The traditional TV industry could be in for a historically brutal quarter.
Pay TV providers could lose more than a million subscribers in the current period, a team of analysts at UBS led by John C. Hodulik wrote in a research note distributed Tuesday.
"That would be the worst result on record and equate to a 2.5% annual decline," compared to 2.1% last quarter, the analysts wrote.
And things for the industry could only get worse, the analysts wrote.
"We estimate this will put the industry on pace for a 3.3% decline in 2017 and 4.0% in 2018," they said in their note.
Over the last few years, there has been a fierce debate over whether "cord-cutting" — people ditching their expensive cable TV packages — is a trend, or an overblown media narrative. But recent results make it hard to say "nothing" is going on. The pay-TV industry already lost about 762,000 subscribers in the first quarter this year, according to MoffettNathanson.
“For the better part of fifteen years, pundits have predicted that cord-cutting was the future. Well, the future has arrived,” industry analyst Craig Moffett wrote in a report about the Q1 results.
The UBS analysts took into account current "cord-cutting trends, seasonal weakness and additional pressure from streaming TV alternatives" to come up with their forecast. Here's a chart of what UBS is estimating over the next few years for traditional video subscribers:
It isn't all bad news for the pay TV industry, though. UBS does believe one segment of the market will see growth: streaming TV packages. Like traditional pay-TV offerings, these packages give subscribers access to collections of channels. But they're delivered over the internet, tend to offer fewer channels, and generally provide more flexible terms.
Here's how UBS sees the competitive landscape of these services:
"We believe YouTube TV and Hulu Live are off to strong starts (both launched in 2Q17) while DirecTV Now regroups as it deals with technical issues. While Sling TV and DirecTV Now offer consumers lower prices, we believe YouTube and Hulu are more clearly taking advantage of the benefits of being an online/mobile service (intuitive user interface, strong search & discovery, etc.), have leading expertise and trusted brands for streaming video, and will have significantly faster innovation cycles given their tech scale. Aside from solving many of the issues that have plagued early offerings, we also believe these services will boost awareness of the overall streaming TV market going forward."
Since some of these new services are being offered by traditional pay TV players, their rise could offset some of subscriber losses for those companies' older services. Meanwhile, companies that offer broadband as well as pay TV could mitigate some of their losses with the former, since the new streaming TV packages need broadband connections to function.
UBS estimates the number of subscribers to such streaming services will grow to around 4 million by the end of this year, around 7 million by the end of next year, and about 15 million by the end of 2020.
Here's what the entire balance of the TV industry will look like over the next couple of years, according to UBS estimates:
The big question for the industry is what affect the loss of pay TV subscribers will have on their business models, which have relied on a combination of subscriber fees and advertising. As more and more consumers migrate to streaming alternatives, it's unclear whether those services will emulate this traditional business model or whether they will adopt new ones.
For their part, streaming services like Netflix and HBO Now are betting they can build businesses solely around monthly subscription fees, rather than ads. By contrast, Facebook and YouTube are prepping slates of TV-quality shows to be completely supported by their ad machines.
But with Netflix seeing a massive outflow of cash each year as it bulks up its library of videos — and YouTube and Facebook premium video services largely untested — it's too early to tell whether the digital future will be ruled by the same models that defined the past.
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