Remember the days of accessing your content through one main source — and one main screen? Today’s content consumption landscape offers unprecedented choice, but that choice often comes at a cost to the consumer. As platforms proliferate, so do the number of subscriptions needed to access premium content. Consumers are frustrated with high prices, content search functionality and the sheer number of streaming platforms saturating the market. This is pushing media and telecommunications companies to focus more on business model reinvention as they rethink their strategies, look for operational efficiencies and differentiate their offerings to help reduce churn and drive growth.
See our recommendations for business model reinvention to help manage down the legacy business as you forge a new role in the value chain.
In a recent Forbes Home survey, 86% of respondents said they’re paying for two or more monthly streaming subscriptions, and many consumers have as many as eight. While streaming platforms like Netflix and Amazon attract viewers with binge-watching models that pose a threat to the economic model of linear TV, the cost of multiple subscriptions can easily eclipse the cost of an average cable package. Traditional pay-TV providers are witnessing a decline in subscribers. For the first time, the linear (broadcast + cable) share of total TV viewing has dipped below 50%. But overall video content consumption continues to grow.
Gen Z in particular is changing the way consumers watch video content — 85% of them use their mobile device while they’re watching TV. And when they consume video on mobile, it’s often on user-generated content (UGC) platforms such as YouTube, TikTok and Instagram Reels. This trend hasn’t gone unnoticed by some streaming service providers that release promotional clips of their shows or movies via platforms like TikTok.
Due to their low variable-cost structure, UGC platforms’ inherent business models have a competitive cost advantage compared to those of traditional pay-TV providers. At the highest level, UGC requires low-to-no variable costs to create and share with an audience. Once a UGC platform becomes established, its fixed costs to service the platform are relatively flat. As a UGC platform reaches scale, they see a dramatic rise in advertising revenue without a similar rise in variable costs, which boosts profitability. Meanwhile, traditional pay-TV providers have to pay to create, license or host content, which might increase advertising revenue — but it also increases their variable operating costs. And if the content doesn’t perform as expected, it has the potential to decrease profitability as well.
The live pay-TV market — mostly traditional multichannel video programming distributors (MVPDs) like Comcast and Charter — faced a new low subscription rate in the second quarter of 2023. The decline in the number of subscribers is expected to accelerate, with subscription revenue projected to fall by around $15 billion annually by 2027. We expect a revenue tipping point or cliff in the near future, with several potential triggers.
The migration of sports to over the top (OTT) platforms may help accelerate the decline in linear TV. While linear players are still willing to shell out hefty fees to entities like the NFL, so are OTT platforms — Netflix just made a 10-year deal to secure WWE’s “Monday Night Raw” for more than $5 billion. And Peacock recently secured the first-ever exclusive streaming of an NFL playoff — and they added 2.8 million subscribers in the lead-up to the live stream of the game, which is a little over 9% of their reported total of 31 million subscribers. The race is on to pursue and secure sports rights, reduce churn and encourage platform stickiness year-round. ESPN, Warner Bros. Discovery and Fox are also getting in on the streaming game and recently announced plans for a sports-focused streaming service. While further details are still forthcoming, these types of partnerships and alignments are consistent with our US Deals 2024 Outlook. As live sports play a crucial role in retaining linear subscribers, any shift of media rights to streaming platforms could contribute to loss of linear viewership.
TV networks also face escalating costs and fierce rights competition from big tech companies. Fixed costs for rights are overwhelming a shrinking subscriber base –– broadcast retransmission costs are ten times what they were ten years ago (S&P Capital IQ, 2024). Large tech platforms like Apple, Amazon and YouTube are feeding demand, and they’re better equipped to play the long game. Amazon enjoyed a second season of Thursday Night Football on Prime Video as part of its 11-year $1 billion per season deal, and it has plans to stream National Women’s Soccer in the spring of 2024 and Nascar in 2025. Additionally, Apple capitalized on the Messi effect with a documentary and its MLS Season Pass.1
1 “How to watch Lionel Messi vs Cristiano Ronaldo: Inter Miami vs Al-Nassr stream and time.” Mirror January 31, 2024.
With the end of linear TV on the horizon, legacy media and telecom companies should devise multiyear strategies to anticipate declines in linear revenue, identify areas of growth to offset the decline and establish long-term viability, add services for customers to increase stickiness and stem customer loss, and consider an intricate business model reinvention to help manage down the legacy business while charting a new role in the value chain.
Here are some possible ways to chart that new role.
Take cues from other successful players, including getting more creative with pricing. Consider expanding ad revenue possibilities from promotions tucked within the most binge-worthy content available in advertising-based video on demand (AVOD) tiers, or even dynamic ad insertion capabilities. These moves could prove lucrative given that the AVOD market is forecast to have a value of $59 billion by 2027. Or take the collaborative approach and build a flywheel that evolves into a home platform from which customers can access content and services across a broader ecosystem that can include video, music and even gaming and e-commerce. This can strengthen engagement and keep churn at bay.
With the ongoing trend of cord cutting and the increasing availability of alternative options and pricing choices, streaming providers may start to actively pursue strategic partnerships. These partnerships would ideally involve subscriber bases that complement each other, valuable intellectual property, and a shared vision and strategy for attracting new subscribers. Traditional providers may also unlock inorganic growth through partnerships and deal-making, including niche tech areas like extended reality, Internet of Things and machine learning.
Bundling should also be on the table. Consumers look for simplicity. Remember that one service and one screen we all used to have? Working directly with content owners to bundle streaming services and sell to customers at a single fee could leverage existing content owner relationships and renormalize annual contract negotiations.
As the future of TV unfolds, traditional models are being disrupted. Legacy media companies should focus on quality over quantity. Telecommunication companies should carefully examine forecasted revenues and look to continue to take significant cost out of their operating models. It’s time to get proactive about managing down costs to keep pace with revenues to avoid negative margins, margin compression and adverse allocations to the broadband business.
These “ways to play” come with risks and may require substantial capability expansion and/or reengineering to reinvent a new business model. They also contemplate maintaining the customer relationship, increasing stickiness and services to add value to the customer and incorporating strategies for skating to where the puck is headed. But the payoff could be winning in the future virtual MVPD market.
The decline of traditional, linear TV should serve as a cautionary tale for streaming services. Beware the churn trap of consumers who refuse to carry too many subscriptions and hop from one service to the next. The answer can’t simply be price hikes to recoup revenue or cracking down on password sharing in hopes of gaining more subscribers. You’ll need other optimization avenues that allow for flexibility in pricing packages, minimum commitment periods for streaming services or incentivized annual rates relative to monthly ones. Many services have already taken this route, with discounts on quarterly and annual plans. And perhaps the solution needs to be more creative, albeit more difficult. It may necessitate business model reinvention altogether — one that involves collaboration and consolidation — and a focus on defining new capabilities.
Legacy distributors such as cable and satellite companies will face challenges as renewals of major distribution agreements turn into disputes. This is happening already, as evidenced by the recent FCC notice of proposed rulemaking that proposes pay-TV providers give rebates to customers for the programming blackouts these disputes cause. Blackouts will become more common and last longer, with some becoming permanent. For sports fans specifically, these blackouts may prompt consumers to jump over to a virtual MVPD that streams their favorite team’s games.
Ultimately, the video ecosystem will reach a new equilibrium. The winners will likely be those that act decisively to identify their role in the value chain and shift their strategies, resources and capabilities in order to deliver value to their customers.
Principal, Consulting Solutions, Atlanta, PwC US
Bart Spiegel
Global Entertainment & Media Deals Leader, PwC US
Kim David Greenwood
Principal, Strategy&, San Francisco, PwC US