Finance

Q3 Pay TV Losses Are Flat, But Winds of Change Blowing

Analysts bracing for impact of coming live OTT services 11/14/2016 8:00 AM Eastern
TakeAway

Pay TV providers saw flat losses in the third quarter, but the coming of DirecTV Now and Hulu’s OTT service threaten to change that equation.

Pay TV subscribers were leaving the ranks in the third quarter at about the same rate they did last year, but some analysts are bracing for the impact that new over-the-top offerings from DirecTV and Hulu might have on overall cord-cutting.

 

The pay TV industry lost about 486,000 subscribers in the third quarter, similar to the 436,000 net loss in the same period last year, according to MoffettNathanson principal and senior media analyst Craig Moffett. But if you add over-the-top provider Sling TV to the mix, the losses add up to 282,000 versus 277,000 last year.

 

Improvement in the cable sector, which lost 124,000 customers in the period vs. 218,000 in Q3 2015, wasn’t enough to offset continued heavy losses in the telco TV sector — down 365,000 subs in the quarter compared with 41,000 subs lost in Q3 2015 — and sluggish growth in satellite TV.

 

Leichtman Research Group president and principal analyst Bruce Leichtman estimated that pay TV lost about 255,000 subscribers in Q3, slightly higher than the 210,000 losses he estimated in the prior year.

 

“While the narrative is, ‘This market is falling apart,’ that’s not the reality,” Leichtman said. “What we’re really seeing is a market, which we have been seeing for the past four years, that is saturated and in slow decline.”

 

A WINTER OF DISCONTENT

But Moffett warned that while the seasonally weak summer months were stable, winter may be coming for the industry. AT&T’s DirecTV Now, the aggressively priced ($35 per month) 100-channel OTT service, is scheduled to launch later this month, and Hulu is expected to release its live-streaming service in the first quarter of 2017.

 

Moffett said pricing will be key. If DirecTV Now follows through with a $35 price point that is more than just an introductory base price — and Moffett is skeptical — the service could truly be the “game-changer” its management has spoken often about.

 

“AT&T is taking its content partners for a dance on the edge of a cliff,” Moffett wrote. “It is next quarter, and the quarter after, that will matter. The music has barely begun to play.”

 

In the meantime, traditional strong points for the pay TV sector continue to be pressured, with satellite and telco TV video losses mounting (see chart).

 

Dish Network continued to lose net new subscribers by the bucketful in the third quarter; it was down an estimated 320,000 subscribers, not including gains at Dish-owned Sling TV, according to Moffett. Including Sling TV gains of about 204,000 customers, Dish lost 116,000 net subscribers in the period.

 

At DirecTV, strong gains — 323,000 net additions — in Q3 couldn’t offset heavy losses at parent AT&T’s U-verse TV service. U-verse TV shed 329,000 video customers in Q3, three times the 92,000 subscribers it lost in the prior year, as it transitions customers to DirecTV’s satellite platform. Verizon Fios managed to add about 36,000 video customers in the period, even with last year’s 41,000 additions.

 

Leichtman saw the share shift between telco and satellite as more of a business decision than a change in consumer preference. He noted that the telco sector added 1.6 million video subscribers in 2014 and lost 1.4 million video customers in the past year. Of those 1.4 million losses, 1.33 million were from AT&T.

 

“What we’re seeing is a share shift driven by a decision that AT&T has made, not by consumers moving away from telco TV,” Leichtman said.

 

CABLE’S BROADBAND EDGE

Broadband has apparently been the difference for the cable companies as cable’s high-speed Internet customer growth has far outpaced the telcos’ for decades.

 

Leichtman estimated that broadband added about 3 million customers in the past year, and said cable accounted for more than 115% of that growth.

 

“Cable added nearly 3.5 million broadband subscribers, and the telcos are losing,” Leichtman said. “The bundle is as important as it has ever been.”

 

BTIG media analyst Rich Greenfield estimated that pay TV subscribers from all sources are declining at a 0.9% rate year-to-date and the rate is likely worse among the privately held MVPDs. In a blog post, Greenfield wrote that he is more concerned about cord-shavers — subscribers who are opting for skinny bundles — than those who are severing the relationship altogether.

 

Cord shaving raised some stubble in late October, after Nielsen estimated that ESPN lost 621,000 subscribers in one month, double the normal rate. Disney has disputed the figures — Nielsen stands by them, and they show increased losses at other networks — but affiliate fees declined in Q3 in part because of a declining base.

 

Disney chairman and CEO Bob Iger said he was bullish on ESPN’s future, adding that the main reason for the subscriber losses — migration to smaller packages — is easing. He also was encouraged by new deals with digital and over-the-top providers.

 

But it is just those digital and OTT providers that Greenfield is most worried about.

 

Greenfield pointed to the new virtual MVPDS, most concerned with the absence of friction in the subscription process. Customers can sign up and drop the service at any time with a click of a mouse, without having to return equipment or pay early termination fees.

 

“While this clearly may lead to new subs entering the ecosystem,” Greenfield wrote, “we are far more worried about the aforementioned 88 million video subscribers shifting to platforms where they no longer need to pay for an entire year of service to access the content they are most interested in.”

 

SIDEBAR: Birds and Wires

AT&T’s continued migration of U-verse TV customers over to DirecTV dominated Q3 telco TV losses, while cable managed to reduce subscriber declines in the period.

 

                                                  Q3 2015                     Q3 2016

Total Cable Adds . . . . . . . . . . . . . (218) . . . . . . . . . . . . . . (124)

Satellite TV Adds . . . . . . . . . . . . (152) . . . . . . . . . . . . . . . . 3

Telco TV Adds . . . . . . . . . . . . . . .  (41) . . . . . . . . . . . . . . . (365)

Sling TV Adds . . . . . . . . . . . . . . . . 155 . . . . . . . . . . . . . . .  204

Total Net Adds . . . . . . . . . . . . . . (277) . . . . . . . . . . . . . . (282)

Source: MoffettNathanson estimates; figures in 000s; numbers in parentheses represent declines.

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