• Cord-Cutting Remained Modest in Q3, But Potentially Turbulent 2017 Looms

    According to industry data compiled by Leichtman Research Group, cord-cutting remained relatively modest in Q3 ’16, with the top 11 pay-TV operators, which account for approximately 95% of the market, losing 255K subscribers vs. 210K lost in Q3 ’15. As has been the trend in recent quarters, cable operators performed better than satellite and telco operators, which are disprorportionately bearing the brunt of the overall market’s slow, but ongoing, contraction.

    In Q3 ’16, the top 6 cable operators lost 90K subscribers, an improvement vs. the 170K lost in Q3 ’15, the best results in 10 years. As I’ve previously explained, Comcast was the standout of the group as the only large cable operator to actually gain subscribers in Q3, powered by its game-changing X1 set-top box.

    Telco and satellite performance was again distorted by AT&T’s continued strategy of shifting its own U-verse subscribers over to DirecTV and also by Dish Network lumping in gains for its Sling TV skinny bundle, without specifying their actual additions. The 2 satellite operators, DirecTV and Dish, added a net of 207K subscribers in Q3 ’16 vs. a gain of 3K in Q3 ’15, with DirecTV adding 323K and Dish losing 116K.

    Meanwhile the 3 largest telcos lost 375K subscribers in Q3 ’16 vs. losing 45K in Q3 ’15. Verizon gained 36K FiOS subscribers in Q3 ’15 vs. a gain of 42K in Q3 ’15. AT&T lost 325K U-verse subscribers in Q3 ’16 vs. 91K in Q3 ’15. LRG noted that over the past 4 quarters AT&T has lost 1,335,000 U-verse subscribers while adding 1,207,000 DirecTV subscribers, for an overall net loss of 128K.

    The churn between AT&T U-verse and DirecTV is poised to accelerate further in 2017 with the launch of DirecTV Now, which will be $35 per month. We still don’t know exactly what TV networks will be included in DirecTV Now, or how the base tier vs. add-on tiers will work. But if it is a true “multichannel bundle at a skinny bundle price point,” it could become a meaningful churn driver for current pay-TV services.

    That would of course include BOTH U-verse and DirecTV, so AT&T would be hit with a double whammy. Rather than improving margins by shifting U-verse subscribers to DirecTV (as it’s been doing), AT&T would suffer significant margin erosion on all its subscribers moving to DirecTV Now. Current DirecTV subscribers are estimated to generate $60 per month of margin, while it’s quite possible that DirecTV Now will operate at negative margins given the cost of programming alone.

    Beyond DirecTV Now, other skinny bundle launches slated for 2017 - particularly from Hulu and YouTube - could further roil the pay-TV market. It is still too early to tell what these services (and others) will look like and how competitive they’ll be. But one thing that’s for sure is that they’ll create more choice in the market, which will almost certainly lead to a higher degree of churn among existing pay-TV subscribers. One way or another 2017 is shaping up to be a turbulent year for pay-TV operators.