DISCONNECTED REALITY: Untangling the Great Cord Cutting and Streaming Misconception There’s tremendous noise around cord cutting and streaming, with results from narrowly focused studies publicized in scattershot fashion. The investment community has gotten the impression that newly empowered consumers are abandoning TV for other content streamed online. What is really happening? What impact does cord cutting and streaming really have on the TV/video ecosystem? And what does it mean for marketers? Because no single study has approached the question holistically, we pulled together data from a wide range of reports to construct a complete picture of what people are actually doing. Therefore, this whitepaper explores the demographic makeup and decision-making of “cord cutters,” “cord nevers” and broadband-only homes; the effect streaming has, or doesn’t have, on TV penetration and viewership, and the real health of the TV industry. In a nutshell, cord cutting – and its corollary streaming – isn’t who, what, or why you may think.

Cord cutting is about cost, not content. The reality is lower-income consumers (young and old) are cutting the cord to save money. When they do cut the cord, the vast majority (78%) of what they stream is TV content licensed from networks.1 Overwhelmingly, viewers tell researchers they prefer an MVPD subscription, because there is a wider variety of content they want on demand. People with both MVPD and OTT subscriptions watch more TV than non-streamers.

Streaming is an and, not either-or, proposition. Streaming turns out to be an enhancement, not a replacement. Only 18% of cross-platform homes account for nearly all streaming, and 9% of streamers account for 87% of content watched. Fully 78% of that content is TV programs licensed from networks. Streamers want access to the most quality content most efficiently; their choice is on format, not content. In fact, the more premium content there is available, the more TV viewers are watching. The majority of streamers continue with MVPD subscriptions because TV Everywhere packages contain premium content they cannot access elsewhere.

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DISCONNECTED REALITY: Untangling the Great Cord Cutting and Streaming Misconception Who are the Cord Cutters and Cord Nevers? Cord Cutters are Cost Cutters, of All Ages Cord Cutters are fairly diverse in terms of age with a majority living in lower income households. Only onethird of “cord cutters” are Millennials and they mainly cut the cord due to economics and their own personal finances. Thus it is important to understand that cord cutting is more a result of income than age or lifestage.

Source: SNL Kagan February 2015 Consumer Insights survey

According to SNL Kagan, 58% of people that don’t have a multichannel subscription state it’s because “the cost is too high,” which is a significant increase from the prior year. Only 18% say they don’t subscribe because online TV programming fulfills their video needs; a substantial 30% drop from last year.

Source: SNL Kagan 2015 vs. 2014 Consumer Insights survey

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DISCONNECTED REALITY: Untangling the Great Cord Cutting and Streaming Misconception Cord Nevers are Cost-Constrained Younger and Older Viewers Cord Nevers are a mix of young & old and are more likely than “cord cutters” to come from lower income households. It is interesting to note that Boomers / Seniors make up a higher percentage of “cord nevers” than Millennials and, as with “cord cutters,” the main motivation for remaining a “cord never” is a result of income and not age or lifestage.

Source: SNL Kagan February 2015 Consumer Insights survey

Much like “cord cutters,” the top reason that “cord nevers” don’t subscribe to an MVPD service is because of cost (35%). Interestingly, more “cord nevers” state that broadcast TV meets their needs rather than online TV programming (which experienced a YOY dip to 15% from 18%).

Source: SNL Kagan 2015 vs. 2014 Consumer Insights survey

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DISCONNECTED REALITY: Untangling the Great Cord Cutting and Streaming Misconception Cord Cutting Isn’t Forever According to SNL Kagan’s Consumer Insights survey, with all things being equal and no barriers to subscribe or continue subscribing (i.e., costs, etc), a whopping 80% of cord cutter / never respondents said they would prefer to receive video content as part of a multichannel video subscription (either alone or in conjunction with an OTT service). This indicates that there is a strong potential for some of these consumers to become subscribers in the future.

Source: SNL Kagan 2015 Consumer Insights survey

This prediction is ringing true, especially among the younger audience where the majority of adults (57%) that subscribed to a multichannel TV service in the last year were Millennials. The survey findings also indicate that many Millennials are becoming multichannel subscribers as they gain a higher income.

Source: SNL Kagan February 2015 Consumer Insights survey

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DISCONNECTED REALITY: Untangling the Great Cord Cutting and Streaming Misconception Broadband-Only Homes are a Small Fraction of TV Households Although much has been mentioned in the trade press about Broadband Only Homes it’s important to note that, according to Nielsen, they reflect only 2.9% of total U.S. TV households as of May ’15 and the number has remained relatively flat since October 2014.

