As someone who has been navigating the ever-changing landscape of television for decades, I must say that the recent developments in cable-streaming bundles are a fascinating twist in this saga. It reminds me of when I first started my career and we were still using Betamax tapes!
2024 has seen a significant shift for cable companies, with an estimated 4 million U.S. households leaving their traditional pay TV bundles during the first half of the year. This trend is expected to continue, with MoffettNathanson predicting that the number will reach over 6 million by the end of the year. This decline in subscribers means that the total number of households paying for a traditional cable package will drop to approximately 47 million by year’s end. As analyst Craig Moffett recently noted, “The traditional pay-TV system is experiencing a steady and persistent decrease.
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The coverage of last week’s deal has emphasized that since Max includes HBO programming, Charter can offer it “for free” to some customers. However, this oversimplifies the situation significantly. Firstly, most Spectrum users who will benefit from this offer are already paying over $80 monthly for video content (excluding any discounts for combining TV with phone or internet). Secondly, and more crucially, Charter will still be paying WBD a wholesale price for Max (and consequently HBO), regardless of whether the customers use the app. This arrangement is not unusual in the cable industry, where it’s been common practice for half a century. While it’s correct that few cable operators have included HBO in their basic packages, the premium network has traditionally been packaged as an added bonus to persuade customers to pay for channels they might not want otherwise or to prevent them from canceling their subscriptions altogether. As a long-time industry insider put it this week, “Packaging is what made the cable business so successful. You would get numerous channels for ‘free’ or on top of other channels, and it discouraged people from switching providers.
As a dedicated fan, I’m excited about the recent move by Charter and its content partners, which includes giving me free access to popular streaming platforms as part of my ongoing cable subscription. This strategy is aimed at retaining existing customers like myself and potentially attracting new ones. The foundation for this innovative approach was laid a year ago when Dana Walden from Disney negotiated a new deal with Charter, ensuring Spectrum customers would receive Disney+ as part of their cable package.
This helps explain why Walden and WBD’s David Zaslav have decided to accept the trade-offs that come with making deals like the ones they’ve made with Charter — including less revenue per subscriber when someone gets Disney+ or Max via cable, since the wholesale-rate cable companies pay Disney or WBD for their streamers is notably reduced from what consumers pay when they sign up through the app. As Zaslav noted last week at a Goldman Sachs investor conference, companies like his have realized that they can’t be dogmatic about going direct to consumer with their platforms and need to explore a variety of ways to get in front of audiences. “If things were going great for consumers and if things were going great for the media players, then we wouldn’t be doing these creative deals that we’re doing,” he said. It’s why, in addition to the deals Disney and WBD have separately made with Charter, the two companies also recently teamed up to offer cord-cutters the ability to bundle Max, Disney+, and Hulu together for one discounted rate. And last week, just before the WBD-Charter agreement was announced, Disney used its Charter template to engineer a new carriage agreement with DirecTV, one that will give many of its satellite customers the same sort of access to Disney streamers that Charter subscribers currently enjoy. “This disruption is a real challenge, but it’s providing real opportunities,” Zaslav said.
This situation can be seen as a return to the way things were prior to the intense competition among streaming services around five years ago. Before companies like WBD and Disney started emulating Netflix’s strategies to compete, they primarily earned their profit by permitting their networks to be bundled by distributors such as Charter, Comcast, or DirecTV, which was then sold as a package to consumers. This system, however, was criticized because it meant that people who only watched Bravo and MTV reality shows had to pay for the high cost of ESPN, while sports enthusiasts were forced to pay for channels they never watched. Essentially, this was TV’s version of socialism, and while it wasn’t perfect, it kept the television industry financially stable and made viewing easier for consumers.
The idea behind the free-market streaming economy was to improve conditions for all by empowering consumers to manage their TV expenditure and allowing media companies to maximize profits directly from their platforms, rather than sharing it with cable intermediaries. However, the dismantling of traditional television as we knew it, often referred to as “unbundling,” hasn’t delivered on its promise for most except Netflix. This doesn’t mean streaming was a flawed concept or that direct-to-consumer relationships are not beneficial for businesses (or consumers). What has become evident over the past two years is that the television industry may have tried to change too drastically without first exploring a balance between the traditional and modern approaches.
