Basic-subscriber erosion, once looked upon as a runaway train heading straight for the cable industry, appeared to slow in the first quarter, as six of the top 10 MSOs reported a net gain of 20,200 basic customers, despite robust customer growth in the satellite sector.
Three of the top 10 MSOs reported basic-subscriber gains in the period — Time Warner Cable, Cablevision Systems Corp. and Mediacom Communications Corp. — offsetting losses at Charter Communications Inc. (6,700), Insight Communications Co. (1,100) and Comcast Corp. (23,000). These gains came despite the best quarter of basic-subscriber growth in DirecTV Inc.’s history (505,000 net additions) and strong adds at EchoStar Communications Corp. (325,000).
While Charter and Insight each lost customers, they appeared to have stemmed the bleeding of past quarters. Charter’s first-quarter decline was its lowest in more than a year — it lost 204,000 basic customers in 2004 — and Insight’s 1,100 basic-customer decline was a marked improvement from the 21,100 basic customers shed in the fourth quarter.
As a whole, publicly traded cable companies subtracted about 13,000 basic subscribers in the quarter, if losses at Adelphia Communications Corp. (33,000) are added in.
Still, that’s far from the 830,000 net additions in the direct-broadcast satellite sector and far better than what analysts had predicted for the MSOs.
WHERE ARE THEY FROM?
While the gains bode well for the success of both industries, according to one analyst, they also pose a puzzling question: If everybody is gaining, where are those new subscribers coming from?
Cable’s gains could erode in the typically weak second quarter. But for now, the sector appears to be benefiting from the continued popularity of advanced services, especially bundled voice, video and data packages.
Sanford Bernstein & Co. cable and satellite analyst Craig Moffett said in a report that it was no coincidence the two big MSOs showing basic-customer gains in the period are leaders in cable telephony.
Time Warner Cable, which rolled out telephony service in all of its markets last year, added about 152,000 telephone customers in the first quarter, ending the period with 372,000 subscribers.
Cablevision, the first MSO to roll out telephony across its entire 3 million-subscriber footprint, added 92,000 telephone customers in the quarter, finishing with 364,000 subscribers.
Cablevision said it crossed the 400,000 telephony subscriber mark in April.
Voice growth was strong and could get even better in the coming quarters.
On a conference call with analysts, Cablevision chief operating officer Tom Rutledge said the MSO has recently made number portability — the ability for customers who switch providers to retain their phone numbers — available, which should further drive subscriptions.
“Almost all of the growth for VoIP up until now has been as a result of marketing voice as part of a bundled package to new subscribers,” Rutledge said on the call. “We anticipate we’ll have greater sales going forward than we’ve had to date.”
Moffett’s report, though, said telephony gains (and their customer-retention impact) don’t fully explain the rise in basic subscribers.
“For the cable operators, the swing to positive basic-subscriber growth at Time Warner and the continued strength at Cablevision highlights just how significant the addition of VoIP can be to the rest of the cable service offering,” Moffett wrote.
“Their success in adding bodes well for Comcast, who trails Time Warner by about six months and Cablevision by about a year in their deployment of VoIP.
“But the subscriber gains coming through bundled VoIP cannot be expected to fundamentally grow the market, so they shed little light on the mystery of the cable/satellite gap.”
Moffett said some of the subscriber gains could be explained by accelerated housing starts (historical trends point to about 370,000 “new homes” being created each quarter); over-the-air broadcast conversion and tighter content-security techniques implemented by DBS providers, forcing former satellite pirates to pay for service.
“But even considering all these factors in concert, the yawning gap between satellite growth and cable contraction seems confoundingly large,” Moffett wrote. “In any case, the subscribers must be coming from somewhere. We just don’t know where.”
Basic-subscriber growth wasn’t the only bright spot for the MSOs in the first quarter. Practically every operator showed substantial gains in digital and high-speed Internet subscribers — Time Warner Cable added 209,000 data customers in the quarter, its first quarter of 200,000-plus additions in two years.
Financial results for the MSOs were strong, too. Time Warner Cable reported 10% growth in revenue and cash flow in the period and Cablevision posted 15% revenue growth and 19% cash-flow growth at its cable operations.
Digital penetration, once expected to level off after hitting the 40% mark, is showing no signs of doing so.
Cablevision led the industry with 54.4% digital penetration (it added 140,000 digital customers in the period). Time Warner cracked the 45% penetration threshold in the first quarter, adding 103,000 digital customers.
Digital customers are also taking on other high-margin services like digital video recorders, HDTV and subscription video on demand.
Time Warner said DVR penetration into its digital base is now about 20%, or about 1 million customers. About one-third of its digital subscribers also pay for SVOD.
NETWORK DVR COMING
Cablevision has resisted jumping the siren song of DVRs: It offers them, but only if customers specifically ask.
On the conference call, Rutledge said the MSO is focusing on a network DVR product and could begin technical trials later this year. “We’re pursuing it as a business as rapidly as we can,” he said.
DBS was no slouch in the period either. At DirecTV, revenue rose 27% and operating income before depreciation and amortization increased 77%. EchoStar reported a 28% increase in revenue and a profit of $318 million (70 cents per share).
DirecTV CEO Chase Carey told analysts subscriber additions could decline by 10% for the foreseeable future as the DBS giant implements more stringent credit-checking policies.
Still, Carey said DirecTV would look for new-subscriber growth by attacking new sectors, like multiple dwelling units, and focusing on cable systems they consider vulnerable by offering ethnic programming packages, interactive features and new products like digital video recorders and HDTV.
“That [MDUs] is an opportunity for us to develop a market we have clearly underperformed in,” Carey said.
Carey said DirecTV is beginning to download software this month to customer set-tops that will enable them to access local weather and electronic programming guide features.
This summer, DirecTV is launching its next generation DVR and in the third quarter it will launch an MPEG-4 (Moving Picture Experts Group) set-top that will provide expanded HDTV offerings.
DirecTV also benefited in the quarter from about 150,000 gross subscriber additions through relationships with telephone companies Verizon Communications, Qwest Communications International Inc., Cincinnati Bell Inc. and BellSouth Corp., which bundle DirecTV’s DBS service with their telephone and high-speed data offerings.
Carey said he expects DirecTV’s telephone-company relationships to continue to produce strong subscriber growth.
ERGEN WAS DOWNBEAT
While DirecTV was upbeat in its presentation to analysts, EchoStar chairman and CEO Charlie Ergen ran a conference call that was “downright depressing” in tone, according to a report by Prudential Equity cable and satellite analyst Kathy Styponias.
Ergen ticked off a litany of gloomy news: his RBOC partner, SBC Communications Corp., announced it was de-emphasizing satellite TV as it moves to build its own video service; he believes the competitive benefit of local-into-local DBS service has essentially peaked; and although he thinks HDTV service, slated for launch later this year, will be successful, he was concerned that the economics won’t work out in markets outside of the top 20 DMAs.
“To the extent that EchoStar plans to have only a limited local HD offering, we think that makes them even more vulnerable to competition from cable and/or DirecTV,” Styponias wrote.
Investors apparently felt the same, driving EchoStar stock price down as much as $1.10, to $28.76, on May 5, before rallying slightly to close that day at $28.99, down 85 cents.
Mediacom’s first quarter basic-subscriber growth was its first in about two years. The Middletown, N.Y.-based MSO also reported personal bests in digital customer additions (34,000) and high-speed data additions (40,000).