The television industry is experiencing a renaissance in more ways than one.
While some of the best content out there is now debuting on TV, the medium is also experiencing a rebirth in how it's distributed. Netflix (NASDAQ:NFLX) is putting pressure on traditional pay-TV providers like Comcast's (NASDAQ:CMCSA) NBCUniversal. At the same time, these cable companies are fighting with satellite providers and other competitors to attract a shrinking customer base.
Here are five biggest trends in the television industry investors should follow this year.
Netflix is stepping up its competition with traditional networks
Netflix plans to spend $6 billion on content in 2016, with a significant portion of that budget going toward original programming. Content chief Ted Sarandos says the company plans to release 31 new seasons of original comedies and dramas this year -- twice as many as last year -- including kids programming, comedy specials, and films.
As Netflix expands its original content spending, it becomes more of a threat to traditional networks that rely on viewership for a large portion (if not all) of their revenue. It could also increase the price of top TV shows with more bidders entering the market. Netflix is even planning to produce some content in-house, meaning other networks won't even have a chance to bid on it.
NBCUniversal exec Alan Wrutzel said he's not afraid of Netflix, pointing to data from Symphony that shows Netflix's ratings aren't that impressive. FX's John Landgraf, on the other hand, sees his networks competing with Netflix for the rights to new originals. FX reportedly bid on Aziz Ansari's Master of None.
Customers get more over-the-top options
The number of over-the-top streaming options ballooned in 2015. DISH Network (NASDAQ:DISH) rolled out Sling TV, which streams about two-dozen live TV networks. HBO and Showtime each decided to offer a stand-alone streaming version of their premium cable networks. And we saw smaller entries such as Verizon's Go90, Comcast's Stream, and Nickelodeon's Noggin.
Investors should expect more OTT options from major networks. NBC started streaming its comedy library through Seeso in January. Other networks may follow NBC and Nickelodeon's lead, offering niche programming over the top. Others might go full CBS or HBO and offer complete access to the network's archives. Meanwhile, competing pay-TV operators may look to join DISH and Comcast in offering their own live streaming options.
Skinny bundles are everywhere
Pay-TV operators started offering skinny bundles a few years ago, but the option really started picking up steam in 2015. Skinny bundles appeal to customers looking to save money on their television bill but who still want live programming. Verizon introduced its Custom TV plan last April, which offers a bundle of a few base channels and allows customers to add two channel packs at no extra cost.
ESPN immediately went to work on a lawsuit against Verizon, claiming breach of contract. ESPN's contracts don't allow most of its networks to be part of any add-on packages. ESPN is one of the networks suffering the most from skinny bundles, as subscribers have fallen from 99 million to 92 million over the past two years.
As pay-TV operators look to attract more customers, skinny bundles will become more prevalent. While they have a negative impact on average revenue per subscriber, they increase the lifetime value of a customer for most pay-TV operators thanks to bundling.
Cable is growing subscribers
While the total pay-TV audience in the U.S. is shrinking, traditional cable operators are doing surprisingly well. Time Warner Cable added video subscribers in 2015 thanks to improved customer service. Comcast still saw a decline in subscribers, but the 36,000 net loss was its lowest in nine years.
The cable operators have a good chance of keeping up the momentum in 2016. The telecoms have stopped building out their fiber networks, which means there aren't as many new promotional offers to compete with.
Still, with AT&T buying DirecTV last year, it will be able to leverage its popular wireless network to grab subscribers for DirecTV. The company is already offering unlimited LTE data exclusively to DirecTV subscribers. Other pay-TV competitors may look to offer similar bundles and exclusive benefits to video subscribers in order to compete going forward.
Set set-top boxes free
FCC Chairman Tom Wheeler recently shared a proposal with his colleagues to remove pay-TV operators' control of consumer set-top boxes. A whopping 99% of pay-TV subscribers rent a set-top box from their cable company. As a result, they're hit with various fees that add significant bloat to their cable bills.
The proposed regulations would open the door for third parties to create set-top boxes while maintaining security and copyright protections. That's bad news for pay-TV operators, which make $20 billion a year off of these devices but good news for customers, who would be able to save money by purchasing a set-top box outright. Even customers who continue to lease could find themselves with a price break due to increased competitive pressure.
Investors should pay close attention to the FCC decision, as it could have a major impact on pay-TV operators' average revenue per subscriber and how they go about differentiating their products.
Adam Levy has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Netflix. The Motley Fool recommends Verizon Communications. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.