Tipping Point

Publish date:

TV shows have ruled the day in the cable industry for more than 60 years, since the entrepreneurs climbed their first poles and strung wire to bring moving pictures to rural America.

But a funny thing happened to the cable-TV industry as it evolved: Revenue from video, the very product that gave cable life and sustained it for decades, is diminishing its influence as a business.

Video sales as a percentage of total revenue have been on the decline for top cable operators for the past 10 years (see charts). And as basic video subscribers have declined and higher-margin products like high-speed Internet and telephony have gained steam, the next decade seems poised for a different business model.


Even longtime cable executives are bracing for the day when video is no longer the dominant revenue source — Time Warner Cable chairman and CEO Glenn Britt said as much earlier this year at an industry conference, when he noted that highspeed Internet is quickly becoming the core product for the No. 2 U.S. cable operator.

“We have become less of a TV company than we have previously,” Britt said at the Sanford Bernstein investor conference in New York in June.

Britt isn’t alone in that thought. Several analysts have predicted that video sales will fall below 50% of total revenue in the next five to eight years for the top publicly traded cable operators — only Cablevision Systems is expected to maintain the video status quo — the first time that has happened in the history of the industry. A combination of a declining video base, steadily growing high-speed data and phone customers and a surging business communications business is fueling the trend.

Taking information from several reports from Morgan Stanley media analyst Ben Swinburne, Pivotal Research Group principal and media & communications analyst Jeff Wlodarczak, and Miller Tabak media analyst David Joyce, it appears that high-speed data, phone and business services revenue will begin overtaking video as early as 2013. Ironically, or not, one of the last MSOs to reach that crossover milestone will be Britt’s own Time Warner Cable, which should reach that mark in 2019.Video is expected to be overtaken at Comcast in 2015.

The shift won’t likely require any sweeping changes at the respective MSOs, given that they have managed the shifts in business lines for years.

“That’s what is driving the growth on the non-video side of the business,” Joyce said. “The relative importance is already obvious and is gaining traction.”

In assembling data from several separate analysts’ reports for each publicly traded MSO, advertising revenue was not considered. Although ad sales are becoming an increasingly significant line item for many MSOs, it was thought that it would be more accurate to compare subscription revenue from each service.

The growth of broadband has been spurred along by a combination of things — the rapid rise of the Internet over the past several years as a critical information hub, the explosion of websites, applications and services to utilize that hub and the need for ever-higher connection speeds to take advantage of all the Web has to offer. Over the past 10 years, cable has been able to consistently provide higher speeds, better service and reasonable prices.

None of this is to suggest that cable operators will deemphasize or abandon video — it is still a huge revenue stream and should continue to be the largest individual segment for years to come. Video service continues to be the focus of product innovation, like network digital video recorders and TV Everywhere, to name a few.

And not everyone is bearish on video growth. According to SNL Kagan, video revenue for the entire cable industry should continue to dominate into the next decade — Kagan predicts that video revenue will account for 54% of total revenue in 2021. The difference appears to be in the how much business services revenue is expected to grow. SNL Kagan estimates that industry-wide, commercial voice and data revenue will more than double between 2011 and 2021, from $4.8 billion to $12.8 billion. For individual companies, the growth is expected to be much higher. For example, Joyce predicts that business revenue at Comcast will nearly quadruple from an estimated $1.8 billion in 2011 to $6.9 billion by 2016. In the same time frame, Swinburne predicts business revenue will rise about 86% to $2.6 billion in 2016 for the nation’s largest MSO.

But make no mistake: Video’s role in the overall cable business is diminishing. Basic video subscribers have been on an industry-wide decline since 2003, when total basic video customers dipped from 66.1 million to 66 million, according to SNL Kagan. The falloff has been steady in the past eight years — Kagan estimates that there were 59.8 million basic-video customers in 2010. By 2021, per Kagan, there will be less than 53 million cable subscribers across the country.

At the same time, video revenue has risen steadily (about 37% between 2003 and 2010, according to Kagan) mainly as rate increases and additional revenue streams like digital tiers, DVRs, and HD service have outpaced customer losses. During that same period, broadband and phone revenue rose 92%, while subscribers have skyrocketed. According to SNL Kagan, total high-speed Internet customers nearly tripled between 2003 and 2010, from 16.5 million to 44.4 million and phone subscribers increased sevenfold, from 3 million in 2003 to 23.9 million in 2010.

MUL_cover Story_10_31_11