Why has the US been so vulnerable to cord-cutting?
For several years now, a number of pay TV operators have been suffering subscriber declines and subscription video-on-demand (SVoD) providers, in particular Netflix, have been the ones to blame. But the "cord-cutting" and "cord-shaving" phenomenon has affected different countries in various ways, and it is important to understand why. While cord-cutting has been apparent in the US, it has not affected countries in Europe in the same way. In fact, many countries in Europe are still experiencing pay-TV growth. But are the TV consumers in the US really so different from the ones in Europe?
Looking at cable TV, the first thing to note is that the market that has experienced the most cord-cutting is also the one with the highest cable TV ARPU in the entire world: the US.
Cable TV average revenue per user (ARPU) in the US is $80, according to IHS more than twice the price of equivalent packages in developed Western European markets. In the European Union, average cable TV ARPU, by contrast, is just $19. Netflix, on the other hand, is consistently under $10 regardless of geography. The churn savings in the US are far larger than their European counterparts and, as result, European cable companies have not experienced the high levels of churn that US cable companies have.
What Netflix has shown the US consumer is that attractive TV content is not worth $80. Were, then, cable companies in the US overcharging their customers?
Many US pay-TV subscribers have felt that way, and many will continue cutting the cord in favor of lower-priced alternatives if they feel they're overpaying for what they are getting. (The US market evolved under relatively uncompetitive conditions that encouraged high-price products. When a competitor entered the market via an uncontrolled access route, the house of cards fell.) In addition, to attract the "millennials"-those that have never paid for TV packages before-a low-priced entry package is essential alongside an attractive bundle of telco services.
Is content or price king, then? The answer is both. Netflix is not only offering an attractive price, it is also investing in original content that makes the service unique to its customers. In addition to the high price of pay-TV subscriptions, there are a number of other factors that have left the US more vulnerable to cord-cutting than other regions:
- Market saturation: With pay-TV penetration plateauing at around 80%, there is little room to attract new pay-TV subscribers-particularly with over-the-top (OTT) video alternatives-making it harder for operators to attract younger generations to traditional full pay-TV packages.
- A lack of timely innovation: Multiscreen services and many of the more advanced "next-generation" product developments have come as a late response to the innovations brought to the table by Netflix, Hulu, Amazon Prime Video and other OTT providers as a reaction to new consumption habits.
- Operators caught off guard by Netflix rights-acquisition strategy: Netflix gathered momentum quickly in the US by acquiring SVoD rights before operators realized their value, meaning that it was able to build a strong and appealing offering as an alternative to traditional pay TV. Operators in other regions were wise to the strategy by the time Netflix began launching internationally, meaning that the OTT service is a much less compelling offer outside the US.
The operators that have succeed are those that have learned what consumers want, how they want it and at what price. In many cases, operators have even partnered with Netflix to offer the service as part of their own bundle, and as a recent report from IHS suggests, it has been a happy marriage, if one of convenience, for many of these providers. In this digital race, only those who adapt, innovate and evolve will win. It is not just a matter of what Netflix has done right, but also one of what many operators have done wrong.
For more information, please visit us at TV Media Intelligence Service.
Maria Rua Aguete is the Research Director for Television Media at IHS Markit.
Posted 16 June 2016
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