Cord-Cutting Accelerates, Sends Shock Wave Across Traditional TV

By Stock Board Asset

According to eMarketer, digital video consumption is on the rise leading to a seismic shift in the industry. Traditional TV viewers are expected to shrink nearly 10% by 2021 with the expectation of a sharp decrease of total media ad spending upwards of -30% reduction. Even in 2017, the trend is accelerating with eMarketer expecting a slowdown in ad spending, after 2016 benefited from the Olympics and U.S. presidential election.

As eMarketer explains, traditional TV advertising is slowing even more than expected as viewers cut cable and transition to digital video platforms. The estimates for ‘cord-cutters’ is expected to explode this year through 2021. The timeframe provided could explain cable-apocalypse is here. Per eMarketer,

In fact, by 2021, the number of cord-cutters will nearly equal the number of people who have never had pay TV (“cord-nevers”).

This year, there will be 22.2 million cord-cutters ages 18 and older, a figure up 33.2% over 2016. The overall tally is much higher than the 15.4 million eMarketer previously predicted. Meanwhile, the number of US adult cord-nevers will grow 5.8% this year to 34.4 million.

“Younger audiences continue to switch to either exclusively watching Over-The-Top video or watching them in combination with free TV options,” said Chris Bendtsen, senior forecasting analyst at eMarketer. “Last year, even the Olympics and presidential elections could not prevent younger audiences from abandoning pay TV.”

The hemorrhaging of traditional TV viewers will only accelerate. Overall, there are 196.3 million Americans that watch traditional TV, down 2.4% over 2016. By 2021, Emarketer thinks the total will fall nearly 10% compared to five years earlier. TV views over the age of 55 will continue to watch conventional TV, because that is tradition in their generation. The cord-cutting revolution is mainly impacting younger generations, as the old system is dismantled and the new system is ushered in.

Who are these disrupting digital streaming video services?

Back in August, WPP, the world’s largest advertising company cut full-year revenue forecasts and offered “terrible guidance”, which sent shares lower -13%.  Goldman Sachs reports:

• Results confirm weak trends seen across advertising companies/TV, with ad spending cuts in fast-moving consumer goods being the common driver


• Key question whether pick-up in organic growth from 2H is credible


• Goldman sees new organic growth guidance as “achievable,” based on comments by several consumer goods companies on higher ad spending in 2H, easier comparables, recent improvement in WPP’s new business performance

Paul Verna, a principle analyst at eMarketer listed several factors in the acceleration of cord-cutting trend:

• First, traditional pay TV operators are increasingly developing streaming platforms, such as Dish Network’s Sling TV.


• Second, networks such as HBO and ESPN have launched standalone subscription services that allow users to tap those channels without a cable subscription.


• Third, digital players like Hulu and YouTube are now delivering live TV channels over the internet at reasonable prices—including sports properties that were previously available only through traditional distribution.”

Average time spent per day with video by US Adults, by device, 2015-2017

While the end of legacy cable may not be here, it is approaching. America is currently in a transitional period and is increasingly gravitating to the cheapest possible option away from cable, and unless cable providers drastically change their cost structure and pivot their business models, the revolution in America"s viewership habits will be televized for all to see.

Netflix Now Has More Subscribers Than Cable

Despite going all-in on Adam Sandler content – a bizarre choice - Netflix has managed to continue growing its subscriber base, recently reaching a new milestone: It now has more paying customers than Comcast Corp., Charter Communications and all other US cable companies combined.

As Forbes reports, Netflix now has 50.85 million subscribers, surpassing cable"s 48.61 million. There is one caveat, though: Cable’s total doesn’t include minor cable networks, which could amount to 5% of total customers.

Over the past five years, Netflix has managed to more than double its subscriber base from 23.4 million in the first quarter of 2012. But growth has slowed recently due to intensifying competition from a host of rival streaming services, causing Netflix to miss both its domestic and foreign subscriber targets for the first quarter.

Here’s a summary of Netflix"s Q1 results:

1Q revenue $2.64b vs est. $2.65b

1Q GAAP EPS 40c vs 37c

1Q domestic streaming net adds 1.42 million, vs consensus est. 1.59MM vs company forecast 1.5MM

1Q international streaming net adds 3.53MM consensus est. 3.90m vs company forecast 3.7MM

2Q GAAP EPS forecast 15c vs est. 23c

2Q revenue forecast 2.755BN  vs est. $2.76BN

Luckily for American cable companies, the battle for subscribers isn’t a zero-sum game. Here"s Forbes:

While cable subs are down by 4 million in the same five years that Netflix has seen huge growth, that"s not a massive drop off. It"s also worth bearing in mind that cable TV makes up only 50% of total TV viewership in pay TV. That said, Q1 2017 shows a net loss in subscriptions while Q1 2016 saw cable grow a little.

