This is strangers: Goldman Sachs, where people from our firm share their incites on developments currently shaping markets. Industries in the global economy, objects, work global, had of corporate communications here at the firm how we watch is changing. Fundamentally, as new online video streaming services put pressure on, traditional television providers This has investors analyse asking? Is this the end of tv as we know it, bread Feldman drew Borst equity, analysing global investment research. A common are here too. their take on the new tv landscape. Gentlemen. Welcome to the programme great beer. Thank you break. perhaps the hottest issue in the media and telecom space right now is cord cutting for some of the listeners who might not be as for me with this concept, explain what cord cutting it is and why two significant topic right now so at the most,

basic level court cutting is one consumers cancel their pay tv subscription that either the cable company, which is how the phrase court cutting came to be or Sally Company in order to exclusively watch videos streaming services, but. Word, cutting is really only one thing: that's happening with rigour, as to how the pay tv ecosystem is changing, as a few other cord words we use are also people, Concord, shavers. So those people who are downsizing to smaller video packages, primarily to save money, so they're not actually cancelling you ve? consuming less bitter they're paying less for it. for consumers. We call cord nevers, and these are generally younger consumers or millennials, who don't cut too. They never actually become pay tv customers to begin with. So when they gradually college and move at home, they exclusively consume. streaming services There's a subset of the cord nevers who are called. were cheaters, and these are people who

In fact, watching a lot of pay tv with their friends password was their friends. Passwords are usually their parents password. Some of the larger pay tv companies call this account packing, which is this. A lot of people are using the same password. I got it so certain You obviously has been going on for a while cord cutting called shaving or never. But it's you, like the markets noticed- and there was a big cell awesome stocks tied to pay tv in content. So why did the investor focused increase so intensely just in the past several months? Yes, there are really two reasons for that. First reasons at some of the entertainment companies talked about Miss forward guidance, because, They were seeing an acceleration or more significant decline. the subscriber counts and this Thing is when you did the bottoms up of total where people subscribing to pay television as report, by cable, satellite and telco providers,

what you saw in the second quarter was a significant acceleration and in that decline, So you kind of got warning signals from both the entertainment, the content company, saying they're, seeing it on their bottom line or their top line, and then you're seeing it also just in the data analysis, that's right, but tea earlier point. It's totally not new. You known fact. Investors have been talking about this to one degree or another for the better part of pi two years, but look at the numbers. There was just a small it wasn't very significant, in fact, since two thousand and twelve the amount of Lord cutting or the decline and pay tv subscribers, it's about percent over that time frame, but the second is the one that kind of got people's attention and said. While are we flexion point. thing changing here, to put more for these numbers around it. It was the european hundred thousand people that disconnected their pay tv, Sir one quarter, and just in that one quarter and it

about one and a half to times worse than the level we had seen in the year ago. So there, it was definitely was worse quarter on record that probably less than one percent of the overall people who pay for tv today, but still you starting this climb in and may signal the onset of a trend, that's right So, what's really the heart of this whole debate? Is this just changing consumer preferences technological d rupture little bit of both the Irish. it's a combination of a couple things on the technical whose side were now at a point where justified everybody has a smartphone and a lot of people have tablets. So you now have devices in your hand or in your pocket that allow you to wash free media anywhere. You are a we're all the point where all the national, whilst carriers have been, band wireless networks called forging networks and homes have a broadband connection. So over the last few years you ve gone to the point. We are almost always covered by broad band and you almost we have a device where you can use a broadband network

consume video because of that we ve seen an increase in the number of streaming services that are available, but there's piece of as well, which is economics which is it the traditional painting, the package on the satellite or cable companies very expensive gnats, because the large bundle of programming that their selling you cost a lot for them to buy from the car generators. But if you decide to go streaming, you can be more narrow in your contents. Elections and so Sir, people have found that they can actually save money by streaming instead of buying the big tv bundle, so our though and providers the entertainment companies adjusting to this new landscape there's a number of different strategies that they're using and its in Africa when he's got a slightly different view on how they're they're moving forward and in this tragic they take in many cases has a lot to do. the assets that they have within their portfolio. Allow the entertainment companies are legally integrated. So they make programmes, television shows at a tv, studio,

