The Analysts’ View: How Can Pay TV Operators Stem Subscriber Losses?

Traditional pay TV providers in the US and Europe find themselves in a tough spot, competing with far cheaper over-the-top (OTT) services and bundles. A few reports last week highlighted these difficulties, with Ampere Analysis reporting big losses for US pay TV companies, and Digital TV Research forecasting that global pay TV revenues will fall by $150 billion between 2019-2025.

Reversing this trend is definitely not easy. VAN spoke with leading analysts to hear which, if any, strategies pay TV operators can use to help stem these subscriber losses.

Patrice Cucinello, Director, TMT, Fitch Ratings

For pay TV, we’re not too concerned right now because even though we’re seeing an acceleration of video subscriber losses, a good number of pay TV providers also offer broadband, which is higher margin, and we expect the pandemic will increase overall demand for broadband services. That will help offset the declines in video.

As far as what they can do to help stem video subscriber losses, many are already doing the types of things I’d have anticipated. I feel like the best you can do is be flexible about retaining customers, and think about alternative ways of bundling entertainment to keep subscribers. And we’re seeing this happen, with some of the pay TV providers offering lower tier bundles to retain customers.

But there’s been a more material pivot by the providers to focus on their broadband offerings. In our analysis, even if you were to see some overall revenue declines through the pandemic, as residential video sub losses weight on operating metrics, broadband growth will provide an offset. And we believe overall that there’s good enough stability in the business model, and the broadband product helps support the stability of the model.

Simon Murray, Principal Analyst, Digital TV Research

Digital TV Research believes that the traditional pay TV churn seen in the US will not happen elsewhere. There are several unique factors in the US that are hastening its rate of disconnections, including high prices (exacerbated by high carriage fees demanded from the channels) and the breadth of OTT platform provision that will not been seen elsewhere.

US traditional pay TV operators have tried to counter the churn by offering slimmer versions of their packages with fewer channels. However, the channel owners usually demand that pay TV operators carry a substantial number of channels from their stable – not just the flagship one – which pushes up carriage fees.

Traditional pay TV operators both in the US and Europe will maintain a significant advantage over the OTT players if they can retain the rights to top professional sports.

Traditional pay TV operators and OTT platforms are now much more willing to work together. In the past they were seen as competitors. The advantages to the pay TV operators of working with OTT platforms are the kudos of offering their subscribers established brands (sometimes at lower prices than going direct to the OTT platform), the chance to aggregate OTT platforms as well as lower costs by not going it alone.

For the OTT platforms, partnerships with established pay TV platforms mean instant access to their subscriber, removing the need to bill customers directly (which can be tricky in countries with low credit card ownership) as well as access to operators that often have very good broadband networks.

Richard Broughton, Research Director, Ampere Analysis

My first piece of advice is, slightly flippantly, don’t be a pure-play satellite company! One of the things we’ve seen consistently is that satellite operators have generally been worse hit by cord-cutting. They don’t have the option of providing bundled packages with communications, and broadband in particular, to help stem subscriber losses. Cable companies can more easily juggle their price points – increasing their broadband prices a bit and dropping their TV prices, keeping customers on roughly the same ARPU (average revenue per user).

Having said that, you see examples like Sky who launched a home broadband play years ago, and that’s positioned them well. So satellite companies should try to diversify to put themselves in a better position – launch a broadband play or find a telco to partner with (though there are relatively few who haven’t launched their own TV operations).

Another strategy is to integrate your rivals. If you’re losing subscribers to OTT services, those OTT services nevertheless need you to continue growing the market beyond a certain point. So partner with them, make it easy for customers to sign up to them through your platform.

Sports would be the other area. It’s been hurt by the pandemic, but we see sports rights as being very difficult to disrupt from an OTT perspective, due to the value of some of the top tier rights. We’ve seen from the struggles of DAZN that it’s not easy to make an OTT play when you’re buying into top-tier sports rights. Pay TV companies have the advantage of having other businesses to offset some of the costs of the expensive sports rights, so sports remains a relative safe haven.

Jennifer Fritzsche, Managing Director, Equity Research, Bank of America

It’s a hard thing to do, the loss of subscribers is a cyclical trend which has now turned secular thanks to a weaker economy.

I think creating further touch points with the customer from a technology standpoint helps. Comcast’s X1 is a good example, they’ve made the user interface much more seamless, which is important.

But I think this is a train that’s left the station. I think on the other side of COVID, people are going to be evaluating all their bills, and asking if they need to pay as much as they do. You always want to be an essential service, but it’s hard to be an essential service when there’s a trade-down option, and unfortunately for pay TV there is with the OTT services.

The good news is that broadband is more important than ever, and if people are streaming everything, people will be looking for fast broadband. The margin profile on a broadband-only subscription is so much higher than for a video subscription, where you have to costs from content are so high. So they’re moving towards a model where they control the economics, rather than having many mouths to feed.

Paolo Pescatore, Tech, Media & Telco Analyst, PP Foresight

Traditional TV businesses have been hit hard, in particular free-to-air providers who rely on key shows to pull in viewers, and thus advertising. This has been evident in the latest quarterly earnings. And there will be a bigger impact over coming quarters, with continued loss of revenue from advertising, as well as consumers demanding money back from subscriptions. It is important for providers to connect with new audiences in a different way.

The successful release of Trolls World Tour movie via the internet is a notable example. Though this is alarming for the film business, it paves the way for a new way to reach users and maximise revenue. Also, it mitigates against the growing concern around piracy. This does not imply a streaming-only future ,as it might not be appropriate for everyone. But during these uncertain and unprecedented times, it represents a great opportunity for innovation and unique storytelling.

Broadcasters should be applauded for the way they have kept the airwaves ticking over with remote production and virtual galleries. It underlines the value of connectivity. Convergence is firmly the next battle ground among providers. It is all about diversification and offering a broad portfolio of services. Beyond the aggregation of live, streaming and downloading content, there is growing appetite to have cloud-based games as well as music included into bundles.

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