Close to US$100 billion out of the US$180 billion United States' broadcast, pay-TV and home entertainment ecosystem is derived from consumer subscriptions to the pay-TV bundle.

However, speculation about the bundle’s demise continues to grow. News of new direct-to-consumer offerings in the US as well as weakness in live TV ratings and concerns about a broader advertising shift from TV to digital, have intensified concerns.

In theory or even in practical commercial terms, the pay-TV bundle, or at least some version of it, is likely to last (contractually, at least) until 2021 when the first of sports juggernaut ESPN’s renewals come up.

Yet the top eight US pay-TV platforms lost 40,000 subs in Q3 2014, while the top 10 cable & telecom companies added 575,000 new high-speed broadband subs over the same period.

Nonetheless, pay-TV subscriber declines have actually moderated over the past 12-18 months, underlined by new research from the UBS Evidence Lab.

“The pay-TV bundle appears to be holding up quite well, with 2014 tracking towards only marginal subscriber defections,” says Doug Mitchelson, MD of UBS Investment Research.

"Also, cord cutting inertia is stable. Ironically, the biggest risk to the bundle near-term appears to be from the content companies themselves, which are putting more and more content online. The key to watch will be the over-the-top (OTT) offerings such as CBS All Access, HBO Go, Univision UVideos, and Showtime Anytime."

Mitchelson concludes: "We did not find any evidence to suggest that pay-TV subscriber trends will either suddenly begin to deteriorate or improve from current levels, but given the long list of structural challenges to the bundle – ever higher pay-TV pricing, more content online, more homes with broadband service and tablets/connected TVs – it seems likely to us that subscriber declines steadily accelerate over time.”

Three areas are key going forward:

1. NETFLIX

OTT major Netflix continues to grow in the US with its SVOD-type services.

Netflix also continues to expand outside the US, with launches in Germany, France and Spain this year. Australia and New Zealand are scheduled for April 2015, with Japan expected to follow in 2H 2015.

The company ended Q3 2014 with 37.2 million subs in the US and 15.8 million subs in international markets.

Total revenue will likely reach US$5.5 billion this year, with Ebitda around US$575 million. (including content amortization)

Significantly, content cost exposure continues to scale up. Total streaming content obligations reached almost US$9 billion in Q3, with about 40% sitting on the balance sheet. This remains the big item to watch.

2. PAY-TV OTT

In the US, satellite operator Dish has struck deals with Disney and Scripps to launch OTT services, which it calls a personal subscription service, aimed at the youth market. Telco Verizon is doing something similar.

In the UK, Sky has launched Now TV (a relatively cheap OTT service) while in Germany, Sky Deutschland has recently launched a fully online service.

In Asia-Pacific, Foxtel (Australia), Sky TV (New Zealand) and Astro (Malaysia) are all launching dedicated SVOD services.

3. TV CHANNELS GO DIRECT TO CONSUMER

HBO has taken the OTT route in the US as it gears up to launch a potential US$20 per month service, followed by CBS, though few expect a CBS OTT service to work as a standalone offering.

Others include Showtime, while Sony plans to launch a pay bundle all of its own through gaming consoles and other outlets, having struck channel deals with players such as Viacom.

The prevailing mantra appears to be that if Netflix has proved anything in the US at least, it’s that consumers want an aggregator and curator for content choice. Consumers simply need the content to be more flexible (i.e. available everywhere), easy (i.e. accessible) and relatively affordable.

WORDS OF WISDOM

Comments from two industry executives provide valuable context to what may happen next:

John Malone, Chairman, Liberty Global, Liberty Media & Liberty Interactive, November 2014

The cable industry had an opportunity for TV Everywhere, four years, five years, six years ago. And unfortunately, it didn’t accelerate the implementation of that. If they had done that, there would’ve been much less appetite for Netflix.

Now, what you see in, in say what Comcast Xfinity is doing, is basically increasing the free VOD offering. So, there’s going to be a lot of random access TV offered on a free basis, on an incrementally free basis as well as on a premium basis. And I think the consumer will have to sort this out and decide how much and what they want.

I don’t believe that we’re going to see 27 different over-the-top services that the consumer is going to have an individual relationship with. I just don’t see it going that way. I don’t think the consumer wants that much trouble in their lives.

The glue in today’s bundle is sports – roughly 30-40% of homes would elect, if given a choice, to buy sports programming at wholesale prices. So you really have a world where 60% of homes are paying for something so that the other 40% can have access to it. And’s that really driving the phenomenon of the bundle and its cost. Eventually, I think the cable & satellite guys will try and build an alternative bundle around broadband and the differentiator will be random access content.

Finally what you will end up with is more Netflix or more Netflix clones and then you will see some of those Netflix clones cluster into bundles, aggregated and packaged by an operator. I don’t think Leslie Moonves from CBS himself believes that CBS alone is going to have a big subscription audience. But if it’s part of five or six other things, then it may grow as an alternative to the big bundle.

Richard Plepler, Chairman & CEO, HBO, November 2014

I don’t think it’s cannibalistic at all (the new HBO OTT offering). We’re going to have a big business with [MSOs] and we’re going to have a big business with new partners.

Our big market is the 10-15 mil. homes in the US that are broadband-only subscribers [Media Business Asia: About 40-50% of this market take Netflix] and most of these homes get their services from cable companies.

So there is gold in the hills, let’s go get it together – it’s your money too. It also gives us the ability to really market ourselves. We’ve relied way too much on our partners to market us. They have other responsibilities.