Source: Nielsen NPM sample, by reflected week

What’s the Real Streaming Picture? Streaming is Not a Zero-Sum Game Contrary to mounting perception, over the next three years the growth of connected devices and streaming services isn’t projected to come at the expense of multichannel subscriptions.

Source: SNL Kagan October 2014 for connected device projections; SNL Kagan 2015 for multichannel subscriber projections

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DISCONNECTED REALITY: Untangling the Great Cord Cutting and Streaming Misconception Streaming Follows an 87% / 9% Rule Only 9% of cross-platform homes are responsible for a vast majority of all the streaming done in the U.S. (87%). Interestingly enough, the heaviest streamers are voracious video consumers who watch more TV than either light streamers or people that don’t stream at all; and they even devote more than 90% of their viewing time to TV.

Netflix Is a Complement, Not a Replacement Netflix is generally a complement to multichannel subscriptions as evidence by the fraction of time adults spend with the service compared to TV.

Source: Nielsen analysis of time spent; total day; Jan ’15; TV= English cable + broadcast; Netflix = self-reported

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DISCONNECTED REALITY: Untangling the Great Cord Cutting and Streaming Misconception Because of This, Netflix Has Had a Negligible Effect on MVPD Subscriptions Consumers are much more likely to add the OTT service rather than sacrifice their multichannel subscription. According to new research from TDG, the use of pay-TV services (MVPDs) among Netflix users has declined only marginally – a statistically insignificant 3% points over the last three years (87% to 84%). At the same time, the use of Netflix streaming among pay-TV users has increased by one-third, up to 49% in 2015 from 36% in 2012.

Source: The Diffusion Group, Netflix Streamers – A Consumer Snapshot - Netflix Streamers, July 2015 (pay-TV = MVPD subscriptions)

All of Which Helps Explain Why SVOD Churns More Subscribers Than MVPDs SVOD homes have lower retention rates than MVPD homes. In a 3-month period, 93% of SVOD homes are likely to remain as such vs. 99% of cable homes.

Source: Nielsen NPower total day live TV viewing for unified HHs; avg of four 3-month analysis; July’14-Oct’14, Aug’14-Nov’14, Sep’14-Dec’14, Oct’14-Jan’15; based on 3-month unification analysis

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DISCONNECTED REALITY: Untangling the Great Cord Cutting and Streaming Misconception Programming is Paramount The 45-5 Difference: TV Invests Nine Times More in Content TV (networks & MVPDs) is projected to grow its already medium-leading market share over the next ten years (from 25% to 31% share) as advertiser confidence in its ability to deliver a large, desirable audience base continues to be strong. Along with a rise in share, cable & broadcast TV network revenues are expected to increase for both sides of the dual revenue stream (currently projected at $89 billion in 2015 and building to over $100 billion by 2017). These increased revenues allow TV brands to invest heavily in year-round, high-quality content as the networks now collectively spend $45 billion on programming each year, a number that is only expected to grow ($50+ billion projected by 2017). These budgets also allow TV brands and their platforms (linear TV, online, apps) to be the exclusive home for marquee, live action sporting events like Super Bowl, College Football Playoffs, NCAA Final Four, World Series, NBA Finals and Wimbledon. In comparison, TV brands’ programming investment far surpasses spending from the major OTT / streaming services. Not only that, it’s important to note that much of the video content investments made by these OTT & streaming services are put towards proven original TV content, which creates an additional revenue stream that TV programmers can use to re-invest back into their own content.

*Total Ad-Supported TV Brands include Cable & Broadcast Sources: TV Brands: SNL Kagan 2015; all other services based on VAB analysis of existing projections and estimated for U.S content rights only. Amazon: Various analyst reports including RBC Capital Markets; Netflix: SNL Kagan & Netflix financial reports; YouTube: based on YouTube announcements through their corporate blog postings in 2014; Hulu: estimated based on investment projections announced through Hulu & further projected by RBC Capital Markets.

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DISCONNECTED REALITY: Untangling the Great Cord Cutting and Streaming Misconception TV Holds a Colossal Reach and Time Advantage TV continues to dwarf monthly video reach on other devices:  Watching TV: 285 MM  Watching Video on a Computer: 139 MM  Watching Video on a Smartphone: 128 MM Source: Nielsen Total Audience Report, Q1 ’15, P2+ (smartphone based on P18+)

TV holds a huge advantage when it comes to time spent watching video by device; 91% of total video viewing time is spent with the TV: (monthly consumption by hours: minutes)

  

TV - 151:33 Computer – 12:13 Smartphone – 1:53

Source: Nielsen Total Audience Report, Q1 ’15, P2+ (smartphone based on P18+)

Television is the clear leader in total video time across the age spectrum, even among young demos who are the lightest TV viewers:

Source: Nielsen Total Audience Report, Q1 ’15, P2+ (smartphone based on P18+)

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DISCONNECTED REALITY: Untangling the Great Cord Cutting and Streaming Misconception TV Easily Beats All Other Devices On Comparable Video Metrics: How Many? How Often? How Long? Based on current media habits, the average Adult 18+ watches over 5 hours of Television a day vs. 16 minutes a day of video on PC / Smartphone / Tablet combined. That’s a 95% - 5% split in attention.

