Cord-cutting challenges Cable TV industry

For decades cable television had been a “cash cow” for their parent companies, those days however, are quickly coming to a close. In recent years, cable networks, with its dual revenue stream of subscriber fees and ad dollars, had helped to defray the startup costs of streaming video services such as Disney+ and Max that have amounted to billions of dollars. With many streaming platforms still unprofitable, the revenue generated from the cable industry, while still lucrative, has been tapering off.

A recent post from Scott Robson, senior research analyst at S&P Global Market Intelligence, expects ad revenue for cable television to drop by 4.9% this year to an estimated $22.4 billion. The report also forecasts ad revenue to fall below $20 billion by 2027. The last time cable ad revenue was below $20 billion was in 2007. In its report, S&P also noted in 2022 cable ad revenue had declined by 3.4%. Robson expects cable ad revenue to be stronger in 2024 and 2026 benefiting from the Olympics and political advertising.

There are several factors cited in their prognosis, including the continued loss in revenue from cord cutting resulting in not only declining subscriber fee revenue but also lower ratings impacting ad revenue.

According to Nielsen, cable penetration reached its high-water mark in May 2011 when 90.7% of all TV households (105.1 million) had subscribed to cable television. Fast forward to September 2023, Nielsen counts 75.3 million multi-channel households accounting for 60.8% of all TV homes.

With the loss of subscribers, in third quarter 2023, there were only three cable networks averaging over one million primetime viewers, Fox News, MSNBC and ESPN. Back in 2011, there had been 19 cable networks that surpassed an average audience of over one million primetime viewers.

Other factors cited include the continued popularity of digital media among advertisers with its superior targeting capabilities. Also, the roll-out of ad supported tiers from Disney, NetflixNFLX -3.3%, Max and others as well as the rapid growth of FAST networks such as Pluto TV. These platforms are offering advertising opportunities as viewing behavior shifts.

In Nielsen’s Gauge Report for August 2023, cable TV had an audience share of 30.2% compared to 38.3% for streaming. By comparison, in August 2022, cable TV’s audience share stood at 34.5% with 35.0% for streaming.

One of the few bright spots for cable television will continue to be live sports. S&P reports in 2022 ad revenue from live sports grew by 2.8% reaching $4.3 billion. For the 2023-24 upfront, with a writer’s strike and a sluggish ad economy, live sports continued to be a popular genre with advertisers with reports of CPM increases in the +5% range. A number of live sports such as NFL Thursday Night Football, several MLB games each week and MLS among others are now exclusive to streaming platforms.

In his post, S&P’s Robson expects more and more smaller niche cable networks to be dropped. In the recent landmark subscriber fee agreement between Disney and Charter CommunicationsCHTR +0.5%, Disney dropped carriage deals with Baby TV, Disney Junior, Disney XD, Freeform, FXM, FXX, Nat Geo Wild and Nat Geo Mundo. S&P surmises other cable TV owners such as Warner Bros Discovery, Paramount Global and ComcastCMCSA +0.9% may also drop smaller niche cable networks in future subscriber fee negotiations.

According to Nielsen, in May 2016, the average TV household received plateaued at 206 TV channels (and watched an average of 20). Since then, with cord cutting, cord shaving and now the possibility that smaller cable networks will fall by the wayside, the number of TV channels receivable in households will continue to decline.

Robson writes, “Our outlook is not calling for a total collapse of the market, however, as we believe there is still value in cable network ads over the next five years as the industry continues its slow migration to on-demand platforms.”

There have been other reports pointing out the financial challenges the cable industry faces. Last June, PwC published its Global Entertainment & Media Outlook 2023-2027. The report projected that by 2027, the U.S. television industry will have a falloff of $30 billion in traditional Pay-TV subscriptions and ad revenue compared to 2017. The report cited cord-cutting as the primary reason for the revenue decline.

Furthermore, PwC projects, that by 2027, the number of U.S households with a cable subscription will fall below 50 million with household penetration at only 38%. Over the same time frame, ad supported streaming video (AVOD) can expect significant revenue growth.

Last week, the Leichtman Research Group issued its latest report on the TV industry. Among the takeaways is the rate of cord-cutting has accelerated over the past five years. Also, Bruce Leichtman, president and principal analyst for Leichtman Research Group, noted, “The penetration of Pay-TV remains lowest among younger adults and the categories that they tend to populate, including movers and renters.” The report found among household heads aged 18-44 only 56% have a Pay-TV subscription compared to 83% in 2013. With TV household heads aged 45 and older, the percentage of Pay-TV subscribers has dropped from 88% in 2013 to 70% today.

Another reason for the decline in cable TV revenue has been content. Nowadays, media owners are more likely to invest in scripted content with their streaming platforms instead of their cable networks. For example, the finale of Breaking Bad. on AMC, on September 29, 2013 was a television event averaging 10.3 million viewers. Other top-rated cable shows included USA’s Suits (now popular on Netflix) and Sons of Anarchy on FX.

Today, programming on broad based entertainment networks is primarily licensed content consisting of offnet reruns and previously released theatrical movies. As a result, USA Network which, at one time, averaged three million primetime viewers, had, in third quarter 2023, averaged just 664,000 primetime viewers.

While sports continue to be a money-making genre on cable, regional sports networks, once a lucrative business, have been financially struggling. With cord cutting continuing, Warner Bros Discovery has sold off all their RSN’s, citing the business is no longer profitable.

The Sinclair owned Bally Sports, the nation’s largest RSN, had declared bankruptcy earlier this year. The RSN no longer televises San Diego Padres MLB games and may soon close down Bally Sports Arizona entirely. Also, Disney is expected to launch a standalone ESPN streaming service in the near future, which is expected to quicken the pace of cord-cutting.

News is also becoming more available on streaming platforms. In late September Warner Bros Discovery launched CNN Max. DirecTV, the nation’s largest satellite TV distributor, has warned Warner Bros Discovery that including CNN in a streaming package could violate the contract between the two companies. In response, CNN Max says the programming is more reliant on CNN International and is less restrictive.

In the mean-time DirecTV (and DirecTV Stream) also announced its second rate increase of the year taking effect on November 5. And yet, the primary reason for cord-cutting continues to be the cost is too expensive. Forbes