Netflix and Amazon Take the Lead in This $25 Billion Market

The problems keep mounting for cable TV as more people cut the cord and consume entertainment from video streaming services.

Less than two-thirds of U.S. households subscribed to a pay-TV service in 2017, down from 74% the year before, according to the Deloitte 2018 Digital Media Trends Survey, while 55% subscribe to at least one video streaming service, a dramatic increase from the scant 9% who did in 2009.

The problem for cable gets even more pronounced when TV consumption is viewed by age. While baby boomers are watching some 31 hours of broadcast TV a week and only nine hours of streaming video, Gen Z viewers are consuming 22 hours of streaming content and only 16 hours of broadcast. Yet so alike are the viewing habits of Gen X, millennials, and Gen Z viewers that Deloitte dubs them "milleXZials."

A generational divide in cord-cutting

That doesn't bode well for pay TV, which would rather people stop streaming as much content as they age, and just settle down in front of their cable TV. The survey indicates that's not happening.

A significant problem for cable TV is that people just don't think they're getting a good deal for the money they pay. Coupled with the fact you're forced to watch programming when the provider wants you to watch, not when you want, it's a volatile situation.

The biggest beneficiary from this move away from broadcast toward streaming, of course, is Netflix (NASDAQ: NFLX), which had 119 million paid subscribers worldwide at the end of the first quarter, with over 55 million in the U.S.

Digital marketing site eMarketer estimates that based on an average of $10.99 monthly cost, Netflix generated $6.1 billion in annual U.S. subscription revenue, more than three times the $2.8 billion runner-up (NASDAQ: AMZN) generated.

Hulu was a surprisingly close third with almost $2.1 billion in annual subscription revenue, but no one even comes close after that with HBO Now having just 5 million subscribers and generating an estimated $899 million in revenue from them.

The Deloitte survey says the average household subscribes to three different video streaming services, totaling $2.1 billion monthly in revenue, or over $25 billion a year. That means Netflix and Amazon alone account for 34% of total subscriptions paid.

Service U.S. Subscribers 2017 (in Millions)

Average Monthly Cost

Est. Annual Subscription Revenue (in Millions)
Netflix 52.8 $10.99 $6,153.0 26.0 $8.99 $2,804.9
Hulu 17.0 $9.99 $2,038.0
HBO Now 5.0 $14.99 $899.4
Showtime 2.5 $10.99 $329.7

Some pay-TV services may yet survive

Cable services are particularly at risk. The only reason most people are keeping cable TV is because it's part of a bundle that includes internet and a landline. Increasing amounts of streaming content is being consumed on mobile devices. It's not unreasonable to assume that households may eventually favor just having internet since they're already watching videos on other devices, putting pay TV is at grave risk.

However, Sensor Tower -- a mobile app oriented marketing intelligence company -- says some pay services may be able to make the transition to mobile and survive separately from cable. HBO Now, for example, is the third-largest mobile app for gross revenue growth across the App Store and Google Play, suggesting it can survive cord-cutting.

Still, it's not a sure thing for the app because HBO relies on hit shows like Game of Thrones to generate interest -- and downloads -- and the lull between seasons or finding hit shows means its success may be unpredictable.

Cable TV's survival depends on its ability to change how it delivers programming and doing so at a better price. Having had a monopoly on content delivery for so long, it was slow to respond when alternatives arrived. Now it's fading fast, and the convenience, cost, and individuality that streaming offers may prove too hard of a combination to compete against. It's certainly a combination that pay TV has yet to effectively respond to.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon and Netflix. The Motley Fool has a disclosure policy.