Eventually, only sports fans will pay for cable

Eventually, only sports fans will have cable.

In a new report released Thursday, Citi analysts Jason Bazinet, Thomas Singlehurst, Michael Rollings, Mark May, and Catherine O’Neill examine the future of media in a report titled, “The Curtain Falls: How Silicon Valley is Challenging Hollywood.”

And one of the most alarming trends for cable TV’s entrenched players is the percentage of US households that are paying for cable.

In the first quarter of 2011, about 84% of all US households were cable subscribers. By the first quarter of this year, that number had fallen to 80%.

And perhaps the most troubling part of this trend for cable providers is that over this period, household formation in the US has increased, indicating that new, millennial homeowners aren’t cutting the cable cord but altogether skipping the bundle.

And this isn’t getting better anytime soon.

“Going forward, we expect pay TV penetration rates to continue to fall,” the analysts write.

“Indeed, we expect more consumers to cut the cord entirely. Over the long-run, we expect the pay TV penetration in the US to mirror Europe: only sports enthusiasts will subscribe to pay TV. That’s because sports isn’t available on [subscription video on demand] platforms.”

And so as cable subscribers fall, Citi expects that the value of media companies could fall 20%-60%, with Viacom getting hit hardest.

The only winner? Disney.

Why? ESPN.

As Citi details, ESPN is just about the only cable channel that could command any sort of meaningful premium in an “over-the-top” or standalone offering outside the cable bundle.

As for why the media companies wouldn’t do this, Citi thinks there are three main challenges.

For one, most media companies don’t have the skills or capability to deal with functions like billing, customer services, and technical support.

Additionally, selling directly to consumers while also relying on distributors like Comcast and Time Warner Cable for affiliate fees is a tricky balance, as in effect you’re undercutting your own content distribution partners by going over their heads.

But perhaps most challenging is that media companies like Disney and Viacom have increased the cost of carrying their networks by 8%-10%. Meanwhile, content distributors have only raised prices 3%-4% on consumers, meaning that were a company like Disney to go direct-to-consumer, they’d lose about half of their pricing power.

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