House Of Pain
Home Industry Slowdown Hits Cable Where It Lives — With Fewer Subscribers
By Mike Farrell -- Multichannel News, 11/11/2007 7:00:00 PM
Cable operators are currently grappling with basic-subscriber losses — a net loss of 65,000 at Comcast and a net loss of 83,000 at Time Warner Cable being the top two examples from the recently reported third quarter.
Comcast blamed telephone companies ratcheting up deployment of video services, including bundles with satellite-TV providers.
Time Warner cited difficulties integrating acquired systems, as 66,000 of the subscriber losses came from Dallas and Los Angeles systems acquired from Comcast and Adelphia Communications, respectively.
Both touted gains in telephone and high-speed Internet subscriptions, which have been cable's growth engines the past few years, while overall basic-cable subscriber levels have been flat at around 66 million.
But an economic factor hanging over the entire U.S. economy is beginning to be recognized as playing a role, too — the slowdown in the nation's housing industry.
| Cable Sows | |
|---|---|
| Cable industry net subscriber additions (losses), in thousands: | |
| Year | Adds |
| SOURCE: Sanford Bernstein |
|
| 2002 | (376) |
| 2003 | (184) |
| 2004 | (600) |
| 2005 | (376) |
| 2006 | 99 |
'BUBBLE HAS POPPED'
“The 'housing bubble' has finally popped,” Sanford Bernstein cable and satellite analyst Craig Moffett wrote in a recent analysis of the state of the cable-television industry.
Housing starts are down. Lenders are pulling back on financing home mortgages as foreclosure rates have risen, especially among high-interest loans taken by “subprime” or non-creditworthy borrowers over the past few years.
Sales of existing homes slowed 8% in September, to an annual rate of 5.04 million, while current home inventories rose slightly, according to the National Association of Realtors.
In a speech on Oct. 16, U.S. Treasury Secretary Henry Paulson declared “the housing decline,” which he said was still unfolding, as “the most significant current risk to our economy.”
The end of the housing surge has got the attention of cable executives trying to add, not lose, basic subscribers.
“There's no question that housing starts — not moves, but housing starts — has an impact on our business,” Comcast chief operating officer Steve Burke said at the Goldman Sachs Communacopia conference in New York in September. “If the housing market is growing 1.7% a year and then it slows down to grow 1.2% a year, that means there are 500,000 new dwelling units that are not up for grabs and we would have gotten our share of that.”
Charter Communications, which lost 40,000 basic customers in the third quarter, said the falloff was due to increased competitive marketing and the housing slump.
| Satellite Grows | |
|---|---|
| Satellite industry net subscriber additions, in thousands: | |
| Year | Adds |
| SOURCE: Sanford Bernstein |
|
| 2002 | 661 |
| 2003 | 2,280 |
| 2004 | 3,206 |
| 2005 | 2,328 |
| 2006 | 1,885 |
“On the housing side, it was more an issue of vacancy rates were up, so we saw fewer dwelling units, kids moving back home as foreclosures went up,” Charter CEO Neil Smit told analysts during a teleconference on Nov. 8.
Housing starts — the number of new homes under construction — had been relatively stable, averaging a little under 2 million a year between 1998 and 2006 and peaking at 2.22 million in 2005, according to the National Association of Home Builders.
But in 2008, the number of housing starts is projected at only 1.395 million, down from 1.49 million this year.
Even as the number of homes rose, so has U.S. pay TV penetration. It's at 83.3% now, up from 79.3% at the end of 2003, according to Sanford Bernstein & Co.
That level of saturation means less opportunity to penetrate existing homes.
Cable's basic subscriber rolls have hovered between 65 and 66 million since 2003, according to the National Cable & Telecommunications Association. In the past two years alone, satellite-TV providers have added about 4 million subscribers per year and now claim more than 30 million.
Moffett's take: Cable held its own on basic subscribers primarily because of housing growth.
That growth has slowed substantially. Housing starts declined 21% in July, to a seasonally adjusted pace of 1.38 million new homes (an annualized rate of 1.08%), according to the U.S. Commerce Department.
It's at the lowest level of growth in 14 years, Moffett noted.
