The top six pay-TV operators lost a combined 1.6 million subscribers last quarter, and that number would've been worse without the FCC's Keep Americans Connected pledge. AT&T (NYSE:T) CEO John Stankey said he expects cord-cutting to get worse in the second half of the year as the economic effect of the COVID-19 pandemic hits more subscribers. Meanwhile, shifting consumer sentiment and a growing number of streaming options are helping move the trend forward.
There's a further shift happening within the media industry that will accelerate the trend well past the end of 2020, and it's manifesting itself in three ways.
"The vicious cycle of sports inflation"
The biggest factor leading consumers to cut the cord is the increasing cost of sports as part of their channel packages. Back when cable had 100 million subscribers, non-sports fans could easily subsidize the cost of sports for the relatively small group of sports fans.
But as more and more consumers cut the cord, sports networks like Disney's (NYSE:DIS) ESPN have had to raise rates in order to cover their content costs. Higher rates are passed along to subscribers, leading more non-sports fans to cut the cord.
Craig Moffett from MoffettNathanson describes this as "the vicious cycle of sports inflation." Some cable subscribers pay over $20 per month just for networks focused on sports. 20 years ago, subscribers paid less than $3 per month for sports networks.
Moving the best content to direct-to-consumer
Another industry trend is the shift of content that used to go to linear TV networks to direct-to-consumer, or DTC, platforms. Both Moffett and UBS analyst John Hodulik point to media companies shifting resources to DTC.
Disney has been particularly aggressive on that front. The company shut down more than 20 international channels this year as it prepares to launch a new DTC service under the Star brand featuring content from ABC, FX, and other Disney brands. While the company's U.S. networks likely won't see a similar fate, it points to Disney's shifting focus on its DTC services over its linear networks.
Shifting top content from debuting on linear neworks to going straight to a video-on-demand service is a double-edged sword. Not only does it make the growing number of subscription and ad-supported services more attractive to consumers, it makes a pay-TV subscription less attractive. And as more consumers cut the cord, competition in the DTC space will spur media companies to shift even more content to their on-demand services, creating another vicious cycle for cord-cutting.
vMVPDs can't pick up the slack
Virtual MVPDs like Disney's Hulu + Live TV or Alphabet's (NASDAQ:GOOG) (NASDAQ:GOOGL) YouTube TV had seen strong growth over the last couple of years, while traditional pay-TV providers were losing millions of subscribers. But reality is starting to catch up for these services, as their pricing has proven unsustainable and they're looking to turn a profit.
YouTube TV launched at $35 per month in 2017, but subscribers are paying $65 per month today. Hulu + Live TV saw a similar price increase over the same period. Hulu's service added about 100,000 subscribers in each of the last two quarters after adding around 1.5 million during 2019.
The promise of vMVPDs to keep prices low through skinnier bundles, lower customer acquisition costs, and superior advertising capabilities is starting to fail under the weight of the aforementioned industry trends. As the cost of content continues to climb, these services won't be able to keep prices low.
Disney's heavily invested in just about every part of the pay-TV and direct-to-consumer industries. And it's willing to cannibalize itself in order to secure a winning long-term position. While its operating results are still heavily weighted toward its media networks, its position in DTC services bodes well for the future.
AT&T, by comparison, isn't quite as well situated, as it's heavily weighted toward distribution and its HBO Max service came out of the gates with a few stumbles. Still, it's much better off than smaller cable network owners who are fully reliant on distributors to reach an audience. As cord-cutting accelerates, Moffett doesn't expect all of those networks to survive.