Craig Moffet, Bernstein Research senior analyst, has long been a “bull” on the subscription video business, a bull on cable TV and a relatively consistent “bear” on prospects for telcos. So it might be a harbinger if a notable long-term bull becomes a bear. And that, one might argue, is happening.

To be sure, Moffet long has maintained that video “cord cutters” don’t buy cable, satellite or telco TV services because they can’t afford to do so. Up to this point, with 86 percent of U.S. households subscribing to a video service, a reasonable person would conclude that most consumers will value subscription TV enough to buy it.

But that could be changing, and dramatically. For the first time, Moffat seems to believe that 40 percent of U.S. households might not be able to afford subscription video, and might be reasonable candidates for alternative entertainment.

“No one would argue that the entertainment choices offered by Netflix are better than what’s available from cable and neither is those offered by Hulu (News - Alert), nor YouTube,” he now says. “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.”

"After the necessities of food, shelter, transportation and healthcare each month, the bottom 40 percent of U.S. households have already exhausted all of their disposable income," says Bernstein.

"There is," he says. "Nothing left for clothing, for debt service, for cable or for phone."

That might be a historically unprecedented situation. The significance here is less that an observer predicts growing dissatisfaction with the video product, or warnings that a growing percentage of potential consumers do not want to buy subscription television. 

The big deal is that an analyst who has been long-time advocate for the business moat around cable TV and subscription video, compared to alternative online choices, now seems to question whether the subscription video industry can continue to operate as if nothing fundamental has changed. 

If one assumes 40 percent of households really cannot afford to buy, while a growing percentage does not wish to buy, one could assume that the potential customer base for subscription TV could drop as much as 50 percent. That might imply a 34 percent household take rates for subscription video. 

At such rates, many providers--perhaps all--would find that it no longer is profitable to sell subscription TV, unless there was a massive supplier consolidation. In a market with four major suppliers, including a local telco, a cable company and two satellite providers, 34 percent penetration would imply that, all other things being equal, any one of those suppliers could expect to gain and hold no more than eight to nine percent market share. 

Of course, all things are not equal. One might, in such a scenario, assume cable could get 17 percent, the telco nine percent, one satellite provider four percent and the final provider perhaps the final four percent. 

With today’s capital and operating costs, it is possible none of the providers actually could make money. Aside from everything else, consolidation would have to occur. At the same time, service providers would have to have radically retooled their operating costs. 

Video distributors and programming networks might not prefer to retool, but if Moffat is right, and people begin to abandon services at high rates, those suppliers will not have a choice. They will be forced to change business models in drastic ways.





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