Moody's: Online Video Services to Have "Evolutionary" Pay TV Effect

Illustration by: Paweł Jońca

New service launches have come "fast and furious, but ... cable remains strongly positioned for at least the next few years on the strength of the broadband business," the firm says.

Over-the-top video services, such as Internet offers from HBO and CBS, will have an evolutionary rather than revolutionary effect on the pay TV sector, credit ratings agency Moody's said in a report on Thursday.

"High Yield Cable's Broadband Still Effective Defense Against Over-the-Top Siege," the title read.

"Over-the-top (OTT) options are now arriving fast and furious, but ... cable remains strongly positioned for at least the next few years on the strength of the broadband business, limited competition and customer inertia," Moody's analysts wrote. "Most operators have the chance to build financial flexibility and prepare in case industry fundamentals change more significantly." It added that "how they choose to allocate free cash flow will determine credit strength."

OTT services are evolving quickly, Moody's highlighted. "The addition of live content and sports from Dish Network’s Sling TV and Sony Corp.'s Vue, as well as Apple Inc.'s reported pay TV service mark a change from past OTT offerings," the firm's analysts wrote. "However, we believe content providers will tread cautiously, and consumer inertia and demographics give pay TV operators a long tail ... New services will take a small number of traditional pay TV subscribers and changes will be evolutionary, not revolutionary."

But Moody's also warned that pay TV operators may have to better highlight the breadth of their video offerings. "Consumer perception favors OTT and average cable consumers don’t know what they’re getting," the report said. "We don’t think the average customer realizes how much content — linear and on-demand and across multiple devices — that traditional pay TV provides and will give new entrants a break on operational hiccups they wouldn’t extend to legacy cable companies."

And with alternatives available "at a headline cost of $20 per month," pay TV companies will find it "harder to keep raising rates, yet content costs will creep ever upward, so most cable operators will both bleed video subscribers and experience eroding video margins," Moody's concluded.

But the firm added: "We believe broadband subscriber additions will continue to outpace video subscriber losses over at least the next few years. The biggest risk is under-investment, and we anticipate nearly all rated operators will direct capital to enhancing their broadband offerings."

Other analysts have called OTT services an opportunity for content companies to experiment with new digital business models, but have generally also predicted they wouldn't upend traditional pay TV in the near-term.