Source: Nielsen Total Audience Report, Q1 ’15 (A18+)

Multichannel TV HH Penetration Has Increased +10% Over Last 10 Years This increase has even outpaced the growth in total TV universe (+6%) during the same 10 year time period.

Source: SNL Kagan 2015; includes cable, DBS and telco

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DISCONNECTED REALITY: Untangling the Great Cord Cutting and Streaming Misconception VOD is Growing Fastest on TV Video-On-Demand has grown substantially and is now available in over 62% of TV homes; fueled by an improving, more intuitive interface and a recent surge in available content from network providers.

Source: VOD availability based on Nielsen (June of each year)

Improved content search and discovery is allowing consumers easy access to a variety of entertainment options – from a wide assortment of movies, both new and old, to recent episodes or seasons of TV shows that enable viewers to “catch up” on their favorite programs.

Source: SNL Kagan, as of March 2015

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DISCONNECTED REALITY: Untangling the Great Cord Cutting and Streaming Misconception MVPD’s ability to meet consumers’ desire for content variety is unmatched in the industry and their advantage is only growing. Titles available across the major SVOD services are a fraction of what’s available through MVPD’s VOD platform.

Source: SNL Kagan; Netflix reflects estimates based on Jan ’13, Dec, ’13, Dec ’14; Hulu Plus reflects estimates based on Dec ’12 / ’13 / ’14; Average MVPD reflects annual monthly estimates as of March 2015; Amazon reflects estimates in July ’13 / ’14, no reliable data for 2012. Includes both TV and movie titles

“TV Everywhere” is Graduating From “Early Adoption” to “Early Majority” According to Adobe’s U.S. Digital Video Benchmark Report, TV Everywhere consumers logged 2.1 billion authenticated videos in 2014 – up 266% YOY and a remarkable +467% over the last 24 months – pushed initially by marquee sporting events then spread to more broad-based entertainment content. On average, over 13 million viewers logged in at least once per quarter in 2014 to watch TV Everywhere content, which was a 2x increase over 2013. Over the last two years, TV Everywhere has continued to attract new viewers to its content and have kept those viewers actively returning. Interestingly, Q4 2014 active viewers remained robust even without major sporting events which indicates viewers are viewing more than just sports. By the end of 2015, it’s anticipated that almost 20% of pay-TV subscribers will be active TV Everywhere viewers, a fourfold increase over just the last two years. With the current growth, TV Everywhere will soon become a technology used by the “early majority” not just “early adopters.” Another interesting finding is that viewers are returning to the living room where they are watching TV Everywhere through apps on gaming consoles and OTT devices like Apple TV & Roku so they can enjoy a richer interactive viewing experience. 12

DISCONNECTED REALITY: Untangling the Great Cord Cutting and Streaming Misconception

Source: Adobe U.S. Digital Video Benchmark 2014 Inaugural Report

Not only is TV Everywhere growing in terms of footprint and usage but the content catalogues are increasing as well, both quantitatively and in terms of exclusivity with regards to the OTT services.

Source: SNL Kagan as of January 2015; surveyed from MVPD websites

Conclusion The old adage, “things aren’t always what they seem to be,” applies to cord cutting and streaming. What many in the media business have automatically interpreted as a statement of content preference turns out to be simply a cost-cutting measure. The majority of cord cutters and cord nevers cannot afford multichannel TV subscriptions and these people are not targeted consumers for many of the most advertised products on TV today. Likewise, streaming is not a new generation fleeing TV content. It is predominantly TV fans adding flexibility and dimension to their video viewing. TV shows remain the vast majority of streamed programming, while MVPDs are fast expanding their exclusive catalogs of video on demand. In the end, viewers follow the content. With a content investment expected to rise to more than $50 billion in 2017, TV networks and MVPDs are poised to continue creating the center of the video universe. This is why the growth of broadband-only homes has slowed in recent months, and even four out of five cord cutters say they would prefer a multichannel TV subscription.

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