In this retrospective article, Tim Jacks charts the growth of Pay TV using the Bass Diffusion model and 25 years of challenges and triumphs in the UK television market. Will the UK stay the course and follow the uptake of Pay TV in the US?

This is the story of how Pay TV has grown in the UK over the last 25 years… and where it might end up in another 5 years’ time, as seen through the lens of the Bass Diffusion model of product adoption (more on that later).

But we start by having a look at the US TV market. Everyone knows that Pay TV is fundamentally different in the UK from the US, right? Our American friends love TV in a way that we just can’t comprehend – they can’t get enough of it, so over 80% of households pay for TV, whereas here we have better things to do, so we’ll never see more than 50% of households subscribing to Pay TV. Right?

Well, not quite. You see, Pay TV penetration changes pretty slowly, and we sometimes forget that Pay TV has existed in the US since around 1950, gradually spreading and growing throughout the country. In 1971, only 9% of households with TV were paying for TV (our definition of take up). 25 years later, in 1996, this figure had reached around 70%[i]. So how does this compare to the UK?

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Well, in the UK, Pay TV started in around 1985, and didn’t really take off until BSkyB was formed from the merger of British Satellite Broadcasting and Sky Television in 1990 (an exciting story in itself). At the end of 1991 (25 years ago!), Pay TV was in around 10% of TV households – about the same position that the US found itself in 45 years ago in 1971.

Rupert Murdoch created the Premier League in 1992, got people to start paying to watch football, and things went from there. Cable operators (mainly NTL and Telewest) responded by expanding their networks, and growth of both cable and satellite subscribers followed.

This is where the Bass Diffusion model comes in. It’s one method of forecasting the adoption of new products – not perfect, but tends to do pretty well. The Bass model takes three parameters: m = the ultimate addressable market; p = coefficient of innovation (how quickly early adopters will take up the product); and q = coefficient of imitation (how quickly everyone else will take up the product). The average values of p and q have been found to be 0.03 and 0.38 respectively, but these vary across products.

If we use the Bass model to match Pay TV adoption in the UK from 1991-1999, assuming pessimistically that we can only ever hope to reach US levels of adoption of 80% (m), we get values for p and q of 0.015 and 0.14 (half those of average products). As I said, Pay TV adoption is slow!

But look what it predicts – 76% Pay TV adoption in 2020, roughly in line with US progress after the equivalent amount of time![ii]

PayTV - Chart 2.jpg

Unfortunately, things aren’t that simple though. The Bass model prediction only stands when the product isn’t changing.

And in 1998, the Pay TV product in the UK changed, significantly. ITV (with the help of Cartesian[iii]) launched their On Digital service – Pay TV over digital terrestrial television (DTT). It was low-cost Pay TV, and subsequently adoption rocketed – when we match our Bass model to the new take up profile, it looks like we might shoot through the “80% barrier”, to achieve even greater Pay TV adoption than in the US by 2016 and onto 2020.

 PayTV - Chart 3.jpg

But some things are too good to last. And On Digital (rebranded to ITV Digital) went into administration in 2002, unable to afford the Premier League rights it had gambled on (and allegedly the victim of sponsored piracy).

Pay TV adoption took a double blow: not only did it lose the new Pay DTT subscribers, but out of the ashes was born Freeview – suddenly multichannel TV was available without a subscription. With the rapid growth of Freeview, Pay TV adoption slowed dramatically.

Our Bass model now has miserable p and q values of 0.005 and 0.05. It looks like Pay TV will never reach that 80% mark. Maybe we are different from our friends across the pond after all!

PayTV - Chart 4.jpg

Never fear, the industry always has a solution, and 2006 to 2011 saw renewed growth from Sky, and help from the addition of new IPTV services from BT and Tiscali (now TalkTalk TV). These new IPTV services weren’t the most successful during this period, but would provide the basis for some important changes to the environment.

2012 was the year of analogue switch off (ASO) in the UK – by the end of 2011 pretty much every household in the UK had multichannel TV, with more using Freeview as their primary TV service than any other platform. The challenge for the industry was to sell Pay TV to these households. And the solution came quickly (although it didn’t feel like it at the time), and was based around the over-the-top (OTT) revolution.

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YouView was created by a consortium of broadcasters, and the two operators of the previously mentioned IPTV platforms, BT and TalkTalk. The platform was intended to allow easy access to catch up and on demand OTT services through a DTT set top box. Unwittingly, YouView morphed into a vehicle on which BT and TalkTalk launched new low-cost Pay TV offerings, which both saw rapid growth.

At the same time, the Netflix revolution reached the UK, launching here in 2012. Launches of OTT-based subscription VOD (SVOD) products from Sky (Now TV) and Amazon quickly followed.

These two product types combined started a new era in Pay TV adoption. In our chart, we show the SVOD/Free category, meaning homes that pay for an SVOD service in combination with some other form of free TV (Freeview/Freesat), or even with no TV set at all. (Note that the actual number of SVOD subscribers is much higher than this, with the majority in households with cable or satellite TV).

So what happens now when we apply our Bass diffusion curve? Nearly 80% Pay TV adoption by 2020. Phew!

PayTV - Chart 6.jpg

Of course, we’re ignoring the impact on ARPU (not enough space here) of these recent changes, but in terms of understanding the timescales on which Pay TV growth works, and the drivers that can affect it, hopefully we’ve shed a little light.

With Pay TV penetration in the US now falling due to the impact of cord-cutting and cord-nevers, and the increasing influence of global players, we see a potential future where the US and the UK really don’t look that different when it comes to Pay TV. <>

To mark Cartesian’s 25 years in the telecoms, media, and technology sector, we asked our consultants to reflect on industry topics and write about how they have changed over the last few decades. Click here to receive your copy of our anniversary eBook: 25 Years – A retrospective on innovation in the telecoms, media, and technology sector


Notes:

[i] US data sourced from World Almanac & Book of Facts: “U.S. Households with Cable Television, 1977-1998”, January 2000; “Television History – The First 75 Years”. Available at: www.tvhistory.tv/facts-stats.htm.

[ii] UK data compiled from BARB UK TV Landscape 2016 Report, Ofcom UK Communications Market Report (August 2011), and “Sky High” by Mathew Horsman (published in 1997); Cartesian analysis.

[iii] Cartesian acquired Farncombe Technology Limited in July 2015.