Cable Isn’t Going Anywhere… At Least For Now

Americans love video. It consumes more of our time than any other media activity. We wake up to the news on our televisions, watch YouTube videos during work breaks, and relax in the evening with Netflix, Hulu, or HBONow. And all of that time adds up, bringing in more than $183 billion in annual revenue for U.S. digital video and traditional television providers.

So how will this industry evolve in the coming years? After a deep dive into the data over the last few months, we have found a number of interesting trends…

Reports of cable TV’s death have been greatly exaggerated

Traditional television still enjoys considerable advantages in content, user experience, and economic efficiency — and that’s not likely to change anytime soon.

The video content landscape is not zero-sum. The rise of one option does not require the collapse of another, and certain types of desirable content remain squarely within the cable fiefdom.

Live sports, especially for local teams, require a Pay TV subscription, and broadcast contracts with the major professional leagues will ensure that it stays that way for the foreseeable future. Events like live games or award shows also require a broadcast infrastructure that can handle large audiences. Sling TV got a lot of ink when it aired the NCAA Tournament earlier this year, but a vocal minority of viewers faced persistent buffering and quality control issues.

Meanwhile, Netflix and its ilk have carved out a niche as providers of premium scripted content, but they still depend on the traditional television production machine for the vast majority of their content. As operators like AT&T/DirecTV become increasingly wise to this leverage, they are shifting their focus to TV Everywhere products, which give consumers access to expansive on-demand libraries. With improvements to marketing and user experience, these tools can forestall the decline of traditional television viewership.

But what about the bundle?

Surely consumers will be able to save money once they ditch their bloated pay TV packages for a trimmer digital-first option? Actually, a traditional TV subscription still makes quite a bit of economic sense. First, big television operators like Comcast can use their scale to negotiate lower programming costs. Because Comcast can offer a larger addressable advertising audience, programmers can stomach lower carriage fees in exchange for more advertising revenue.

Second, the bundle reduces the price of in-demand channels. In exchange for carrying auxiliary channels like ESPN2 or ESPN Classic, operators pay a discounted rate for the ESPN flagship. (In fact, one could argue that the bundle helped create what The Atlantic called our present “golden age of television.” Before Breaking Bad and The Walking Dead, AMC stayed afloat by being bundled with more desirable channels.) Bring these two factors together, and the average consumer pays $6-$7 per month to receive ESPN in their cable bundle. Compare that to the $25-$30 they would have to pay a la carte, and you start to see why the bundle is here to stay.

One could argue that the bundle helped create our present golden age of television.

Traditional television is still the dominant player in the video landscape. It brings in over $180 billion in annual revenues. Americans still watch more than four hours of it per day. And although cord-cutting is undoubtedly real, it is happening at a slow pace, with one estimate placing pay TV subscriber losses last quarter at less than one percent.

But the status quo is still unsustainable

Between 2011 and 2015, the average American household increased spending on video entertainment by almost 28%, highlighting the need for skinnier, cheaper bundles that align with individual preferences.

Furthermore, the growing appetite for appointment-viewing — more than 83% of Millennials say that they binge-watch television shows — means operators must bolster their on-demand libraries and TV Everywhere offerings.

Conventional wisdom says that we are living in the twilight years of traditional television. Cable providers are hemorrhaging subscribers. The proliferation of subscription services like Netflix and HBO Now will lead to the collapse of the overpriced — and overstuffed — cable bundle. Indeed, in August the The Atlantic proclaimed that the “nightmare of cable TV is over.”

This view is mistaken. With the right adjustments to their digital offerings, cable companies that are willing to adapt can adjust to this new video landscape.

It’s their game to lose.