WHILE THE CANADIAN SUBSCRIPTION television market is at the beginning of a decade-long decay, growth is still in the cards for cable and telecom companies in Canada thanks to the world’s shift to broadband, says a new report from Scotiabank.
The report, entitled “Embrace the Evolution” (whose cover photo is pictured) says thanks to broadband internet “the growth outlook is bright” for telcos and cablecos (1%-1.5% revenue growth and 2.5%-3.5% in EBITDA growth), due partially to more predictability on the capital expenditure front – and the concentration on more profitable broadband products and services.
However, it won’t be pretty on the traditional subscription TV side of the business. “The Canadian pay TV segment is about to experience more revenue and margin pressure than ever before. The pay TV subscriber base in Canada is declining for the first time in history and penetration decline is accelerating,” reads the research. “We believe this is caused by demographic shifts, technology (including over-the-top and IP masking), rising prices (driven by content cost), and the lack of channel package flexibility.
“We believe the Canadian pay TV subscriber base and penetration levels are at the start of a 10-year decline. More importantly, we believe gross profit (total and per subscriber) is for the first time set to decline in a meaningful fashion, due to the lack of pricing power (no average revenue per user ARPU growth) and rising content costs driven by sports programming and additional content rights for more OTT offerings in an attempt to protect the TV segment.”
Basically, people are beginning to cord-cut or cord trim, content rights costs are climbing and BDUs are looking at a market which won’t bear any more price increases.
“To protect the TV business and to enhance the user interface and experience, we believe pay TV operators will shift capex toward cloud architecture and IP video delivery,” predicts the report. “We believe this will cause cableco capex to become more fixed as opposed to variable or success-based, driven by the number of households or subscribers. This fixed-versus-variable capex dynamic is very different from what we have seen over the past several years among cablecos, when capex has been largely variable and success-based, driven by set-top box (STB) deployment.”
Scotiabank’s analysis says it foresees subscription television gross profit dropping by 25% – 30% in the next 10 years.
While the broadcasters have spent big money on sports as a way of shoring up those potential losses, in the belief that sports fans HAVE to see their teams play live, the Scotiabank reports calls that just “a partial hedge.”
“While The Sports Network’s (TSN) national penetration of households is ~85%, we believe its popularity may be artificially inflated by the inclusion of the channel in basic TV packages. Telus, which does not include TSN in its basic channel packages, has a TSN penetration of only 50%-55%,” reads the report.
“We do think the TV industry needs to pursue this issue of channel packaging – regardless of the regulator’s position – in order to retain pay TV subscribers… We believe that, the more flexibility pay TV distributors have in channel packaging, the more they should be able to retain potential cord cutters and attract cord nevers.” – Scotiabank
And, despite the fears of many in the industry, the CRTC’s push towards more a-la-carte TV channel packaging is a good thing. “We do think the TV industry needs to pursue this issue of channel packaging – regardless of the regulator’s position – in order to retain pay TV subscribers,” says the report. “We believe that, the more flexibility pay TV distributors have in channel packaging, the more they should be able to retain potential cord cutters and attract cord nevers.”
Those cutters and nevers are getting their video fix online through various portals (mostly Netflix and YouTube) but look for the distributors here to jump into OTT (as we have reported here). “We expect Canadian pay TV operators will enter the OTT market in a more meaningful way in 2014 to combat the OTT threat. The rationale for these operators is to cannibalize their own base before Netflix or other OTT providers beat them to it, and to address the at-risk TV subscriber base that is not tied to sports programming,” says the research. “Although most pay TV operators have introduced authenticated TV Everywhere (TVE) options to their subscribers over the past two years, usage has been below expectations, with disparate and incomplete content and log-in complexities cited as barriers. Without meaningful impact from TVE and with cord shavers/cutters/nevers becoming more visible, we believe pay TV operators will, either on their own or in a coordinated fashion, launch a separate entity to combat Netflix.”
All of which means, the rationale for consolidation is also increasing, says the report (indeed, reports out of the States say Comcast and Charter may together purchase Time Warner Cable). “Unless a company has the scale of, for example, Comcast Corporation (Comcast or CMCSA) on content and technology spending, we believe pay TV operators can benefit substantially from scale in negotiating better content costs and spreading fixed capex across a larger subscriber base. In Canada, we believe the combination of Rogers Communications Inc. (Rogers or RCI) and Shaw Communications Inc. (Shaw or SJR) makes more business sense than ever before.
“In the case of RCI-SJR, the combined company would have stronger negotiating power against BCE/Bell Media/TSN. This should not only lower cost per subscriber, but also allow RCI-SJR to gain more flexibility in channel packaging,’ it continues. “We believe the evolution of the pay TV platform to IP and cloud is important to maintain competitiveness against telcos and OTT providers. We believe having the scale to invest in this evolution will lower capex per subscriber or household.”
Plus, a combined RCI-SJR would realize significant savings. “We believe the combined entity could generate monthly content cost savings of roughly $1 to $2 per subscriber (~$120 million a year). We believe removal of redundant overlap of management structures, headquarters, and other employee-related costs will drive additional cost synergies. We estimate Rogers and Shaw spend a combined ~$950 million in annual cable general and administrative (G&A) expenses and approximately ~$1.3 billion in Media. We believe up to $180 million per year in G&A savings can be realized.”
While wireline growth has been aided on the telco side by the push into IPTV, that will only drive wireline growth until 2016, says the report, as so many people move all their telephony to wireless – which will deplete the number of cable phone customers as well. “We estimate that, in 2013, over 500K lines were cut because of wireless substitution – the highest annual figure ever for this metric in Canada. We expect wireless-only homes will overtake cable phone homes and telco-phone homes in 2015 and 2017, respectively. By 2023, we estimate that 44% of Canadian households will not have a wireline home phone,” reads the research.
