In 2021, analyst firm Moffett Nathanson wrote “The media industry just suffered from the worst year ever for cord cutting.” At the time, it had. Streaming viewership hit an all-time high, programming costs skyrocketed, and premium content was largely distributed directly to consumers (DTC) via streaming platforms rather than broadcast channels.
Since then, the challenges facing the Pay TV space have only multiplied.
More concerns than ever weigh on each Pay TV operator and broadcaster, who must fight an ever-increasing number of DTC competitors across every niche for eyeballs. Revenue declines are accumulating for Pay TV companies who no longer can rely on the lucrative Pay TV-internet service bundles to drive customer retention, much less win new business. According to global data, Pay TV revenues are expected to fall at a negative CAGR of 6%, from $88.5 billion in 2022 to $65 billion in 2027, driven by subscriber churn to streaming services.
The decline of the bundle, and the broader Pay TV ecosystem, operates like a game of Jenga. Each new disruptor is like pulling another block out of the tower. It’s only a matter of time before the whole tower topples over—unless Pay TV operators pivot before it’s too late.
Pay TV providers face an uphill battle
Some of the challenges are not new. Sports content has been shifting to DTC for years, although with the start of the 2023-24 NFL season, the industry will see its biggest shift yet towards the streamers. In the new media rights agreement, DirecTV loses its cash cow NFL Sunday Ticket out-of-market games package—which it has held since 1994—to YouTube TV. Three over-the-top (OTT) services—Amazon Prime, ESPN+, and Peacock—will air exclusive games. Even worse for traditional providers, Disney CEO Bob Iger has pressed the idea that ESPN, the most expensive channel among Pay TV packages, will pivot towards DTC in 2025 or 2026.
Carriage and re-transmission fees continue to rise, as TV network owners charge higher rates to Pay TV providers to carry their channels to make up for the lost revenue from a smaller subscriber base. This is also partially due to a loss in advertising revenue that is increasingly moving to OTT and DTC services at the expense of network TV.
By 2025, DTC will account for more than 60% of all content spend, almost triple the amount it currently receives. The most-watched, highly anticipated, and critically acclaimed releases will focus almost entirely on DTC channels, while content developed for Pay TV will fall by the wayside.
Newer disruptors have arisen as well, such as fixed wireless internet networks that compete with the broadband services that Pay TV providers include in the traditional bundle.
How will the bundle change? What actions should operators take?
For decades, a Pay TV-internet (and previously phone) package served as the optimal avenue to promote customer stickiness and optimize operating performance. As Pay TV becomes unprofitable, operators will need to shift the fundamental strategy of the bundle. We see three steps they need to take:
Revamp the product mix of the bundle: Use existing products to create a brand-new bundle that entices customers. Operators should utilize their mobile services (especially mobile virtual network operators, or MVNOs) as a replacement or supplement to Pay TV. Another route is to utilize ecosystem and aggregation platforms to bring a modern take to the bundle. Comcast and Charter are already starting to do this with Xumo, and there is more potential for growth.
Develop new partnerships: For those that do not have a wide array of services beyond broadband and Pay TV, building joint ventures or partnerships with other operators or providers will allow them to craft new bundles to reach new customers. These partnerships could also be with OTTs and virtual multichannel video programming distributors (vMVPDs) to gain access to their exclusive content.
Know when to cut loose: Get ready to recognize when the Pay TV bundle is a drag on your bottom line. Look six to 12 months ahead and be prepared to wind down Pay TV or sell it off to gain cash if needed.
As our proprietary cord cutting model shows, these threats will accelerate the drop in Pay TV subscribers—by 2027, we expect only one-third as many subscribers as 15 years prior.
If Pay TV operators can’t meaningfully shift their bundle strategy to better connect with customers soon, it may be time to sell off what they can before the tower collapses.