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The children are our future, and they don’t pay for TV

November 8, 2011

By Ryan Lawler

A weak economy is putting pressure on the pay TV industry, as it struggles to get new users to sign up for cable, IPTV and satellite services. But the short-term issue around the affordability of cable is hiding a bigger trend of young people who are choosing not to pay for TV. The latest evidence of this comes from statements made by Dish Network Chairman Charlie Ergen, who’s trying to figure out how to keep pay TV subscribers who are increasingly watching over-the-top video.

While there’s still some debate over how many users are ditching pay TV in lieu of cheaper online options, Ergen said on Monday’s earnings call that there’s a bigger macro trend developing, with young people choosing to forgo pay TV subscriptions altogether:

“Young people who move to an apartment or get a house for the first time don’t subscribe to any MVPD (multichannel video programming distributor) and they just… get their network programming from Hulu and they get Netflix… As an industry where people pay between $70 and $92 a month, that’s a lot of money to a young person today who is getting their first job when they can go out and watch Hulu for free and Netflix for $7.99. So it’s a threat.”

We’ve written about this phenomenon before, as operators must convince these so-called “cord nevers” — recent college and high school grads moving into their first homes and paying their own bills for the first time — that subscribing to pay TV services is worth it. For many of these users, who likely grew up watching content online — on mobile devices and on their own time — the concept of paying close to a hundred dollars for access to linear programming might not be a winning formula.

Pay TV is not giving up on young people
But pay TV providers are going to great lengths to win over this demographic. That means lower-priced packages of content, and in many cases, it can involve pitching broadband services ahead of TV. Take Comcast, for instance: In meetings at Comcast headquarters in Philadelphia last week, execs said the company has benefited from a number of marketing programs aimed at college students and recent grads that push data-first packages. Other cable providers, like Time Warner Cable, are also focusing on broadband as their core selling point.

That’s fine for cable and IPTV providers, which have the infrastructure to roll out broadband Internet offerings, but for a satellite provider like Dish Network, the lack of an Internet offering of its own can be a roadblock to acquiring customers that way.

Premium services take a bigger hit
While Netflix and Hulu are eating into potential new customers in the younger segment of the market, they’re also decreasing revenues that Dish gets for premium channels like HBO and Showtime. Online services are largely still seen as complementary to pay TV services for most consumers, except when it comes to paying more for premium packages of TV content.

“One reason our premium business is down is… when someone can buy Netflix for $7.99, do they really want to pay $14.99 for HBO? And so when people look at their pocketbooks, obviously, every time somebody subscribes to Netflix, it’s probably 1/2 of a customer that our industry loses from a premium perspective,” Ergen said. He also noted that about 20 percent of Dish subscribers also pay for Netflix, which cuts into its potential premium network revenues.

That said, there’s the possibility that the streaming business model might not hold up, particularly as broadband service providers move to more usage-based pricing models. Ergen noted that a $7.99 subscription to Netflix might not be as attractive if the cost of broadband increases. If broadband goes up $20, that’s the equivalent of a $27.99 service, he argued, which is something streaming video providers can’t control.

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