CES 2016: Pay-TV Services to Slow Down in 2016. Where Is the Growth Opportunity?

Egham, UK, December 3, 2015

Over the space of four days in January 2016, many of the world's biggest tech companies will roll up to CES 2016 in Las Vegas to reveal what they have planned for the coming year. With consumers cutting the cord more frequently, will innovations be in store for the pay-TV business?

Derek O'Donnell, senior research analyst at Gartner, shared his latest insights into the state of the pay-TV market, and where the opportunity for growth lies.

Q: What's the outlook for pay-TV subscriptions, and where are the growth opportunities coming from?

Gartner forecasts that worldwide end-user spending on video media services will reach $316 billion in 2016, a 6 percent increase on 2015. Pay-TV services represent the largest segment of the market with end-user spending totaling $293.8 billion in 2016, a 5 percent increase on 2015. Despite a slowdown in global end-user pay-TV subscriptions in the last five years, spending will be driven by new value-added services and premium content that will only be available through paid services.

In mature markets, we expect end-user pay-TV service penetration to grow by 1.5 percent in 2015, and 1.3 percent in 2016. By 2019, subscription growth will slow to 0.2 percent, with some specific regions within this group starting to show small attrition. The two main reasons for this pattern are market saturation and changing TV viewing habits, especially among the younger generations.

Developing markets in Sub-Saharan Africa, the Middle-East and Northern Africa will together experience 18 percent growth in household subscriptions in 2015, and 14 percent in 2016. There are a number of factors that will drive the growth in these regions including the launch of more affordable pan-African pay-TV satellite service providers, and the digital switch-over that makes accessing content on analog TVs impossible without a set-top-box.

Q: What are the changing viewing behaviors that are affecting the pay-TV market?

Consumers in mature markets, especially Millennials, are beginning to watch a significant proportion of their long-form television content through video on demand (VOD) services. While pay-TV providers will typically include access to VOD content with a subscription, consumers are diversifying their VOD libraries by subscribing to multiple low-cost subscription services, like Netflix and Hulu Plus. Many consumers think these substitute services deliver better value for money. We forecast that, by 2019, some consumer groups will reduce their spending on premium pay-TV content by up to 40 percent and will instead subscribe to one or more VOD services.

Q: What impact will Millennials have on the video media services market?

Millennials subscribe to fewer pay-TV services than other age groups. In the second quarter of 2015, Gartner surveyed 16,000 respondents between 18 and 74 years old in five countries on their use of personal devices. The survey showed that consumers under 35 are 4 percent less likely to subscribe to pay-TV services than the rest of the population, as were 7 percent of single respondents. These results demonstrate that Millennials have a negative impact on pay-TV subscriptions.

By 2019, Gartner expects that up to 50 percent of newly formed households in mature markets will never subscribe to traditional pay-TV services, and will solely rely on online access to VOD, whether paid for or not.

Q: Will 4K Ultra HD TVs increase pay-TV subscriptions?

4K Ultra HD TVs (also known as UHD TVs) deliver four times as much detail as full 1080p HD, that's eight million pixels compared to two million. In terms of potential image clarity, it offers finer detail, greater texture, and an almost photographic emulation of smoothness. The better image quality, with greater detail and range of color shades, will be appreciated at a closer distance than with standard- or even high-definition televisions. For example, the visual experience of sports events will improve noticeably.

We expect the impact of 4K Ultra HD to be on what the consumer spends on pay-TV services rather than in an increased number of subscriptions. Availability of 4K content is still limited and it will take time for full deployment.

Q: What innovative video products can we expect to see at CES 2016?

In the video space, we are likely to see more innovation on TV sets, such as flexible displays at lower prices, and maybe the first commercial 8K TV sets. The 8K format provides 16 times as many pixels as 1080p HD. It creates an image so detailed that it can appear three-dimensional. Content for 8K is still a long way from now so any announcements of 8K-ready TV sets will be little more than a preview of forthcoming technology from manufacturers. Flexible displays are still a novelty, and aimed at a niche market.

We also expect voice recognition technology to be announced in many video streaming boxes and TV sets, following the addition of this feature to the latest version of Apple TV launched in September. It's an expected feature that, if well implemented, can immensely improve the television viewing experience around search and the control of other TV other features.