The picture doesn't seem to be improving. The National Association of Home Builders, a building-industry trade group, reported housing starts in September were down about 10.2%, as builders pulled back on new construction until they reduce existing supplies of new homes.
According to NAHB, overall housing starts fell to a seasonally adjusted annual rate of 1.19 million units, the slowest since March 1993 (1.08 million units).
Single-family home production registered a 1.17% decline to a 963,000-unit rate, while multifamily production fell 34.3% to a 228,000-unit rate.
The Northeast actually reported a 45.4% gain in September, according to NAHB. But other regions tanked: the Midwest, South and West reported declines of 28.4%, 11.7% and 10.1% respectively.
| Maxing Out | |
|---|---|
| Total multichannel penetration of TV households: | |
| Period | Penetration |
| SOURCE: Company reports and Sanford Bernstein |
|
| Q4 '03 | 79.3% |
| Q4 '04 | 80.3% |
| Q4 '05 | 81.7% |
| Q4 '06 | 82.8% |
| Q2 '07 | 83.3% |
SPREADING THE PAIN
Satellite TV should also feel the pain, Moffett believes, with subscriber additions falling in 2008 and 2009 and customer rolls actually declining in 2010. (Pay TV providers could benefit in 2008 and 2009 from another external factor: the transition to over-the-air digital TV signals should push homes with analog televisions to get a set-top box from either a cable, satellite TV or telco video provider.)
Moffett thinks top satellite-TV provider DirecTV will add about 605,000 net new subscribers in 2007, falling to 355,000 in 2008 and 270,000 in 2009.
In the just-reported third quarter, DirecTV added a net 240,000 subscribers, a figure 45% higher than reported a year earlier. DirecTV has about 16.6 million subscribers.
It could start to see net declines in 2010 (9,000) and 2011 (186,000), though, Moffett estimates.
The No. 2 direct-broadcast satellite provider, EchoStar Communications' Dish Network, is seen adding 827,000 net new customers in 2007, dipping to 535,000 in 2008 and 390,000 in 2009. Dish last reported having about 13.9 million subscribers.
Moffett projected Dish will keep adding subscribers in 2010 (154,000) and 2011 (29,000).
Comcast's loss of 65,000 subscribers in the third quarter came off a loss of 95,000 basic customers in the second quarter.
So, despite a 75,000-subscriber gain in the first quarter, Comcast has lost about 85,000 customers so far this year. It now has about 24.2 million subscribers.
Burke, who raised the housing issue in September, amplified on the point a bit in discussing earnings results with analysts on Oct. 25. “A slowdown in overall housing starts also has to have some impact on the industry subscriber trends,” he said.
Moffett said Comcast management later cited notable subscriber weakness in Michigan and Miami, Fla., two areas hit hard by the housing slump.
Atlantic Broadband COO Ed Holleran, with about 90,000 subscribers in a dozen communities in the Miami Beach area, said he has seen a decline in new housing in the past two years — estimating that if builders were constructing 4,000 units per year in 2005, they're building half that number now — but it hasn't translated into basic-customer losses. Atlantic Broadband has about 285,000 subscribers across the country.
“We're certainly seeing a slowdown this year. We saw a slowdown last year as well,” Holleran said of new housing starts. “But we're still seeing growth.”
In the Miami Beach area, Atlantic added about 1,500 subscribers in the first half of the year — ahead of last year's pace, but slower than previous years.
“I guess we're bucking the trend,” Holleran said.
Comcast's housing explanation resonated more with Moffett than with Burke's competitive examples.
Moffett noted that AT&T's satellite TV subscriber additions of about 140,000 in the third quarter — through a reseller agreement with EchoStar and DirecTV — were in line with last year's third quarter.
And while Verizon hasn't yet reported third-quarter numbers, its FiOS TV video network covers only 3% to 4% of Comcast's footprint, too little to make a big difference.
“The softness in the telco/DBS results raises the question of whether the results reflect macroeconomic weakness rather than competitive shifts,” Moffett wrote.
Last week brought more bad news for cable on the subscriber front.
On Monday, Mediacom Communications reported a net loss of 13,000 basic customers in the third quarter, more than double the 6,000 customers lost in the same period a year ago.