It’s not as if industry professionals were unaware of the risks related to fully committing to streaming services; instead, they aimed to tread carefully with a more moderate strategy. For instance, Comcast executives initially marketed their streamer, Peacock, during the early stages of the COVID-19 pandemic by emphasizing its free access. This was partially due to the fact that the service offered both a free, ad-supported tier and a premium offering for $5 per month (with fewer ads). However, the message “Peacock is free” also reflected their initial business strategy: providing free access to Peacock Premium to those who already paid for cable packages. Comcast executives believed that by negotiating new distribution deals with cable companies and internet providers, they could eventually make Peacock Premium available to a majority of the population at no extra cost by 2022.
In 2020, Strauss and Peacock were attempting a strategy similar to Charter’s current approach with Disney, WBD, and Paramount: Offer cable service and include Peacock Premium. However, this plan didn’t materialize for some reason. Later on, Peacock discontinued its completely free version and started insisting that everyone pay for the service, regardless of their cable subscription status. Just like Disney, Warner Bros. Discovery, and Paramount Global, they jumped headfirst into the direct-to-consumer market, resulting in significant financial losses.
Essentially, Peacock’s philosophy in 2020 was accurate. Similarly, Disney and WBD are making the right decision by fulfilling Charter and DirecTV Now’s demands, which involve bundling streaming platform access with traditional pay-TV subscriptions. Over the past five years, programming budgets at Disney, WBD, and Paramount cable networks have been reduced significantly. Regrettably, those who continue to pay for cable are receiving a noticeably inferior product compared to 2019, yet they’re not seeing any reduction in cost. Instead, these media companies are reaping profits from their remaining cable operations and investing them into creating streaming content, while neglecting their cable networks. It’s no surprise that cord-cutting has increased or that providers like Charter and DirecTV Now are pushing for changes.
The Disney and WBD framework combined with their Charter plan is logical because it’s unlikely we’ll revert to the era when cable networks were dominated by expensive, exclusive scripted content. Although TNT and USA may produce new scripted shows in the future, they won’t regain their former glory. For those who prefer the convenience of cable and live TV, providing “free” access to previously cable-exclusive programming seems fair, given that much of this content is already being paid for by cable providers. The industry veteran we mentioned argues that if the cable operators are already footing the bill, it makes sense for them to pass some of this content on to their customers.
Essentially, it would have been ideal if Peacock executives had started offering their service as part of traditional cable packages five years ago. The strategy should have aimed at maintaining subscribers in long-term cable contracts while using streaming services as a supplemental source of income rather than the primary focus. Regrettably, by not doing so, these legacy companies unintentionally made cord-cutting an increasingly appealing option, thereby accelerating the decline of the bundle’s longevity.
The challenge with introducing cable bundles containing Disney+ or Max now is that many existing cable customers who currently pay for these streaming services may choose to cancel them once they are included in their cable package. However, any revenue loss for the streamers could be compensated if these bundles decrease churn on the streaming side and reduce the number of people cutting their cable cords. New customers drawn to streaming by the “free” cable subscriptions will receive ad-supported versions of Disney+ or Max, which can still generate revenue since more viewers equals more advertising dollars. Furthermore, it’s worth noting that many older cable customers are not yet familiar with streaming services, so offering them exposure to these apps could be beneficial in the long term. If and when they decide to leave cable, they may be more inclined to subscribe directly to a streamer.
In this emerging period of cable-streaming bundles, it’s clear that many viewers find little value in expensive packages if they don’t require live-broadcast networks or sports. However, for heavy TV viewers who utilize multiple services, these bundled offers could be a very attractive option. I frequently hear complaints about the complexity and cost of streaming, particularly when aiming for an ad-free experience across major platforms. Just this week, a friend in his early 30s even mentioned to me that he occasionally considers returning to cable due to these concerns. (Surprisingly!)
It’s important to mention that despite bundling Disney+, Paramount+, AMC+, and most recently Max (HBO) with its Spectrum TV service for several months, Charter has still experienced a significant decrease in cord-cutting, with a drop of almost 10 percent in video subscribers this year. This is slightly better than Comcast but still not ideal. The introduction of Max could potentially help, as it offers the broadest and most comprehensive streaming package that Charter has bundled so far. However, even if it doesn’t immediately stop cord-cutting, it’s crucial for cable providers and media companies to keep innovating. There are still millions of Americans who prefer a traditional TV experience and the convenience of a single TV package. The pay-TV bundle, despite its issues, remains the most profitable television model ever created. As an industry veteran puts it, “The cable business is bleeding out. You need to find the best way to stop or at least slow down the bleeding.” Given the current tough situation for big media companies, it makes sense to continue experimenting with new strategies, as there’s not much more to lose at this point.
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2024-09-20 17:54