How Pay TV will deal with cord-nevers and premium direct-to-consumer apps

Pay TV is no longer a growth industry in the U.S. and over time it will become relatively less important to service providers as they transition to a ‘broadband first-television second’ mentality, a process that has already begun. These are the views of Michael Greeson, President of The Diffusion Group, the U.S.-based research company that has long tracked the growth and impact of online video services and recently published research outlining the motivations leading cord-cutters and ‘cord-nevers’ to become what his firm calls ‘Pay TV refugees’. 

“There is no mass exodus from Pay TV but everything points to a future where Pay TV is less important,” Greeson declares, focusing on his home market. “Pay TV will not die; it will transform itself.”

He thinks he knows the strategy that service providers will use to cope with what he expects to be a growing number of Pay TV avoiders. Companies with broadband offers will slowly increase the ARPU they take from that service (which has higher margins anyway) until they reach the point when they can start to offer ‘digital economy’ Pay TV bundles to a carefully targeted group of consumers – those who are actively avoiding the big subscription package. These offers already exist in some places, but only on the screens of the customer call agents – and they start as low as $5 a month and include broadcast channels and some select cable networks.

These are not intended as a mass-market offer and if they are marketed at all, it would be towards college students, for example. “You will not see these packages advertised on television. It will be highly focused,” Greeson predicts. “But if people start leaving Pay TV in big numbers, then the digital economy package would appear on the website.” He emphasizes: “First they [operators] need to increase broadband ARPU in order to make that transition on the price of TV to some customers. Then they might be able to take a little less on the television package.”

Service providers will not wait for an exodus to begin but will get these alternative packages in place in order to offset one. “We will see a slow expansion of these skeleton [Pay TV] services,” Greeson declares. “They are already repositioning themselves from being Pay TV operators who also offer broadband to broadband operators who also offer Pay TV. That is the direction in which we are headed.”

In this context, Greeson views the growing number of direct-to-consumer online services, like the one HBO will launch in the U.S. (making its content available outside a Pay TV and TV Everywhere bundle) as less of a threat than they might appear. He is confident that the HBO online offer will end up being packaged with broadband services as the standard business model. “They will say it is standalone but it is not really; it will be standalone from other Pay TV content but operators will use it to sell greater [broadband] bandwidth throughput to the home.”

The Diffusion Group (TDG) did some research that suggests that this kind of service will only thrive as part of a broadband bundle, anyway. Greeson says the findings were not positive for an HBO offering sold in a truly standalone fashion, with only 9% of cord-nevers or cord-cutters showing an interest in an app that gave access to HBO content. These figures were based on presenting consumers with the scenario that the app gives them access on their connected devices to on-demand and linear content and costs $15 a month. Greeson reckons the bundle of premium online video and broadband service will be another weapon when handling Pay TV avoidance.  

He also highlights how some Pay TV operators are creating their own online bouquets, too (and this is an option that is open to service providers without a broadband offer). Greeson points to the expected standalone broadband TV service from DISH, the U.S. satellite Pay TV provider, as an example. He predicts it will target the cord-never male, will be sports-friendly and will cost around $30 a month. 

In Europe we can point to NOW TV from Sky in the UK and the new (currently soft-launched) Sky Online from Sky Deutschland as examples of the standalone online Pay TV offer. Both can be termed ‘Pay TV light’ because they offer a sub-set of a full satellite bouquet and as we reported recently, Sky Deutschland views Sky Online as a way to reach out to new target groups, those with connected devices who also happen to be younger (and which it is referring to as ‘Generation Sky’). Yomvi from Canal+ in Spain and Viaplay from Modern Times Group in Scandinavia are other good examples of the standalone broadband-delivered Pay TV service.

Soon we will have an interesting test of what U.S. consumers think of a major multi-channel online pay bouquet that does not come from traditional Pay TV operators. Sony (Sony Network Entertainment International in cooperation with Sony Computer Entertainment) unveiled its PlayStation Vue service earlier this month and this will offer around 75 linear channels as well as three-day catch-up for popular shows and 28-day recording for tagged favourites. The CE/content company heralds Vue as “a pioneering new cloud-based TV service that reinvents the television experience.”

Major programming groups (e.g. CBS, Discovery Communications, Fox, NBCUniversal, Scripps Networks Interactive and Viacom) are signed up. Notably, the service includes local broadcast stations for each market. Consumers will only need to sign-up one month at a time. The service is currently available as part of an invitation-only beta trial for PlayStation 3 and PlayStation 4 owners and roll-out began in New York, with plans to extend to Chicago, Philadelphia and Los Angeles. Early users can watch on their Sony game consoles but more multiscreen devices will follow, starting with the Apple iPad. 

PlayStation Vue is expected to launch commercially in the first quarter of 2015. As Greeson points out, this broadband TV service looks more like a Pay TV replacement than any SVOD offer. “We expect it will cost $60-80 a month, which means they are going head-to-head with [traditional] Pay TV. We think it will be sports-heavy to suit their young demographic of gamers.”

Content owners may be supporting such services but there is little expectation among them that they will make “tonnes of money” from direct-to-consumer apps, Greeson claims. “There are only 13 million Pay TV refugee homes in the U.S. These are the cord-nevers and the cord-cutters and it is not a gigantic market,” he cautions.

So the message is: Pay TV will evolve to survive; Operators will adjust their Pay TV packages and pricing but only as they are forced to; Service providers could offer their own standalone online Pay TV bouquets; They can turn direct-to-consumer subscription services (like the one coming from HBO) to their advantage if they sell broadband; If they offer broadband, this will become the primary service anyway.