Subscriptions are healthy, but younger adults are cutting their spend on pay-TV, says Martin Pilkington

Could we be on the edge of a rapid change in media consumption patterns, requiring a transformational shift in business strategy by the pay-TV industry? 

The TV industry has always watched consumer patterns very closely and responded with attractive and highly competitive products. Huge marketing efforts by the pay-TV companies are promoting slim bundles and low-cost web-based over-the-top (OTT) services to compete with the rapid rise of the pure-play internet offerings of Amazon Prime and Netflix.

UK and European pay TV companies are using triple- and quad-play convergence to drive economies of scale and offer compelling packages to customers to cross-sell products and generate further revenue and ‘stickiness’.

The subscription numbers indicate that the approach is paying off. In the last quarter of 2015, BT put on nearly 100,000 new TV customers, and Sky announced today that while churn remains a problem, it has enticed 177,000 new subscribers so far in 2016.

So far, so good - the weight of evidence would suggest that pay TV packages (albeit perhaps in slimmed-down form) and internet-based TV consumption are complementary.  But our research, ‘The Perennial Millennials’, indicates that this is probably not the case for millennials, the generation that has grown up with the internet.

Moreover, the corresponding impact on pay TV companies’ financial models could be far greater and more rapid than some have anticipated as the ‘internet generation’ reduces spend on pay-TV in favour of cheaper (and sometimes free) web services.

Subscription-based OTT services are more popular for millennials of all life stages than for older generations: 38% of pre-family millennials and 32% of those with kids have an OTT subscription versus just 15% of non-millennials.

Millennials’ consumption of traditional TV has already taken a hit as a result, with 60% of the generation with OTT services saying they have significantly reduced their viewing of pay- and free TV.

In contrast, OTT is broadly complementary to traditional TV viewing for non-millennials as only a quarter of the group to date has significantly reduced their use of traditional pay and free TV. 

The impact on pay-TV spend has yet to be seen, but 45% of millennials with paid-for television subscribe to, or plan to, an OTT service in the next 12 months. Critically, two-thirds of them say they expect to cancel or reduce their spend on pay-TV within the next year.

Some pundits will respond that the trend may be the case for younger millennials but not for the generation’s less internet-obsessed older groups. This might turn out to be wishful thinking, as our analysis shows that all 17 to 35 year-olds, including those with children, plan to cut their spend on pay-TV. The shift online could be even more significant as our numbers indicate that millennials’ consumption habits are spreading virally to older generations.

We are not for a minute suggesting that the pay-TV is about to face Armageddon. Our research across the life stages of millennials is the very first of its kind. But some pay-TV players may need to take a closer look at their strategies to capture the spend of the millennial generation.

  • Martin Pilkington is head of L.E.K. Consulting’s European Media, Entertainment and Technology Practice

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