This report is part of the “New normal, new opportunities” series, in which we examine secular trends in a post-COVID-19 world. The series will cover a range of themes that are emerging as a result of social distancing, the work-from-home imperative, health care developments, corporate implications, and broader societal change. We believe identifying these trends and understanding their investment implications will be critical to navigating the road ahead. Additional reports will be released over the coming weeks.
Over the last several years, continued price hikes in pay TV, a proliferation of video streaming services offering high-quality content, and households’ desire for more customized viewing options have underscored the cord-cutting1 phenomenon. We believe that the pandemic has magnified the value proposition of video streaming given better economics, access to high-quality content, and greater control of the viewing experience, and could potentially accelerate the cord-cutting1 and cord-shaving2 trends.
Cord-cutting: The process of cancelling a cable or satellite subscription and getting TV shows and movies by other means. Most often, this involves switching to video streaming services that can be accessed via the internet.
Cord-shaving: Keeping one’s cable TV subscription, but cancelling all the costly channels, packages, and add-ons. As a result, household cable bills drop significantly, while retaining some of the essential basic channels, along with an internet connection.
Video streaming goes viral
With the vast majority of the workforce at home, a fear of public spaces, an inability to enjoy live events, and the pause of live sports (until recently), it’s not surprising that households are relying on home entertainment as a means of passing time and leisure in the midst of this pandemic. An April report published by Nielson cited that time spent streaming videos from services including Netflix, YouTube, Hulu, and Amazon Prime Video more than doubled from a year ago as a result of COVID-19.
In fact, based on a cord-cutting study published by Roku in July of this year, cord-cutting hit a milestone in the midst of the pandemic with nearly one in three U.S. TV households without traditional pay TV subscriptions (cable, satellite, telco), while another 25 percent of households identified as cord-shavers and cut back their service.
COVID-19 has given households the opportunity to reassess their home entertainment experience and what they are willing to pay for it. Ultimately, the Roku study suggests that COVID-19 is in fact favorably influencing the shift to streaming. When asked about the intent to cut the cord fully in the next six months, 45 percent of cord-shavers indicated they were likely to do so. The focus on value is key, with 40 percent of recent cord-cutters deciding to cut traditional pay TV services as a result of access to free trials and premium subscription services.
While the absence of live sports events on traditional pay TV services earlier on during the pandemic no doubt facilitated the acceleration in cord-cutting and greater adoption of streaming services, at the time the survey was taken it was questionable as to whether cord-cutters would resubscribe to traditional pay TV in order to regain access to live sports. Interestingly, according to the survey, only 17 percent of recent cord-cutting households indicated that this would be the case. One-third of households said they would likely subscribe to a live sports streaming service, and over half of traditional and cord-shaver households said that they would likely reduce their package if televised sports on traditional pay TV did not return.
Cord-cutting and cord-shaving on the rise as households prioritize value
In 2019, major cable and satellite TV operators collectively lost around 5.8 million subscribers in the U.S., more than double that lost in 2018, according to protocol.com. We believe these changes are driven primarily by households’ desire to lower expenses by switching to cheaper video streaming alternatives.
Consider the fact that the vast majority of households with a cable bundle end up with a host of channels they don’t watch, while also paying a disproportionate amount of their monthly income towards their cable package. A recent report published by DecisionData.org in March of this year found that the average U.S. consumer pays more for their cable package—an average monthly cost of $217.42, of which TV services constitute 50 percent—than they do for most other household utilities combined. Further, the average cable bill stays relatively similar across household sizes, whether one or more people live there—though this is not true of other utilities such as electricity or water. Notably, cable bills have steadily been on the rise and despite the pandemic, there are few signs that annual price hikes will abate anytime soon.
We believe households that cut the cord can economically redirect those savings towards multiple streaming subscriptions. Consider the fact that the average U.S. household pays around $100 per month for pay TV services. Even if a household were to sign up for subscriptions to, for example, Netflix, Amazon Prime Video (for non-Prime members), Disney+, and AppleTV+, they would still be retaining close to 60 percent of those savings (see table).
Potential savings from cord-cutting & switching to multiple streaming subscriptions
| Streaming provider | Cost per month |
|---|---|
| Netflix* | $15.99 |
| Amazon Prime Video** | $12.99 |
| Disney+ | $6.99 |
| AppleTV+ | $4.99 |
| Streaming total | $40.96 |
| Average cost of pay TV | $100.00 |
| Cord-cutting savings | 59% |
*Premium subscription cost. Basic subscription is $8.99/month.
**Cost is for non-Prime members. Amazon Prime members get access to Prime Video for free.
Source - Company websites, RBC Wealth Management
Ample runway for cord-cutting over the next several years
Despite a strong shift towards cord-cutting globally, particularly in the U.S., over the last several years, we believe there is an ample runway for this megatrend to continue on a multiyear basis. Statista projects revenue in the global video streaming segment to reach $51.6 billion in 2020—a 16 percent increase year over year. Over the next five years, revenue is expected to grow at an annual compounded rate of 10.7 percent, or to $85.7 billion by 2025. Note that the penetration rate, despite robust growth over the last several years, was just under 11 percent in 2019. This is expected to expand to approximately 17 percent by 2025.
While the focus on value as a driving force of cord-cutting cannot be understated, we believe there are other factors that will potentially magnify this megatrend over the long term.
First, the desire for personalized content coupled with greater control of the viewing experience will augment the secular growth trend of video streaming.
Second, as the subscriber base for a subscription video-on-demand (SVOD) provider grows, this creates a giant data set that can be mined to better understand customers’ viewing behaviors and preferences, and ultimately used to purchase or create better content. The data should empower the provider to not only strengthen its relationship with its customer base but also attract new customers to the platform.
Third, technological advances related to improved network speeds should enable SVOD service providers to deliver high-definition videos at a faster streaming rate. These faster speeds, coupled with the proliferation of connected devices such as smart TVs, smartphones, and tablets, will enhance the growth of the broader streaming “ecosystem.”
This article was originally published on Aug. 20, 2020
Non-U.S. Analyst Disclosure: Jim Allworth, an employee of RBC Wealth Management USA’s foreign affiliate RBC Dominion Securities Inc. contributed to the preparation of this publication. This individual is not registered with or qualified as a research analyst with the U.S. Financial Industry Regulatory Authority (“FINRA”) and, since he is not an associated person of RBC Wealth Management, may not be subject to FINRA Rule 2241 governing communications with subject companies, the making of public appearances, and the trading of securities in accounts held by research analysts.
In Quebec, financial planning services are provided by RBC Wealth Management Financial Services Inc. which is licensed as a financial services firm in that province. In the rest of Canada, financial planning services are available through RBC Dominion Securities Inc.