Investment firm Needham & Company has released its latest Future of TV report, with lead analyst Laura Martin concluding that the biggest current risk to the TV industry's economics is unbundling of subscription TV channels. Martin asserts that if consumers had the option to choose their channels on an a la carte basis, rather than the multi-channel bundles that pay-TV operators currently offer, approximately 50% of today's TV revenue would be eliminated with fewer than 20 TV channels surviving.
The draconian forecast adds a financial dimension to the ongoing debate around whether the TV industry will need to radically re-think its business approach if - and it's still a big "if" - cord-cutting gains momentum. To date cord-cutting (and "cord-nevering," where younger viewers simply don't subscribe to pay-TV as in the past) have been relatively muted, with estimates for 2012 in the 500K range. However, several key industry trends such as the escalating cost of pay-TV, changes in consumer behaviors, proliferation of connected and mobile viewing devices, the surge in OTT SVOD adoption (e.g. Netflix) and DVR-based ad-skipping all suggest that the industry's traditional bundled model could be tested over the next few years.
In addition to these market trends, a la carte is now on the radar in Washington, with Senator John McCain proposing new legislation, and the inclusion of costly sports channels in pay-TV bundles (which in turn drives up subscriber rates) is getting more exposure in mainstream media (see yesterday's WSJ article for the latest example of this). Even veteran pay-TV executives like John Malone are suggesting fundamental changes in industry structure are required for long-term health.
The report notes that today's TV ecosystem revenues are approximately $150 billion per year, split about evenly between advertising and subscription fees. However, the report notes that HBO, the most popular standalone network has 30% penetration, suggesting that in an a la carte world, reaching even that bar would be optimistic for others. The report contrasts HBO with TBS, which derives over half its $3.5 billion annual revenue from advertising. The report doesn't specify how a la carte would drive the 50% contraction in TV industry revenues, but presumably it would be on both the subscription side (a la carte payments don't equal today's pay-TV fees) and advertising (smaller audiences mean less advertising potential).
The report also highlights a few specific monetization threats to the TV industry: Aereo (which undermines retransmission consent fee payments), DISH Network's Hopper (which easily eliminates advertising), DVRs (same concept as Hopper, just not as automated), sports tiers (which would reduce both advertising and subscription revenue) and premium online video alternatives, particularly mobile (which divert viewers' attention from traditional TV).
Lastly, on the positive side, the report points to 3 areas of potential revenue growth for the TV industry: video-on-demand ($10 billion incremental annual revenue), advertising from Internet companies specifically ($5 billion incremental annual revenue) and TV Everywhere ($4 billion of incremental retention revenue).
Note: Laura Martin appeared on a session at last December's VideoSchmooze event in NYC. Session video is available here.