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Top Multichannel Developments To Watch For In 2017

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On the heels of record losses, multichannel observers no longer seem to debate cord cutting and instead are contemplating the magnitude of the sub erosion to come. Doomsday scenarios remain popular, but more sober assessments recognize a measured reduction accompanied by the shift to broadband-centric services, sending bullish signals across a sector continually reinventing itself.

A year ago we called for an MSO move into wireless, only to see Comcast Corp. and Charter Communications Inc. a few months later announce they would trigger their MVNOs with Verizon Communications Inc. We also anticipated an acceleration in multichannel video subscriber losses, a steep drop in cable M&A volume and activity, and a surge in advertising receipts as cable benefits from new political spending strategies. Our expectation that content owners would see their leverage at the negotiating table slip failed to materialize, and as 2016 was coming to a close, industry executives appeared to have given up hope it would ever happen.

Below we list, in no particular order, what we believe will be the top developments to watch for in 2017.

The big subscription package is dead. Long live the big subscription package. The skinny bundle has been larded with hyperbole, as evidenced by a majority of attempts that are skinny in name only. However, there is no question that traditional programming packages are under pressure from alternatives such as DISH Network Corp.'s Sling TV, Sony Corp.'s PlayStation Vue, and AT&T Inc.'s DIRECTV Now. More competition is on the way in 2017, led by Hulu LLC's pending debut in the virtual service provider, or VSP, space. However, arriving at that sweet spot between a mainstream channel lineup at a bargain price point with rational economics promises to slow the march and keep the majority of consumers in a big programming package bundled with a broadband service.

Cracks in live-linear-sports dam to widen, putting additional pressure on multichannel subscriptions. Despite silver linings, such as strong ratings for the World Series, 2016 was an annus horribilis for sports television. NFL ratings logged noteworthy declines, and Summer Olympics viewership was lackluster. Demographic trends point toward continued erosion: Millennials and post-millennials are supplanting baby boomers, historically a heavy sports-consuming, multichannel-subscribing demographic. Changing viewing habits, which include an increasing aversion for heavy ad loads and a growing preference for instant watching (in lieu of appointment TV) are also at play. If the sports woes of 2016 turn out not to be a one-off event due to the presidential race and the softness continues in 2017, it will weigh on the big subscription packages.

Limited horizontal opportunities to send top MSOs down vertical M&A path. The high-profile deals struck in 2014 and 2015 significantly reduced the list of Tier 1 cable operators available for M&A. AT&T's acquisition of DIRECTV and proposed merger with Time Warner Inc. — moves that place the wireless behemoth at the forefront of the mobile pay TV frontier  — could compel Comcast and Charter to look outside the cable sector for assets to navigate a fast changing media consumption landscape. Comcast actually embraced vertical M&A in 2009, with its acquisition of NBCUniversal Media LLC. The top MSOs' interest in wireless in the activation of their MVNO agreements with Verizon weighs in the balance. The idea of wireless acquisitions is not far-fetched, and a list of potential targets could include T-Mobile US Inc., Sprint Corp. and perhaps even larger carriers. That said, Comcast is investing heavily in its platform, and if it can't leverage that across a larger base domestically (read Cox Communications Inc.), it may look to international acquisitions in 2017.

Cracks in live-linear-sports dam to widen, putting additional pressure on multichannel subscriptions
Multichannel providers to move aggressively to monetize TV Everywhere libraries. Part of the move away from multichannel subscriptions has been attributed to the erosion of multichannel affordability over the years, but changing viewing habits are playing a greater role. Binge watching is facilitated by popular subscription video-on-demand services like Netflix Inc. and Inc.'s Amazon Prime, but also by the large TV Everywhere libraries offered by the top multichannel providers. The supply/demand relationship between multichannel providers and what large swaths of consumers want is lopsided, and what is currently offered as a multichannel add-on is not truly being monetized. Instead, it is essentially used as an incentive to subscribe to a traditional multichannel package. Remedies are on the horizon, including a strong push toward dynamic advertising insertion, programmatic buying and the rollout of SVOD services.

Cable One Inc.'s passive-video strategy to inspire copycats. Cable One has expanded its blended margin by more than 9 percentage points in the past four years in part by privileging broadband while only selectively fighting what the MSO deems the secular video customer erosion. Its model was partly a response to the exponential rise of programming costs, and the strategy is likely to increasingly resonate with smaller-to-midsize operators.

* Trump-era FCC reshuffle points to reversal of Title II reclassification of Broadband. With FCC Chairman Tom Wheeler to resign Jan. 20, the winds are blowing toward FCC senior Republican Ajit Pai to take the helm. Pai’s track record presages less government intervention in the next four years (formally relegating Wheeler’s set-top box proposal to the ash heap of history). At the top of the list: reversing the Title II reclassification of broadband. This would remove, at least for a while, the specter of a rate-regulating framework and check impediments to prioritizing certain services. Surprises are not implausible, however. The distancing (but also outright reversals) of President-Elect Donald Trump from his campaign-trail rhetoric and stances suggests caution is de rigueur.

AT&T/Time Warner deal to put wireless-carrier-like pricing plans back in the spotlight. The evolution of video consumption toward an individual experience increasingly makes the case for a move away from household-based subscriptions to an individualized, wireless-carrier-like model. AT&T's proposed merger with Time Warner, or the fusion of a wireless colossus with a programming giant, brings water to this mill, giving the Dallas-based company the opportunity to market high-demand content to a wireless subscriber base of roughly 133 million. AT&T's DIRECTV Now is a step in that direction. And the relative popularity of DISH's Sling TV, for the most part a one-stream service, suggests this can be done.

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* MSOs to ride out drop in political dollars and absence of major international sports events. Odd years historically make for tough comps for the TV ecosystem, coming off the highs of political ad spending. In 2017, the universe is also going against the advertising bonanza surrounding the Summer Olympics in Rio de Janeiro. But cable MSOs have a few cards up their sleeves in the absence of these windfalls. Notably, the ability to "geo-target" and sell addressable ads (paid for only when actually seen), which has proved its efficacy through its use by political campaigns, is likely to increasingly appeal to all advertising categories in an ever more fragmented media world. Also, the sector's heavy consolidation and nationwide reach of the top MSOs should increasingly bring national advertisers into the cable fold.

* The battle for control of the home focuses on home control. The commercial success of Amazon's personal in-home electronic assistant Echo and Google Home in what is rapidly becoming an increasing connected world sets the stage for cable operators to move aggressively into the segment. Comcast is best positioned to respond with its X1 platform, the pending debut of the XB6 home gateway and the further integration of its voice control beyond content selection. The proprietary platform aside, several factors play in cable's favor, notably its last-mile access to the consumer, a wide (and growing) Wi-Fi network, installers on the ground to help push beyond early adopters, and multiproduct bundling.

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Jan 24, 2018