Inside the Slow Death of Cable TV
But the company, founded in 1965 by Dick and Susan Gessner and now run by their son Bob, can’t do much these days to please the dwindling number of subscribers who pay for cable TV service. MCTV has steadily raised the rates for its traditional cable TV packages during the past six years. The price hikes have been commensurate with the higher costs that the cable company has faced in carriage negotiations with local broadcasters and the largest programmers, from Disney on down.
Massillon, Ohio-based MCTV is one of a number of small and midsize cable operators that have thrown in the towel when it comes to trying to hang on to television subscribers in a cord-cutting universe. The company’s profit margin on its TV service has fallen by nearly half in recent years. Consequently, MCTV is now focused largely on providing broadband service.
Bob Gessner, president of MCTV, explains the intricacies behind the change in strategy. “I lost 9% of my TV customers last year,” Gessner says. “It makes my heart skip a beat when I think about that. For every 10 new customers we get, only 2 will take some form of video.”
Gessner is not the only cable TV boss doing tough calculations on how to manage his changing business. The original disruptors of broadcast TV’s status quo are under siege from a slew of new low-cost streaming competitors. They’re also facing an uphill climb in carriage negotiations with programmers that have bulked up in the past few years to bring more clout to the table even as they also pursue direct-to-consumer plans that take the cable middleman out of the equation.
The Disney Plus streaming platform expected to debut in the U.S. by year’s end has been widely viewed as the media giant’s response to the rise of Netflix. But it can also be seen as a reaction to the steady decline in the user base of the traditional cable and satellite TV distributors. The largest entertainment companies are bracing for the day when the economics of video become so challenged that even the largest cable operators no longer want to be in the business of delivering cable television. “The genie can’t be put back in the bottle,” says analyst Craig Moffett, a longtime cable industry watcher and partner in MoffettNathanson.
The swings in the marketplace are evidenced by the number of cable operators who have essentially given up on video and are focused on growing the broadband side of their business. Some smaller operators go so far as to help customers find low-cost streaming bundles from outside providers — think YouTube TV and Hulu Live — when they call to cancel their service.
“The problem now is that there are so many households who get their video through a means other than a traditional cable TV subscription that the media companies have no choice but to engage with the market in a very different way,” Moffett says. “Almost by definition, that will only accelerate the rate at which everybody else entertains the idea of leaving cable.”
The high demand for broadband service is a saving grace for cable operators, but cable’s dominance of high-speed internet access will also be challenged by the rollout of 5G wireless technology by Verizon, AT&T and other telcos.
DirecTV and Dish lost a whopping 2.4 million subscribers, or 7.5% of total subscribers, in 2018, up from a loss of 1.6 million in 2017, according to Leichtman Research Group. The six largest cable operators shed a total of 910,000 subscribers last year, or 1.9% of total subs, up from a loss of 680,000 last year, per Leichtman.
The exodus from traditional MVPDs is a red flag for Hollywood, because cable and satellite providers shelled out some $41 billion plus in carriage and retransmission consent fees for programming in 2018. Those affiliate fees have been the single biggest drivers of corporate earnings for the major media conglomerates for two decades.
Now, as the industry’s traditional Hollywood studios take a cue from Netflix, those predictable fees paid out over multiyear contracts will give way to Disney and other content owners courting subscription dollars directly from consumers.
“Media companies in many aspects of their businesses are wholesalers,” says John Hodulik, telecom and media analyst for UBS. “They’re starting to realize that their ability to maintain their current economics or to grow is going to require having a retail relationship with their customers. That’s a dramatic change from how these companies have done business in the past.”
Moffett’s partner, analyst Michael Nathanson, called Disney Plus a hedge against the possibility of a precipitous drop in traditional MVPD subscribers over the next five years.
After peaking in early 2012 at just under 100 million video subscribers, the size of the overall MVPD universe fell to about 89.1 million in 2018, including subscribers of the newly launched virtual MVPDs.
