The way Americans watch TV is going to change in a big way in the next few years, according to analysts at UBS led by John Hodulik.
The catalyst of this change will be new live-streaming TV packages like DirecTV Now, Sling TV, and YouTube TV, UBS analysts wrote in a recent note to clients.
The concept of these emerging services is pretty simple: You pay for a package of channels like you would in a cable or satellite TV bundle, but those channels are delivered over the internet to your smart TV, laptop, smartphone, and so on. The thinking is that these flexible packages will lure younger people into the pay-TV universe.
And UBS thinks it will work. The analysts wrote that over 15 million people will subscribe to streaming TV services by 2020, as players like Hulu (confirmed), Amazon (rumored), and Apple (very murky), jump into the market. That would mean about 13% of all US homes.
Here's a chart that shows how UBS thinks the market will grow over the next few years:
But here's a question: If these services will find such a huge audience in a few years, why haven't they taken off immediately?
UBS chalks it up to three factors limiting growth:
Quality of live-streaming. This has been the real weak spot for entrants like Sling TV and DirecTV Now, which give great value in terms of number of channels (per dollar spent), but have under-delivered when it comes to performance. And it's a big problem, since a spotty service is an especially hard sell if you are dealing with people who are used to cable TV. They expect their TV to just work every time they turn it on. The reputation that streaming services are unreliable might be set to change, however. YouTube and Hulu have both emphasized their prowess with handling massive amounts of video online, but we've yet to see how their live-TV products perform in the wild. UBS is optimistic. "Given their streaming backgrounds and strong brands, we expect upcoming offerings from Google and Hulu in 2Q17 and Amazon (2018?) to solve many of the quality issues that have plagued early offerings while driving awareness of the streaming TV market," UBS wrote.
Channel availability. This is a double-edged sword for these streaming TV services. Part of the appeal of the category has been that many of the services have offered "skinny bundles," which give you a smaller package of channels for a price point of around $35-$40. For younger folks who balk at a $100-plus cable bill, that is attractive. But it also means trade-offs. YouTube TV, for instance, costs just $35 dollars a month, but doesn't have channels like CNN, TBS, TNT, History, AMC, A&E, Comedy Central, and HBO.
Consumer awareness. This will change if the popularity of these services starts to ramp up.
If this streaming-TV sea change does come, what will happen to the companies selling you pay-TV packages?
One big difference is that because of how aggressively these services are priced, the margins are razor-thin, especially compared to the fat margins of normal pay TV. That means if someone swaps a cable package for a streaming one, the cable company is going to lose some revenue — sometimes a lot. UBS says that cable companies will be able to offset some of that financial impact by charging customers for the data they are using to stream TV, since many are delivering internet too.
"These [streaming TV subscribers] will often come in at less than half the price of traditional service, but ... cable's broadband business will see upside given the broadband surcharge and potential speed migrations," UBS wrote. "In summary, while investors are concerned about the potential impact from new streaming TV services, we believe the financial impact on cable [companies] is manageable."
But that issue isn't so rosy for satellite TV providers, which UBS described as "challenged." There might be a potential escape valve for at least one: AT&T, which owns satellite provider DirecTV, plans to weather the storm by pushing for its upcoming 5G network to become a vehicle for delivering TV wireless. In that case, it would have the same data fee advantage cable companies have. But it's way too early to tell whether 5G will become the wireless TV juggernaut of AT&T's dreams.