North America Equity Research20 December 2017 Cable, Satellite, and TelcoThe Rise of OTT and vMVPDs: Bracing for a "New Normal" in Video Distribution Telecom Services / Cable & SatellitePhilip Cusick, CFA AC(1-212) 622-1444philip.cusick@jpmorgan.comBloomberg JPMA CUSICK Sebastiano C Petti(1-212) 622-8529sebastiano.c.petti@jpmorgan.comRichard Choe(1-212) 622-6708richard.choe@jpmorgan.comEudora Erickson(1-212) 622-5623eudora.erickson@jpmorgan.comMediaAlexia S. Quadrani AC(1-212) 622-1896alexia.quadrani@jpmorgan.comBloomberg JPMA QUADRANI Parris J Taylor(1-212) 622-9252parris.j.taylor@jpmorgan.comJulia Yue(1-212) 622-9896julia.yue@jpmorgan.comDavid Karnovsky, CFA(1-212) 622-1206david.karnovsky@jpmorgan.comJ.P. Morgan Securities LLCSee page 30 for analyst certification and important disclosures.J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.www.jpmorganmarkets.comSince cresting in 2009 around 88%, legacy linear PayTV penetration of occupied households has deteriorated steadily with recent declines more precipitous. Given the acceleration of legacy subscriber declines year-to-date to 3.2% we now estimate subscriber declines of ~3% per annum through 2025. At the same time, we look for tremendous growth among virtual MVPD platforms such as Sling TV, DirecTV Now, and YouTube TV – approximately 19% CAGR from 2017 to 2025 – whose growing share in linear TV subscriptions is expected to not quite offset losses on the traditional linear side. We believe that the viability of vMVPDs will be tested as ISPs drive broadband speeds/pricing higher to re-capture some of the savings of bundle-shaving/cutting. Additionally, the success of new entrants, relative to scaled legacy providers in OTT/vMVPD, hinges on the ability to scale addressable/targeted advertising in order to recoup limited gross margins on headline packages. Traditional sub declines are accelerating due to virtual MVPD substitution.During 2017 the legacy PayTV ecosystem has seen subscriber losses accelerate to record levels (estimated 3.3m). We ascribe the acceleration in sub declines to four predominant factors:1) higher prices; 2) worsening relative experience/UI; 3) proliferation of vMVPDs; and 4) a shrinking linear video market. Given the new trend line year-to-date, we forecast ~3% annual legacy linear PayTV subscriber declines through 2025, and a –1% CAGR of all linear Pay TV over that time. As vMVPD ecosystem momentum builds and legacy PayTV headwinds persist, we forecast a 19% CAGR in vMVPD sub growth between 2017 and 2025 culminating in ~20m subs by YE2025 vs 3.7m at 3Q17. Virtual MVPDs support the media ecosystem. With vMVPD use becoming more mainstream, we think investors will increasingly describe the PayTV ecosystem in terms that combine the legacy and internet delivered models as we’ve done in this note. While our forecast is directionally negative, our estimate of 93m subs (legacy + vMVPD) in 2025 paying for some video bundle is still very substantial for content providers, and hardly the dire scenario of zero terminal value we think some investors have assumed. The benefits from these new services though are likely to be uneven, with the advantages so far accruing to media companies with scale, broadcast networks, live sports, and event programming. Expect cable video loss CAGR to be half of telco/satellite. We believe the relative impact from OTT/vMVPD proliferation and further video ecosystem declines will be centered on disadvantaged (sub-scale) operators with inferior offerings/UIs, and those unable to bundle video alongside a robust broadband product. Accordingly, we believe our cable coverage should fare better than average in this “new normal” and model a -2% video CAGR to 2025 due to its robust broadband value proposition, while our broadband-disadvantaged telco and satellite coverage is modeled to decline at a -4% rate.Completed 19 Dec 2017 11:07 PM ESTDisseminated 20 Dec 2017 12:15 AM EST每日免费获取报告1、每日微信群内分享5+最新重磅报告；2、每日分享当日华尔街日报、金融时报；3、每周分享经济学人4、每月汇总500+份当月重磅报告（增值服务）扫一扫二维码关注公号回复：研究报告加入“起点财经”微信群。2North America Equity Research20 December 2017Philip Cusick, CFA(1-212) 622-1444philip.cusick@jpmorgan.com Introduction / Executive SummaryWhile linear video declines are far from a new phenomenon across the multichannel universe, the pace of losses to 3.5% in 2017 entered uncharted territory relative to prior year levels. Within we examine the causes of acceleration – both from internal and external forces – while also extrapolating forward recent sub trends to depict the future landscape of linear PayTV over the next several years (traditional linear and vMVPDs). In doing so, we attempt to quantify the current and future size of the burgeoning virtual MVPD lands...
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