Pay TV Still Pays… Well, For Now Anyway

Image Courtesy of Digital Trends
Image Thanks to Digital Trends

Face it: TV bundles packed with channels you are forced to buy, are a thing of the past. The only issue is that the markets are slower to catch on to the trend than the common consumer. However, this isn’t the only industry paradox that has taken place in recent years showing that what customers think and what they do can sometimes be a complete contradiction. Pew Research reports a similar US incident occurring in 2012, whereby, despite the fact that a majority of Americans read news via countless online sources, 23% of this same group continue to purchase a print version of the news paper as well.

Furthermore, The Wall Street Journal quotes data gathered by the Center for Disease Control and Prevention by saying:

“Old technologies can be slow to fade. even when newer alternatives catch on. Most Americans now carry smartphones. But about 53% of U.S. households still pay for a landline phone…”  

Thus, it’s easy to see just how Pay TV can still seriously stay in the market for television services with its clunky business model; threats to this method of Pay TV may be seen by potential, better alternatives that are available thanks to efforts made by Apple, HBO, Hulu, or even Netflix and Amazon Prime’s video streaming capabilities.

Perhaps this was part of the logic behind last year’s acquisition of DirecTV for $49 billion by communications and entertainment behemoth, AT&T inc. With consumers demanding fewer of DirecTV’s television services every year, AT&T’s strategy seems to be to capitalize on the fact that the markets catch on slowly to newer, innovative technologies.

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Image thanks to State of the Media

One of the largest changes seen in audiences’ viewing preferences was from 2009-2010, when online sources gained a 17.1% increase in total viewers. However, today’s actual transition to an online option for television has proven to be much slower than this as the trend continues to push forward. The slow “melt” of the Pay TV model seems to still have such a massive customer base, that companies such as AT&T find the market worthwhile in the short-run. A $49 billion buyout will generate adequate returns as long as this process of change remains a slow one. Thomas Gryta, of The Wall Street Journal explains further:

“The conventional wisdom is that such services aren’t comprehensive enough for most households and will take a long time to catch on.”

However the reluctance of consumers to make the transition from Pay Tv doesn’t deter companies from trying to capitalize on alternative ideas that would create more market competition. SlingTV is a service which was recently offered by Dish Network Corp. This package is offered to be a leaner bundle of channels which include Walt Disney Co.’s ESPN and Time Warner Inc.’s CNN, $20 per month via the internet. HBO is also in the process of launching a $15 per month option of its channel over the internet via Apple TV. These prices seem much more attractive to consumers who would normally pay at least $54.99 per month after the first 12 months with DirecTV or $59.99 per month as is the price of television service with AT&T’s U-verse.  Furthermore, the internet options require no additional hardware or equipment beyond a computer or access to the internet, which most American homes already have.

fredgraph

Moreover, according to the Federal Reserve Bank of St. Louis’ economic data on the consumer price index for cable, satellite television, and radio, the increasing trend for price bundles of each category is rising at a constant rate. This rise in average price of television can be exemplified in this graph and represents traditional Pay TV models. The significance of the CPI increasing at a consistent rate is that non traditional methods of television and video streaming are increasing at an above average rate. This would translate into traditional Pay TV companies losing customers who want to switch to a cheaper alternative. These are truly examples of substitutes.

So what can we take from this explanation? The Pay TV model will remain around as shadow of the past for quite some time. One would even go as far to say that this model for television will last well into the long-run, but will not be as prominent as other options. Consumers seem to be the key determinant here that will allow Pay TV to last, despite the majority of Americans convinced that better viewing options already exist at a much cheaper price. Companies such as AT&T inc. recognize this trend and hope to profit from the “slow melt” that is the Pay TV’s exit from popular use. This can be a dangerous strategy, but for now at least, Pay TV still pays enough to be a profitable undertaking for large corporations. Just as mentioned earlier, there are plenty of examples of older technology dying out much slower than expected. After all, with all the cheaper, better flat screens out there, analog televisions aren’t completely out of style either, right?

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Image thanks to Digital Trends

Sources: The Wall Street JournalState of the Media, Digital Trends, Pew Research, Yahoo Finance, HBO, Netflix, Hulu, Amazon Prime, DirecTV, FRED, AT&T U-verse,

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