COMMENTARY

SVOD Revenue Will Nearly Match Pay TV By 2027, But ARPUs Are Another Story

• by Karlene Lukovitz  @KLmarketdaily, May 26, 2023

Thanks in part to live sports shifting to streaming channels, annual revenues for U.S. subscription video on demand (SVOD) services will nearly equal those of traditional pay TV in 2027, according to a forecast from data and analytics company GlobalData.

That will mark a critical tipping point in the ongoing dynamic of streaming growth versus continued decline in cable and satellite TV and IPTV.

However, the outlook for SVODs’ average revenue per user/ARPU or per subscriber (ARPS, in GlobalData’s terminology) is far less impressive.

SVOD services’ revenues are projected to see a compound annual growth rate (CAGR) of 6.3% between 2022 and 2027, driving revenue up from nearly $47.6 billion to $64.6 billion.

During the same period, pay TV is expected to have -6% CAGR, with revenues dropping from $88.5 billion to under $65 billion.

SVODs’ household penetration reached 260% in 2022, reflecting multiple subscriptions in many households, and is projected to jump to 312% in 2027.

Pay TV’s U.S. household penetration rate is projected to slide from 47% in 2022 to 33% in 2027, with ongoing declines registering across cable TV, broadband-delivered IPTV, and direct-to-home/satellite TV subscriptions as the numbers of cord-cutters and those who’ve never subscribed to traditional pay-TV (“cord-nevers”) continue to grow.

The dynamic parallels the acceleration of the transition of live sports from traditional TV to streaming platforms via a growing number of agreements between major-league sports franchises and entertainment companies — including, most recently, NBCUniversal’s snagging the first exclusive live-streaming of a National Football League playoff game, and reports that Disney intends to create a standalone D2C ESPN streamer.

“SVOD was already on an impressive upward trajectory, but the addition of live sports programming is changing audience viewing habits even more, helping drive additional pay-TV cord-cutting and SVoD growth,” says Tammy Parker, principal analyst at GlobalData.

But the shoe is on the other foot when it comes to average revenue per subscriber, according to GlobalData’s estimates.

U.S. pay-TV ARPS reached $113.49 in 2022 and is expected to rise to $118.34 in 2027, thanks largely to price increases by cable TV and satellite TV providers.

Of course, given that pay-TV’s cost and bundle inflexibility are what has driven so many to cut the cord in favor of streaming, you would have to assume that further price hikes will only accelerate its subscriber losses, so even sky-high revenue per subscriber may not allow for much profitability at some point.

Meanwhile, U.S. SVOD providers are projected to be basically stable, with an already low ARPS of $12.16 in 2022 increasing by less than $1, to $12.79, in 2027.  

SVOD price increases will be suppressed by heavy competition, increased use of ad-supported tiers, cheaper plans with limited content, and monthly and temporary discounts, sums up the analysis, adding that there will be less pressure on SVOD providers to hike prices as inflation eases.

GlobalData expects Netflix to continue to dominate SVOD revenue market share, attracting about three times as much revenue as Amazon Prime and twice as much as the Hulu SVOD (not including its live TV vMVPD) each year through 2027.

If these ARPS projections are on the mark, achieving profit in the SVOD streaming segment will be increasingly challenging, and heavily dependent on controlling or cutting content costs and focusing on surefire franchises -- trends already well underway at some providers. Amortizing content costs across a growing number of free and lower-priced tiers will obviously help. But it would seem possible that SVODs’ increasingly blurry value proposition could take a significant toll on their subscriber numbers in the coming months and years. Do providers’ models take that into account? 

On a more macro level, all of this makes one wonder about exactly what assumptions are behind the differing streaming business models now out there, given that to be financially viable, most of them need to strike a tricky balance of volumes and pricing among premium, free, lower-cost, discounted and sponsored subscriptions, also factoring in current and projected advertising levels, with some content licensing and perhaps other revenue sources added to the mix. (Not to mention the impacts on linear TV revenues, for some majors.)

With so many moving parts in play, and consumer behavior and even advertising spend subject to more volatility than ever, can even the savviest operator confidently predict the dynamics and outcomes over even a few years? 

Guess we'll find out soon enough.