They may have a tv channel where there's a castor, cable, channel, that's trying to aggregate audiences and sell advertising against it. They may have premium cable network. So there's a number different business miles, a number of different assets, but you do see different attempts to tap to this trend, Take the challenges that the bundled pay tv service business model has been incredibly lucrative to them. This business. That's characterized with very high margins. anywhere from thirty percent Fidel margins to maybe as high as sixty four. anybody margins, it Stoa Yes, that is growing. I see the subs aren't growing, but the price per sub on a wholesale basis is continued to grow because spilt into their contracts. The advertised in part has been slowing, but it is still eking out. A little bit of growth is flat to slightly up advertising within the broadcasts tv kind of

I was thinking within the total ecosystem of broadcast plus right able, apps, cable everything. This creates Krajina challenge for them, so they dont want to break away completely, make a clean. from this bundled service that has all these advantages at the same time that the consumers, the spending more and more time with devices online or the top so In some cases, they ve been licensing some of their talents programmes too, streaming services that are owned by third parties, in some cases their creating their own streaming services to be delivered direct to the consumer for a discreet fee. and I saw those last two categories streaming, your own content or licensing into a third party- are much less lucrative than their original model. Not always would talk about the directive. Consumer model there's a handful of examples of these, but the price points that the cap These have been establishing in general, are actually premiums to what they are able to get so

some logic to what they're doing so they're saying. Look anyway, I'm gonna leave the confines of this pay. Tv bundled system is, if I actually do materially battered and in some cases, could be to three times the pricing and- you ve got really premium Carter. The people need to watch rang a watch, the licensing of third party streaming services Bobby the area where there's been a lot more controversy, because the big media companies originally were embracing those services and licensing at a certain fixed fee. Or what I think, has ended up happening. Is that so companies have grown more quickly than expected in a shorter period of time. In some cases, they doubled their subscriber base in a matter of two three years and again the fees that those stream services are paying back to the media companies their fixed. They aren't hinge too that subscriber growth were now looking back at these deals and sang soon, happening here, how their potentially impacting ecosystem. How there actually impacting tv subscribers and the cord cunning behaviour we talked about in May,

not charging enough. The good news is that cases. The contracts are pretty short term those kind eggs will eventually come up for renewal, and so there's dancing opportunity to correct that. our advertisers, responding to what's increasingly very balkan Ized lance I mean if you're, trying to sell a car or market beverage or new food product or insurance. How are you spawning to this, the choices that you have, the choice of the consumers: have it sitting challenging space for the marketers, almost every major marketer, the bulk of their budget as the television is poverty. Forty fifty see percent of their total retiring budget, as has been dedicated tv in and tv, has generally serve them. Well, fishing reaching a mass audience, but what's changed over the past two years? Is that we're now seeing a greater decline in the audience levels cross the whole universe, some channels more, but we're time about high single low, double digit declines in viewer ship? Now, as you

suspect the content, companies, the media. Companies are trying to offset declining viewer ship by charging more per viewer for the advertising, so they can sustain their own advertising growth, so the market when confronted with this are now starting if their attention more aggressively to alternative and there's a number of large internet based companies that are offering audience each scale basis and metrics and magics yeah, I'm on top of that presented. Does when you're buying big ads on broadcasting me. Would you know for how many people watching the shell. But these days you don't know, people are watching your add, no that's Copyright in the internet provides a significant advance over tv in and being able to target very narrow niches. So, if you're trying to diapers, you know you can go online and fine women, we just had a baby. In the past six months, you have household income of a hundred care more. You can find those people at a very low, see pm, and

they are moving in that direction and tv is just doesn't have that technical. In that case mobility today, and they need to come up with some type of solution, but it's not that easy solution, What's the advantages that tv providers television providers have over the new entrants, what help maintain or even expand their market share given what's going on today, is actually gets back to something Just talking about which is the challenges that aunt. Em provider has going directly consumer, so the big operators in the pay tv space to cable companies and the satellite companies are huge distributors. That's what they're model is so they already have tens of millions of customer relationships, and so they get all the cost advantages of serving a large customer base and the history of the model. Tv has been that the pay tv companies distribute bill do customer service and the media. But he's just create great content internal over to them, so