MoffettNathanson predicts a rate of decline of about 4% a year over the coming five years, or a drop from about 89 million subscribers in 2018 to 72 million in 2023. But the analyst also has an alternate “doomsday scenario” of a 7%-10% annual rate of decline, taking the traditional universe down to 56.2 million subscribers by 2023.
“Disney is building a product set for scenario two,” Nathanson said during a conference call last month. “If it gets to the point where things get really ugly, they’ve built their lifeboat.”
The nation’s biggest cable operators — Comcast, Charter Communications, Cox Communications and Altice USA — are becoming more selective in their pursuit of video customers. That’s a notion that would have been unthinkable just a few years ago.
“Our largest, most profitable business is broadband,” Comcast chairman-CEO Brian Roberts said at the Morgan Stanley Technology, Media and Telecom Conference in February. “We still want to invest in video. We would like to hold on to video and have it part of our bundle, but we’re not going to chase [it] in these market cycles … where there’s a lot of un-economic things happening in video. Let’s put our attention on broadband.”
Comcast began its push to diversify beyond its core cable business more than a decade ago. Now that it owns NBCUniversal, the company has to balance the opportunity to distribute the studio’s content in new ways with its interest in preserving the marketplace for cable.
Charter Communications had been seen as a cash-rich contender to swallow up a Hollywood studio, possibly Lionsgate given the connective tissue of investor John Malone, who has a stake in both companies. But the upheaval in the content production and distribution arena has quieted those rumors. “They’ve all come to the realization that [cable] is a declining business and needs to be managed as a declining business,” says UBS’ Hodulik.
Adding to the complexity of evaluating the long-term prospects for video is the fact that a number of the most prominent skinny-bundle alternatives to cable are offered as loss leaders to serve other strategic ends. DirecTV has been forced to raise the price of its DirecTV Now service, which bowed in late 2016 at the unsustainable price of $35 for a basic bundle. An entry-level subscription now costs $50.
YouTube is viewed as willing to absorb losses on its $40 YouTube TV bundle because it wants to harvest information on the viewing habits of its subscribers. Hulu’s streaming bundle is seen as a hedge by the company’s owners — Disney, Comcast and AT&T (for now) — to ensure that their respective channels have full distribution in a skinny-bundle world. The creation of smaller bundles has added to the tensions between programmers and traditional distributors, as old-guard cable operators are often under contractual pressure to offer wide distribution of a programmers’ entire channel roster. Now Charter, Comcast and others are starting to experiment with lighter bundles of their own.
“It’s a s–t business,” Moffett says of the cable-style streaming-channel bundles. “The most important thing that they’ve done is force the conversation about more flexible [carriage] terms.”
Like MCTV, many smaller operators have already declared themselves to be focused on providing broadband service to customers rather than the large bundle of video channels that once defined the cable TV industry. The price hikes demanded by programmers in exchange for carriage deals grew at a compound annual rate of 8% from 2013 to 2018, according to MoffettNathanson. But the growth rate is closer to 10%-11% for smaller operators with subscriber bases of less than 1 million, which have less leverage with programmers. Operators have faced the choice of losing money on video subscribers or passing along those costs to customers. Either way, it’s become untenable for many operators.
“‘Media companies are starting to realize that their ability to maintain their current economics or to grow is going to require having a retail relationship with their customers. That’s a dramatic change.’”
JOHN HODULIK, USB
ACA Connects, the Pittsburgh-based trade group that represents 700 cable operators serving 8 million customers, has seen a big transition in the strategic focus of its members. For many, there’s no more discounting or marketing pushes to keep video subscribers from switching to rival outlets.
Phoenix-based Cable One, an ACA Connects member that provides service to about 800,000 customers in 21 states, forged the path a few years ago. Cable One has been vocal about the benefits of broadband and the detriments of video. The company plans to change its consumer brand name to Spark-light later this year to further distance itself from old-school cable service.