Tuesday, November 27, 2012, 10:18 AM ET
New research from The Diffusion Group forecasts that the number of “pay-TV refugees” – U.S. homes subscribing to broadband, but not to pay-TV services – will increase 58%, from 10.9 million in 2012 to 17.2 million in 2017. Pay-TV refugees consist of both “cord-cutters” (homes that once subscribed to pay-TV, but no longer do) and “cord-nevers” (homes that have never subscribed to pay-TV). The percentage of broadband subscribers who are pay-TV refugees will increase from 12.5% in 2012 to 17.2% in 2017.
Although it forecasts the number of cord-cutters to increase over the next 5 years, TDG’s founding partner and director of research Michael Greeson believes the pay-TV industry’s main concern should be with cord-nevers which will more than double during that period. Of the 17.2 million pay-TV refugees in 2017, TDG forecasts 40% or 6.9 million of them to be cord-nevers, up from 29%, or 3.2 million, in 2012.
Michael explained to me last week that, as expected, cord-nevers will be younger, have lower incomes and be more technology savvy. They are challenged by the high cost of pay-TV service, which increasingly will be seen as more of a luxury than a necessity. With the proliferation of inexpensive over-the-top choices and behaviors that lean toward video consumption on screens other than the TV, this cohort will become more prone to skipping pay-TV altogether.
Michael notes that in doing so, many younger cord-nevers will full well recognize that they’ll have an “imperfect, but sufficient substitution solution” for pay-TV. Yet for many, it won’t be much of a sacrifice given shifting viewing patterns. For instance, when cord-cutters age 18-24 were asked about their rationale for dropping pay-TV service, over 61% cited that they were watching more SVOD services like Netflix. This was the second-highest rated response after pay-TV was “too expensive and I needed to cut back,” which, together with pay-TV is a “poor value,” scored in cord-cutters’ top 3 reasons across every age group.
With the average tab for video services alone now over $80/month, affordability has emerged as a key pay-TV vulnerability. The primary culprit in driving up subscriber rates as been the surging monthly costs for programming that pay-TV operators bear. And as I’ve pointed out numerous times in the past, among the programmers, there’s no bigger cost driver than sports networks, both nationally and regionally focused.
The bad news for pay-TV’s future affordability, and one of the reasons I think TDG’s focus on cord-nevers and their price sensitivity is correct, is that TV sports rights continue to escalate dramaticaly. The latest deals by News Corp. to buy 49% of YES Network for nearly $2 billion and also likely pay $6-$7 billion for 25-year TV rights to the LA Dodgers (7 times more per season than it currently pays), plus ESPN’s $7.3 billion to lock up college football’s BCS playoffs, Sugar, Orange and Rose Bowls, are among the latest contributors to the mania around TV sports rights.
As I begain saying almost 2 years ago, and as cable TV titan John Malone said last week as well, rapidly rising sports costs are creating a massive tax on non-sports fans, creating a squeeze on them that will ultimately drive some to switch to cheaper OTT options. Pay-TV subscription rates – like trees – cannot grow to the sky, and TDG’s forecast should be yet another warning sign to the pay-TV industry that given more choices, consumers will vote with their wallets in the years to come.
TDG’s research is based on an online panel of 500 U.S. adult broadband users randomly selected from an online panel of several million consumers. The report also contains extensive demographic, psychographic and techno-graphic information and is available exclusively to TDG’s members.