These big media companies decide that they would like to go direct consumer. They have to create billing departments, argued apartments and customer service departments. Some of them have such great content in such interest, in the products that they can If I, the investment, but the air urge provider programming probably wants to work. distributor and it might simply be that the distribution model evolves instead of taking their content in packs. into a huge bundle of channel, Come in to your receiver, they made ultimately work with these companies say, perhaps we can stream, through your net and you can help us distribute our product on extremely basis that, as only happened at a very nascent level, but real The huge scale and the huge base of exit in customers is one of the disadvantages and, of course, the pity, because these only infrastructure is only couple different ways you can actually get video card and to a consumer. You're gonna go through

network either gonna go to pay tv, cable network, you're gonna go through a satellite tv network or maybe you're gonna go to Broadband connection A key advantage right now is that a lot of these sports net, two leagues have long term agreements with the pay tv providers, how art the providers using that distort protect their franchise. Most of the major sports contracts. I have recently been renewed and in many cases, a stretch out for a decade or longer, and so that there is not. likely to be a lot of movement between now and call it may be two thousand and twenty two thousand and twenty one in terms of how sports video is distributed that's one of the right response. If you only in these contracts but- the major networks are doing with their sports rights, as they do recognize that there is an incredible amount of demand for this content

and you know not, everybody can be at home in front of the television set when the World Series is on, they might be travelling for work and TAT word or they have their mobile phone and so loudly companies, have done a great job of getting that content, did through to those other devices for tying about a cable network. You still have to be a subscriber to pay service assuming you're, not a court cheater the tries Zachary right so the bigger concept ears. There is increasing value in in the life programming. The viewer ship numbers are wholly up a lot better. In some cases they may still be growing. pricing for advertising spots within that programming, as a consequence also continues to move out because the demand is there in another The thing about lie: sports programming is roughly name percent of it. His watch live when you see scripted dramas in comedies, more than half of the audience is going to record that Anna Dvr and then fast forward through

commercials and that's a negative for the advertising, so that doesn't happen with sports. But it's not sports now a lot of the broadcast or try to do other live events. Why the goal of ants and life specials the award shows, are garnering, bigger audiences and those relied events, and so the tv channel to do what they can to sort of two created eyesight men around a particular vat. Then and that's why they actually partnered with some people who help get that audience engage this actually speak to another advantage that the traditional pay tv companies have we become so accustomed to watching streaming, content that allow, consumers are aware how difficult technical generally, it is to send a wife stream to consumer over the internet, especially was to a mobile device. And we have seen some streaming services launch over the last year- that, unlike the traditional which are mostly of library of content. You can watch wherever you want. There are attempting to send you a wife, sporting events, live tv events,

crashing quite often and so the streaming infrastructure is great. If you want to watch something that was aired yesterday or movie coming off a library but- still some meaningful technological barriers at getting live. Content too, I know a number of consumers through internet connection we'll talk a lot about mobile about mobile phone and people getting much more accustomed to watching programming with its live or whether it's something that they can pull up on the man on their phones, how's. That play out over time and in what the impact of mobile on this landscape say two interesting question that the industry is grappling with its quite clear that A lot of video is being consumed on mobile devices, but someone, is actually happening in your house and so trying to get. You are content to someone you see in their sofa through wifi.

next it is very different in trying to get. Somebody may actually be viewing that content over a mobile network where the cost structure and the physics of delivering that signal a very different. But it's also really driving towards me convergence and we ve been using that phrase to talk telecom industry for a long time time. Initially, that meant companies that own wireless networks might also on a wireless network. But now we're saying is that a service needs to be able to move across multiple networks in a way had seen was to the end user and as a rule. I'll do that some of the companies that have the most scale in the video market, like the cable companies our realizing. They may need to have a wireless strategy because so of the content that they are accustomed to distribute is going to be viewed on mobile device and its unclear. What they're going to do either all trying to create more hot spots, more places you can watch tied to them and not to the mobile network, while some of the largest cable companies a couple years ago signed an agreement with a major wireless provider? That

give them the right to resell that wireless providers network under their own brand to their own customers if they wanted to in that agreement has kind. I've been sitting there dormant for a while, but me so come out recently that we might see some of those cable companies begin to take advantage of investors, a very curious to see what their Do is it simply going to be a way for them to fill in the gaps between wifi, hot spots, which it sort of very small move into improving their broadband service, or could they potentially be interested in in advance of that mobile infrastructure to launch a whole new type of video product, but they don't have to do so. Do you see this playing out over the next couple years? Some of these trends have been going on for ever, but, as you said, This play out an optimist. Around pay tv in the long run, the winners and losers are here? He I think, I'm the contents of the entertainment side. Our expectation is that you probably have somewhere to one than two percent.

