be around the edges.

HiGuy

sports is online. Your can get every game in HD from every major sport except NBA delivered directly to your television via a variety of set top boxes. We use the Roku, and the PS3 in our home. I am sure the NBA will soon follow. Heck, you can even get most of the games from all the minor leagues.

jfruh

The sad thing is that the one channel I’d pay extra for, HBO, is owned by a cable company and will never allow itself to be unbundled. The HBO Go app, which lets you watch both current shows and back episodes when you want, is amazing, is exactly what TV should be doing, but unfortunately you can only get it if you subcribe to HBO via cable. HBO costs $14.99/month on your cable bill? I’d bet you could get thousands of people to pay that directly to HBO just for the HBO Go app. What does HBO stand to lose?

Steven Esteban

You can get even more granular with subscribing to programming. So say I wanted to order up AMC, Showtime, ESPN and PBS. You could go deeper and say I want ESPN on the weekends (for football) and not the weekdays and even get more of an exact measure of what you want rather than all you can eat.

Steve

I cut the cord a couple of years ago. First, it was because I lived in an urban area and a cheap antenna got me basic HD. But then I moved more rural and I realized I just didn’t care anymore. I pay 10 bucks for basic HD service now. It’s like 10 channels and I only do that for the NFL and morning news/weather. I’ve read these articles about cord cutting and why it’s about price. It is all true to an extent, but I also just realized I don’t value tv shows as much as I thought I did. I finally got that 90+% of TV annoys me, so why was I paying anything? Because a couple shows are good? Yes, I still watch a few shows, but it is pure convenience. If all the shows I like vanished I would not care that much. It’s a pretty cool feeling.

What does kill me is how I get jacked on my internet cost because losing the internt (music, articles, gaming, etc) is not an option.

swampthing81

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

Jonathan

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.

Evan

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.

Patrick Aiken

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.

Warren

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.

Slo Jo

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.

Russ

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…

Yacko

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.

Taylor Trask

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?

JordanLyons

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.

Motmaitre

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.

sukru

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.

Mathew Halpern

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.

Taylor Trask

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.

Steven Esteban

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.

Rich

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.

Erik Schwartz

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

fjpoblam

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!

Ric

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!

Ricky Cadden

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.

Norm Snow

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

a1icey

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.

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