Dish Sub Losses Push Pay TV Sector Into Red

Economy, Housing Slump Bear Blame but ‘Cord-Cutting’ Could Be a Factor

By Mike Farrell -- Multichannel News, 8/23/2010 12:01:00 AM

Dish Network’s return to net new subscriber losses in the second quarter may have inadvertently done more than signal that the low-cost satellite-TV service provider could be in store for rough times.

It may also add to evidence that “cordcutting” — once laughed off by cable, telco and satellite providers alike — is coming closer to reality.

Dish Network was the last publicly traded pay TV service provider to release secondquarter results on Aug. 9, and by losing 19,000 customers — its first quarterly loss after four consecutive quarters of gains — the sector was pushed into the red for the first time ever.

The Dish deficit meant that the entire publicly traded pay TV industry lost about 13,000 subscribers in the second quarter (a loss of 3,600 customers, if overbuilders such as Knology and RCN are not included). Sanford Bernstein cable and satellite analyst Craig Moffett said that despite the loss, the pay TV market is expected to grow on a full-year basis. But he added that probably won’t stop the skeptics.

The pay TV industry so far this year is ahead of the game by about 582,000 subscribers. So barring a disastrous second half, the sector should end the year in the black.

“That said, can it be long before the claims that cord-cutting has begun?” Moffett asked.

Collins Stewart media analyst Tom Eagan said that a greater mitigating factor of the second quarter deficit is the migration of overthe- air viewers to pay TV. Last year, amid the digital transition, pay TV providers added about 300,000 customers, Eagan said.

Back out the impact of homes that switched from free broadcast TV to pay TV in that period, and the growth trajectory would have been flat, he said.

It should be noted that the second quarter is traditionally a tough one for cable, as customers move to vacation homes and college students leave for summer break.

Adding to the pressure is the cont inued sluggish economy, which has helped increase involuntary churn, or customers that were dropped because of a failure to pay, Eagan said. Voluntary churn, he added, was due mostly to customers who switched from one provider to another, likely because of pricing promotions.

“There was probably cord-cutting for a segment of the OTAs who decided to become subscribers, but didn’t feel it was worth it,” Eagan said. In the past, it was pretty clear where former cable customers were going — to either telco or satellite companies. In the past three years, publicly traded cable operators have lost a collective 2.97 million basic customers, while satellite has gained 3.673 million and the telcos have added 4.7 million.

In the second quarter of this year, the five publicly traded cable operators shed a combined 477,000 basic video customers, mostly less-profitable single-product customers, the MSOs claim. Satellite and telco customer additions for the period were just 464,000, marking the first time the competition was unable to take up the slack. While that may be in part due to the lack of new housing growth (many cable operators on recent quarterly conference calls said there was no evidence of cord-cutting ), housing growth was no better in the past three years.

According to the U.S. Census Bureau, housing starts dropped from 1.4 million in 2007 to 554,000 in 2009. Seasonally adjusted annualized housing starts in June were down about 5%, to 549,000 from 587,000 in May.

One reason for Dish’s subscriber decline, said Eagan, was its decision to invoke a rate increase at the same time it also raised lease charges for set-top boxes. That, Eagan said, helped spike voluntary churn. Dish, which has positioned itself as the low-cost alternative, is particularly sensitive to rate increase and fluctuations in the economy.

Dish blamed most of its subscriber losses on the economy. “We think unemployment and consumer confidence did have an impact on our quarterly results and as a valued provider in the industry, we probably may feel that more than others,” Cullen said on Dish’s earnings call.

Eagan also expects Dish to return to positive subscriber growth in the third and fourth quarters, although not as much as he had previously thought. He expects Dish to add about 127,000 subscribers in the second half of the year, versus his previous estimate of 312,000 additions.