Market researchers The NPD Group caused a stir yesterday when it forecast an upward spiral in pay TV subscriptions—from an average $86 in 2011, to $123 by 2015 and $200 by 2020.
The cause: The “perennial tug-of-war between cable operators and creators of programming over who gets the bigger share of ever-rising cable payments,” as the New York Post summarized it. TV program licensing fees, which drive up pay TV monthly rates by an average of 6% per year. Interestingly, that is just one to two points behind the average upfront price hikes.
The challenge: Consumer household income has remained essentially flat. That is partly why 16% of U.S. households do not currently subscribe to pay TV services. Another factor is a sharp rise in housing vacancies due to the mortgage crisis, which has taken five million fewer U.S. households off the pay TV grid. Still, total pay TV subscriptions in the U.S. have not declined much, due to bulk-service contracts with apartment complexes and home owners associations that enable operators to retain subscriptions in vacant homes.
The result: “As pay TV costs rise and consumers’ spending power stays flat, the traditional affiliate-fee business model for pay TV companies appears to be unsustainable in the long term,” said Keith Nissen, research director for The NPD Group. “Much needed structural changes to the pay TV industry will not happen quickly or easily; however, the emerging competition between S-VOD and premium-TV suppliers might be the spark that ignites the necessary business-model transformation of the pay TV industry.”
Where Cord Cutters Get TV
Advertisers will follow the viewers, wherever they are, be it watching broadcast tube or online. Based on the latest information from NPD’s “Entertainment Trends in America” report, pay TV cord cutters reported cancelling their subscriptions primarily because of economic considerations; however, they are still accessing TV programming from—
- free-to-air broadcast
- free Internet TV (e.g. from network websites and ad-friendly Hulu)
- lower-priced subscription video-on-demand (S-VOD) services, like Netflix (which is increasingly making noise about advertiser support)
But they do so grudgingly. “Despite the plethora of OTT options for movies and TV, most consumers want their pay TV providers to be central and relevant to the acquisition and viewing experience,” said Russ Crupnick, senior vice president of industry analysis for The NPD Group. In fact 59% of pay TV subscribers preferred having one single provider for their pay TV services, compared to 21% who desired multiple providers, and 21% who expressed no preference. Sixty-two% of subscribers wanted premium TV either delivered by their pay TV provider directly, or from a service affiliated with their pay TV provider. Only 20% of pay TV subscribers were likely to cancel their pay TV service, if they could get their favorite shows online.
“Pay TV providers offer a convenient, one-stop shop for subscribers, and the majority of customers like it that way,” said Crupnick. “There is an open window for the industry to meet consumer needs and become to television what iTunes is to music; however, there is also a definite risk if pay TV providers don’t capitalize on the opportunity—and soon.”