Satellite TV is doing okay, with around 38 million subscribers. Dish Network added 318,000 customers in Q1 with Direct TV stalling with gains that didn"t outpace customer loses. Satellite is still growing faster than cable though.

Faster still though are the internet-delivered services like Sling TV and Direct TV now which have added 350,000 in Q1. These services now have 1.7 million customers between them, and it"s likely that this segment will continue to see growth as customers move away from cable TV.

Cable, satellite and internet streaming services in the US have a combined 93.3 million subscribers. Even as Netflix expands into more foreign markets, it likely won’t match that total any time.

To be sure, the Netflix to cable comparison isn’t really fair to the cable companies: While the exact cost depends on the specific package, monthly fees associated with cable are typically many times more expensive than Netflix"s $10 fee.

Which brings us to our next, and final topic: Slowing subscriber growth isn’t the only metric that makes Netflix"s critics uncomfortable. The company’s unprecedented cash burn is another major red flag. In Q1, the company burned $422 million, which while less than the record $640 million burned in Q4 (over $1 billion in the last 6 months) was $160 million than its cash burn from a year ago. The company still expects to burn a total of $2 billion for the full year.

Here’s how the company explains it:

Free cash flow in Q1’17 was -$423 million vs. -$261 million in the year ago quarter and an improvement from -$639 million in Q4’16. The growth in our original content means we continue to plan to have around $2B in negative FCF this year.

We have a large market opportunity ahead of us and we’re optimizing long-term FCF by growing our original content aggressively. Negative near-term FCF is the result of the big increases in our original content, combined with small but growing operating margins. Since we want our operating margins to grow slowly so we can spend enough to quickly grow revenue and original content, we anticipate negative FCF to accompany our rapid growth for many years.

Our operating margins are our key indicator of improving global profitability; they are already growing and we plan to keep them growing for many years ahead. Eventually, at a much larger revenue base, original content and revenue growth will be slower, and we anticipate substantial positive FCF, like our media peers.

It remains to be seen if the transition from massive cash burn to cash flow positive is as simple as the company expects it to be.

Carlos Slim Launching US TV Channel "By Mexicans, For Mexicans"

With just two days left to go until Trump"s inauguration, one of the President-elect"s biggest opponents during the presidential campaign, Mexican billionaire and the country"s richest man Carlos Slim, said on Tuesday that his cell-phone company America Movil is launching a a TV channel in the United State, Nuestra Vision, which "is focused on Mexicans, made by Mexicans and transmitted from Mexico," putting it into competition with broadcasters like Univision and Telemundo.

The news comes at the same time as the Globe and Mail reported that Trump will begin NAFTA renegotiation within days of his inauguration, with an emphasis on trade and immigration policies that could several impact Mexico"s economy.

Slim"s new channel will be offered by the America Movil unit Publicidad y Contenido Editorial, the company said in a statement that was flanked by a promotional video online. Nuestra Vision - "Our Vision" - will broadcast news, movies and sports highlights, America Movil said, stressing the company"s pledge to be "100 percent" Mexican and promote Mexico"s heritage. The addressable market is massive: an estimated 35 million people living in the United States are Mexican or of Mexican background.

As the FT adds, Nuestra Visión will show movies, news and sports highlights from Uno TV and Claro Sports, with anchors and reporters direct from Mexico offering daily newscasts.“The Mexican population represents the most significant segment of Hispanic minorities in the United States,” said Victor Herrera, affiliate relations from Nuestra Visión, in a statement. He saw the new channel having a wide audience “reaching every age group”. The company gave no further details on when the new channel could be launched.

Slim, a major force in pay TV in Latin America, has been kept out of the Mexican market by regulators wary of the financial muscle he can bring to bear from his telecoms empire. America Movil is the biggest cell phone company in Latin America, and helped to make Slim the richest man in the world for several years.

Univision has a close alliance with Mexico"s top broadcaster Televisa, which has for years wrestled with Slim in the Mexican telecommunications market that he dominates.

Slim"s new channel launch coincides with a charged atmosphere between Mexico and the incoming U.S. president Donald Trump, who has taken an aggressive stance towards the Mexican economy and sparked dismay with outspoken comments on migrants.

Trump has proposed taking punitive steps against producers of Mexican-made goods in an effort to bring jobs and investment back to the United States, and has also threatened to tear up a joint trade deal that underpins Mexico"s export model.

Slim was critical of Trump during the U.S. election campaign, but after meeting the New York real estate magnate for dinner at his Mar-a-Lago resort in Florida before Christmas, he was left was a "very positive" impression from the president-elect, the Mexican mogul"s spokesman said.  Slim had previously warned during the election campaign that a Trump
presidency could be disastrous for the US. It remains to be seen if
Trump has forgiven and forgotten.