the Klein's in pay television over the next seven years, but others scribe or side you down on the subscriber side and you seem to think that it will remain somewhat modest and kind of a uniform decline. Think has to do with show the generational aspects of the pay tv subscriber base, and what I mean by that is that you have young people graduating university in Sir matriculating into adulthood. starting to see is that cohort that young twenty some cohort is just now striving to pay tv at the same. Propensity is prior generations before them among older age cohorts there still really enjoying their pay tv still watching allow television, the average consumers still watch five hours a television per day is that number more or less steady yours that been decline has been steady and what's interesting is it it does shift, as you might suspect, between ten years ago that five hours was almost exclusively live viewing, but the final

is now sort of shit from less lived more deeply. You yeah dvr Veo d in those types of services, but people I think, are still getting on Gill utility out of their tasks in service. As a consequence, it really when you take that five hours of consumption in the EU, cable, our poorest if we eighty dollars per month. Kind of run, the massive. How much are how much are people paying per hour of zero dollars and thirty cents, it's roughly twenty five zero dollars and thirty cents and In that context, it certainly seems cheap, but you know we are going and Polly go into this world where the younger cohort is her comfortable, not having the service? You say. I think that start to see happen, happening already today. Is that the patriot Operators are going to continue to offer a wider variety of options. This is a business that, for most of its history, is one size fits all. Hears Four hundred channels in its eighty bucks cannot take it or leave it and

restoring to see that the traditional pay tv operators experiment more aggressively with more affordable options. I went the forty hours no option has many channels, but in the forty channels, this stuff in their potentially. It might include a sports network it's gonna have some of the broadcasts, networks and I'll have a variety of maybe higher quality, basic cable networks and so we're paying to move into this world where the consumer has more choice and price points to choose from so on distribution side, the cable company's the content providers and consumers. How do you see the winners and losers playing out? Obviously, a great game for us to predict who the winners and losers are going to be in because we're still early in this evolution the names can be hard, but what we can do is we can say, will what are they characteristics that a winner? might have If you believe that the reason pay TV is being disrupted is because more consumers are streaming their content to broadband connections that our ass would be that if you have a great broadband network, you're, probably

position as a winner? And so you look at the cable companies- you say they generally speaking- have a lead over their competitors in terms of delivering a great broadband experience and in some ways partially mobilizing that to a rich net of wifi hotspots in their communities, why operators also happy form of a broadband connection, although they argue, it's nice scarce Sweeney. If you're a consumer, you probably have one or two choices in your home for who's. Gonna. Give you ex broad man. For far, we therefore five on mobile space, and so it's kind of interesting to us that investors have expressed a lot of concern about the position of cable companies as there Traditional pay tv model appears under threat, and yet they are the ones who are also typically delivering the best broadband next to the consumer, and so our senses at its very hard for infrastructure to be avoided and it would seem that there are going to find a way to evolve their business model to make sure that they contain

generate the return on those assets that you would think should be able to get based on their favourable position in the market. So just rap up. We'll talk a little bit about this, but what what's a government doing in this is a tradition and a space where there's a fair amount of regulation and government regulation or incentives can really dramatically change a landscape? What are they kind of keeping their eye on, and is it a level playing field as far as the governments concerned, where this has been a huge year in terms of regulatory disruption? That's part of the reason that investors are having Our time, thinking about where this she is going and without getting shoe arcane. The FCC federal Communications Commission made a pretty meaningful decision couple ago they determines they should be regulating broadband services the same way. They have historically regulated monopoly voice. Phone services answer it gives them a lot more leeway to look at behaviour of broadband network operators?

tenderly have greater influence in terms of how we deliver price products to consumers. Although its vague so investors look at that and they say It would seem that cable company should have a lot. Choices for how they price there broadband networks to make sure they are being paid for the growing traffic. That's gonna, be hitting them People consume video over there, those networks, but what? If the regulators, don't like those pricey mom? and it genuinely ambiguous how regulators my treat that, particularly if the regulator already law suits it are flying around and it seems why clear this is going to end up at the Supreme Court and is going to be a multi year process before we figured out. So there is a sense of a cloud over the space in terms of the regulatory view. Thank you bread, a very interesting theme, will keep an eye on it. Next time you got back to explain why Maya Cable Company want me to have voice tv

and brought them with them, but I think I'm kind of getting the answer. That concludes this episode of exchange. The Goldman Sachs objects. You were thanks for listening this pocket, was recorded on October, twenty third, two thousand fifty all price references and market forecasts correspond to the date of this recording. This podcast should not be copied, distributed, published or reproduced in whole or in part. The information contained in this package does not constitute research or recommendation from any Goldman Sachs Entity to the listener. Neither Goldman Sachs nor any of its affiliates makes any representation or warranty.

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