Poverty a problem for pay TV

http://www.variety.com/article/VR1118037755

For years, execs at pay TV companies and telcos boasted about their growth as subscribers continued to pay more for new cable services, next-generation smartphones and faster broadband. Amid the euphoria, however, those execs didn't address what might happen to their bottom lines when consumers could no longer swallow those increasingly larger bills.

They may be facing that reality soon. In a foreboding new report, one analyst concludes that a major risk facing companies like Comcast, Time Warner Cable, Verizon and AT&T is not heated competition from each other, or a fast growing outlier like Netflix, but rather poverty. "The poverty problem provides a new and sobering lens for any serious analysis of the telecom and media sectors," concluded Sanford Bernstein analyst Craig Moffett. "At the low end, customers aren't just choosing between one provider and another. They're often choosing between these services and a third meal." His 96-page report, "U.S. Telecommunications and Cable & Satellite: The Poverty Problem," was released Friday and was certain to have ruined the long Memorial Day weekend for at least a few media execs.

To underscore his premise, Moffett offered some data that would make any sales force out pushing subscriptions cringe.

• About two-thirds of American families subsist on less than the average after-tax income of $62,000 a year. "We are, sadly, a country where most Americans are below average," Moffett wrote.

• Fifty million Americans are on food stamps.

• Forty-nine million are considered "food insecure," with no confidence where the next meal is coming from.

• Forty-four million Americans now live below the poverty line.

"The picture of an America where 40% of households are essentially bereft of discretionary spending power has incredibly important implications for companies in our coverage," Moffett wrote.

Average price of a pay TV subscription has risen 29% in the past five years, while real income growth has declined. Cable and satellite providers now reap on average $77.43 a month from each subscriber. This, of course, includes gains from new services like high-def and DVRs.

As worrisome as Moffett's report may be, pay TV execs could be lulled in to a false sense of security after seeing TV subscriptions rebound through 2010, ending the year with gains of 250,000 after seeing subs fall earlier in the year for the first time ever. Still, some companies like Time Warner Cable began offering lower-priced economy tiers of services to capture and retain customers on tight budgets.

While media consumption has not been affected historically by bad economies, Moffett points out that "the media industry has not a faced a macro environment like this before" or so many alternatives. "No one would argue that the entertainment choices offered by Netflix are better than what's available on cable," he wrote, "and neither of those offered by Hulu, or YouTube. But when faced with a choice of pay TV or a third meal, will some customers choose to make do with a back catalog or off-the-run TV shows and movies? Of course they will."

Telcos faces similar challenges. Moffett said the bulk of telco spending gains are concentrated in the top 40% of households in terms of income. Forty percent of smartphone owners come from the top 20% of the economy. Meanwhile, lower-income users are trading down to less-expensive, pre-paid plans. "Notably, despite the fact that we are on what is perhaps the very steepest part of the wireless data adoption curve, total (average revenues per user) growth in the United States is negative today. The trade-down for the bottom end is faster than the trade-up for the top," he wrote. "Excluding the nontraditional subscriptions, penetration of post-paid wireless has been falling in America for more than a year."