Pay-TV sees more subscriber drains in Q3, opening the door for OTT.

Michelle Clancy | 12-11-2012
The North American pay-TV industry’s subscriber numbers in the third quarter continued to deliver bad news, with subscriber totals across segments missing targets.

Overall, Sanford C Bernstein’s Craig Moffett said that operators, including privately-held ones, lost a combined 127,000 subscribers in the quarter. Analysts say that the continuing softness will drive new over-the-top (OTT) offerings from traditional providers — and perhaps a satellite merger.

Here’s a quick rundown on Q3 totals for traditional cable and satellite: Cablevision lost 10,000 customers, Charter Communications lost 73,000, and Comcast lost 117,000. DISH Network lost 19,000, and DirecTV added just 67,000 new video customers — that’s 80% less than last year. Time Warner Cable, meanwhile, lost 140,000 video subscribers.

“For two years now, the pay-TV industry has grown subscribers at a rate essentially indistinguishable from zero,” Moffett said in a research note reported by the Hollywood Reporter. To wit, he noted that a first-quarter gain of 429,000 this year was promptly negated by a 410,000 drop in the second quarter and now the slightly less awful 127,000 in the third. In 2011 the pattern was the same, but with the second half of the year showing marked improvement. A first-quarter pay TV subscriber gain of 454,000 was followed by a 440,000 drop in the second quarter, a 25,000 drop in the third and a gain of 243,000 in the fourth, he said.

ISI Media analyst Vijay Jayant agrees that the sector lost subs. “The third quarter of the year is generally the rebound quarter for the [sector] after a seasonally weak second quarter,” he told THR. ” While third-quarter video subscribers did rebound, overall video net adds were tepid at 30,000 subs. We estimate that if unlisted cable companies are included, pay-TV industry lost subs.”

Of course, all segments are not suffering equally. In addition to the cable losses, gains at DirecTV offset Dish Network losses to yield net growth of 48,000 subscribers in the satellite TV sector. IPTV operators are faring marginally better than the TV incumbents: Telco Verizon Communications reported that that its FiOS TV service added 119,000 pay TV subscribers in the third quarter. That’s virtually unchanged from the 120,000 subscriber additions in the second quarter, but less than the 131,000 additions recorded in the year-ago period. As of the end of September, FiOS TV had 4.6 million subscribers, representing a year-on-year increase of 15.4%.

AT&T meanwhile added 198,000 U-verse TV subscribers in the third quarter, with revenue ticking upward 38% year-on-year (including the 613,000 additional U-verse broadband subscribers that it picked up). It now has 7.4 million U-verse TV and Internet subscribers.

Overall, the telcos signed up about 320,000 new TV subscribers in the latest quarter — less than a year previous but still far surpassing cable and satellite performance.

So is subscriber drain a serious issue? Yes and no. ABI Research estimates that the traditional TV operator business, which is worth $16.8 billion in the US, is set to decline just 0.5% per year through 2017 — hardly evidence of widespread cord-cutting. But it does show a shift in consumer trends that savvy operators will note and make plans for.

If anything, it could be an opportunity: consumers are embracing additional entertainment choices thanks to continually improved online and over-the-top (OTT) video experiences, leaving an opening for pay-TV operators to build a new business that leverages OTT components. Some are already working on this: DISH Network acquired Blockbuster to make a play at that market; Verizon will soon launch Redbox Instant with physical kiosk rental company Redbox. Meanwhile, TV Everywhere plays that leverage traditional pay-TV operators’ vastly better content vis-a-vis OTT providers can appeal to the thirst for anytime, anywhere content and sweeten the pot for consumers taking $100+ TV subscriptions.

The move to OTT also opens up a case for selling faster broadband tiers to more subscribers. AT&T, for instance, said the average U-verse home spent $170 each month on cable TV and Internet. And 54% of its U-verse Internet customers taking a plan offering speeds of 12Mpbs or higher, compared to 43% in the third quarter of 2011.

The losses, in the main, are being driven by economic woes, and therefore are being seen in lower income households. “Declining industry penetration rates suggest that cord-cutting is a reality, but perhaps not in the way that most pundits think,” Moffett wrote in his note. “Certainly, there is no evidence that customers are dropping subscriptions in droves in favour of Internet-based content. Rising costs of cable service, however, are undoubtedly becoming more burdensome for lower income households, increasing the likelihood that some households are reverting to rabbit ears – cable losses, at least, continue to be concentrated among low-end ‘broadcast basic’ subscribers.”

ABI pointed out that pay-TV operators could thus also leverage thirst for OTT to provide “entry-level” tiers of TV. “While many OTT services focus on movies, the goal of lightweight pay-TV packages should be to introduce customers to the brand and tease customers with premium content offerings,” said Sam Rosen practice director, TV and video.

In addition to OTT strategies emerging, Moffett also thinks that the poor subscriber performances will add impetus to a merger between satellite giants. “We are increasingly of the view that DirecTV and Dish Network will propose a merger over the next 12-18 months,” Moffett said. “Making the case to regulators that their long-term viability is only ensured if they merge to form one stronger entity would be a bit easier against a backdrop of subscriber weakness.”