CURRENTS OF DISRUPTION: STREAMING INTO THE FUTURE OF CABLE
By J. Cummings, CFA et al. from JanusHenderson.com | 17 December 2019
With persistent programming cost inflation and the ever-increasing price of linear cable television bundles driving consumers to seek alternatives, research analysts Josh Cummings, Tom DeLong and Joe Furmanski discuss the disruption of traditional video distributors.
- The number of multichannel pay TV households in the U.S. has dropped by about 9% since the end of 2014, with cable subscribers shrinking from about 62 million to 51 million.
- The changed media landscape can justify a higher level of spending per episode than traditional TV, and increased programmatic advertising is likely to lead to reduced wasted ad spending by improving the relevance of the ads that consumers see.
- Streaming may end up being a boon for cable companies as video consumption moves online, leading to more data being consumed across cable company networks, and 5G networks are going to start becoming a larger part of the landscape.
Josh Cummings: The U.S. TV market has entered a period of considerable disruption, with traditional video distributors like cable and satellite companies losing market share to Internet-delivered video like streaming.
Persistent programming cost inflation and the ever-increasing price of linear cable television bundles drove the consumer to seek alternatives. The number of multichannel pay TV households in the United States has dropped by about 9% since the end of 2014, with cable subscribers shrinking from about 62 million to 51 million today.
Netflix might be considered the grandfather of U.S. television disruption, having now grown to a subscriber base of over 137 million globally. That success has encouraged others to join the market, with Amazon recently adding Prime Video to its global subscriber base of over 100 million.
Tom DeLong: The tech platform’s global business models changed the rules of the media landscape because they can justify a higher level of spend per episode than traditional TV. They’re all creating very high budget shows, and that means it’s a great time to be a content creator. But it also means that you need to have a global footprint or large ancillary revenue streams to make the financial model work.
The promise of programmatic advertising is the ability to reduce wasted ad spend for advertisers by improving the relevance of the ads that consumers see. Today, a single-digit percentage of the overall TV advertising market can be purchased programmatically, and that’s going to lead to a change in how the advertising market operates. As ads become more relevant, that’ll lead to less wasted ad spend, a higher return on investment for advertisers, fewer ads for consumers and higher revenue for publishers.
Cummings: In addition, the evolution of networks from analog to digital-enabled Internet-delivered video to really start to take off. We think that streaming is not necessarily a bad thing for the cable companies because a video subscriber is far lower margin than a broadband subscriber. And as video consumption moves online, it means more data is being consumed across the cable company’s networks.
Joe Furmanski: 5G networks are going to actually start becoming a big part of the landscape over the next handful of years. And when that happens, the way we actually get that video is about to be disrupted. That video is going to be getting to us via different high-speed Internet. Instead of just regular broadband from your cable companies, now you’re actually having a high-speed Internet, something called fixed wireless broadband, coming from your wireless providers.
So, this can create headwinds for the cable companies in the fact that they’ve been increasingly focused really just on growing their broadband network as their cable margins and revenues decline, but now they’re actually potentially going to see more competition in that segment as well, which could push down or limit the amount of revenue growth and margins they can generate going forward.
So, if we look out to 2024 and beyond, what we’re going to find is instead of having one or two cable companies offering you high-speed Internet, you’re going to have those companies offering the Internet plus your wireless service providers, the three or four different companies there could also be offering you high-speed Internet as well.
Cummings: We think the real dream of 5G is in commercial and industrial applications like smart cities, autonomous vehicles, things like that. But for now, the most obvious use case for 5G is residential broadband because it’s a revenue-generating business today. And that’s probably the biggest risk for the cable companies is that as these telecom companies start to roll out their own 5G-capable networks, they’re going to look at residential broadband as the easiest and fastest way to monetize that investment.
Furmanski: Down the road, it’s a much, much bigger piece of the pie that they’re looking at, and it’s going to include everything from gaming to driving to IoT.
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