At the second largest cable operator in the country — Time Warner Cable — basic customer losses continued in the third quarter.
On Nov. 7, Time Warner said it lost 83,000 basic video customers in the period, its second straight quarter of losses.
So far this year, Time Warner has lost 94,000 basic subscribers, and has about 13.3 million overall.
Moffett predicts basic subscriber declines at most major cable operators for 2007 and 2008.
He thinks Comcast will lose 85,000 basic customers in 2007 and 114,000 in 2008.
At Time Warner, he estimates basic customer rolls will decline by 47,000 in 2007 and 63,000 in 2008.
Insight Communications bucked the trend, reporting a gain of 21,100 subscribers in the quarter. The company said housing growth in its Midwestern markets appeared to be not much different than the 1.5% to 2% growth that has been the norm.
| New Homes Dip | |
|---|---|
| Housing starts (000s): | |
| Year | Starts |
| *Projected SOURCE: National Association of Home Builders |
|
| 2004 | 2,079 |
| 2005 | 2,221 |
| 2006 | 1,930 |
| 2007* | 1,490 |
| 2008* | 1,395 |
| 2009* | 1,552 |
NEW DEVELOPMENTS
How cable companies combat housing softness remains to be seen. It doesn't appear the industry is targeting new housing developments any more than it used to — even as there are fewer of them to address.
Dan Ryan, a former Charter executive who's CEO of AdGorilla, a digital ad-insertion company targeting cable operators, said the housing slump contributed to his decision to exit the cable-systems market all together.
Ryan, through another company called RPM Group, had managed a cable system in Lake Las Vegas, Nev., a housing development of multimillion dollar homes on nearly 3,500 acres. That system is now being managed by the developer.
“The slowdown in the housing market put me in a decision-making mode and we got out,” Ryan said. “The payback period is just way too long with the way the housing market is going right now.”
Ryan said that after two years of managing the Lake Las Vegas cable system, developers drastically scaled back their plans for new homes in the development.
“What enticed us to get into it was the growth trajectory that was present when we got in. They were building about 150 homes per month, and when we bailed out it was about 10 or 15 homes every month,” Ryan said.
Others, though, see opportunity in new housing developments and are attacking the market vigorously.
Boston Ventures partner Lou Bertocci said one of the private-equity fund's investments — En-Touch Systems — has been able to carve out a profitable niche serving large, master-planned communities.
Bertocci said that En-Touch already has about 3,000 customers in several areas offering a quadruple play of video, voice, data and home security. And though Bertocci said even Texas has seen a slowdown in new housing, “it's been growing so rapidly over the last couple of years, a slowdown's maybe not so bad.”
En-Touch has a statewide franchise in Texas and most of its operations are centered in the Houston market, where it competes with Comcast.
TOUTING 'ARPU'
Cable operators who have reported subscriber declines are still reporting revenue gains, as they continue to add other “revenue generating units” such as telephone and high-speed Internet subscriptions.
In the third quarter, Comcast's revenue and cash flow growth (at 11% and 13% respectively) were in line with most analysts' expectations.
Time Warner cited an overall gain of 522,000 RGUs and said operating income before depreciation and amortization rose 12% in the quarter, to $1.4 billion, and revenue rose 7%, to $4 billion.
Mediacom said average revenue per unit [ARPU] rose 12% in the third quarter, to $81.81 per month, despite the basic-subscriber dip. That means basic customers falling off could be mostly unprofitable video-only customers — and existing customers are spending more on additional services, such as high-speed Internet and Internet-based telephone. Mediacom has about 1.33 million basic subscribers.
Moffett warns, though, that investors — even ones inured to cable companies reporting small or non-existent subscriber growth — could see subscriber losses as a sign of weakness.
“The impact of sentiment on weaker subscriber numbers could be somewhat greater than the financial impact, however, inasmuch as subscriber growth is often viewed as a critical barometer of competitive health,” he noted in his September report.
That downswing in investor optimism — which has seen cable stocks decline 22% this year with no clear signs of a rebound anytime soon — could end up as the real harbinger of doom or boom for cable.
Housing starts, to the extent they drag down subscriber counts, are part of that mood kill.
Kent Gibbons contributed to this story.
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