• Top U.S. Pay-TV Operators Post Narrow Subscriber Gains in Q3, Rebounding From Q2 Loss

    Eight out of the nine largest U.S. pay-TV operators have reported their Q3 '10 results, gaining a slim 66,700 video subscribers, a rebound from a loss of 47,600 subscribers in Q2 '10. The Q2 loss was the first on record for the industry and fueled speculation that "cord-cutting" due to adoption of Internet-delivered video alternatives was rising. With only mildly positive subscriber adds - and 5 of the top 8 operators actually losing subscribers in Q3 - fears that cord-cutting is rising will surely accelerate.

    The 8 operators (privately-held Cox Cable, the 3rd-largest cable operator does not disclose its results) represent more than 85% of all U.S. pay-TV households. Though they collectively showed a quarterly gain, if Cox and other cable operators lost subscribers at a comparable rate as the 4 large cable operators in the top 8 (Comcast, Time Warner Cable, Charter and Cablevision), the industry as a whole would have actually lost about 97K subscribers in the 3rd quarter.

    The Q3 results show a consistent, though accelerating trend of shifting video subscriber market share from large cable operators to large telco and satellite operators. For instance, in Q3 '10, the 4 cable TV operators lost 518K subscribers (up from 333K in Q3 '09), while the 4 big satellite and telco operators (DirecTV, DISH, Verizon and AT&T), collectively gained 585K subscribers (though that was down from 807K a year ago). One change in the last 2 quarters is that DISH has now lost subscribers too (19K in Q2 and 29K in Q3). In Q3 DISH attributed its losses to higher churn from low-priced promotional subscribers that didn't renew. Meanwhile, the Q3 '10 cable loss was the biggest on record, with Comcast alone accounting for 275K of the loss, more than double its loss of 132K a year ago. The 4 cable operators have lost over 1.1 million video subscribers year-to-date.

    The market share shifts aren't unexpected given the aggressive promotion and pricing of the big non-cable operators. For example, here in the Boston area, where Verizon competes in many communities (though ironically not in the city of Boston itself where it hasn't built out its FiOS network) there are flyers in the newspaper each week, plus tons of radio and TV ads, making it nearly impossible not to be aware of the $99 first year video-voice-broadband alternative to Comcast, the region's big cable operator.

    As these market shifts have occurred, major cable operators have been able to point to consistently rising average revenue per subscriber (ARPU) - which carried through in Q3 as well - as evidence that the millions of subscribers it retains are spending ever more on bundled services (e.g. broadband Internet, voice, digital tiers, HD, DVR, etc.). That also feeds cable's theme that satellite and telco are peeling off lower-paying/deal-shopping/higher-churning subscribers (and DISH's higher Q3 churn adds evidence to that argument).

    The Q2 industry loss and now the widening Q3 cable losses have prompted plenty of tech-centric bloggers to vigorously assert that growth in cord-cutting is at work as well. On the flip side, executives at the top 2 cable operators, Comcast and Time Warner Cable, insisted in their Q3 earnings calls that they've seen no real evidence of cord-cutting. Even HBO, which lost 1.5 million subscribers in 2010, attributed the decline to promotional shortfalls with 2 key distributors rather than cord-cutting (or more specifically, "cord-shaving").  

    The truth is that nobody really knows the impact of cord-cutting - yet. To make their case, cord-cutting advocates have relied largely on surveys of video subscribers who say they plan to cut the cord. But surveys can be an unreliable indicator of actual behavior (for example, how many surveyed smokers who say they plan to quit smoking in the next 6 months really do so?). Meanwhile there's no shortage of extrapolation of anecdotes floating around such as "my 23 year-old cousin Jimmy cut the cord, so everyone under 40 must plan to do so". The cord-cutting theme has great appeal because there are so many people who feel they've been wronged or ripped off at one time or another by their cable company so that the prospect of ditching their subscriptions once and for all is very empowering.  

    While the cord-cutting data may still be lacking, there's a fundamental truism that greater consumer choice inevitably leads to more fragmentation. As all the building blocks for Internet video delivery fall into place - devices, quality, content selection and importantly lower prices - more people will find their way from pay-TV to something else (Netflix? Hulu? YouTube? A combination of all?). The downside for cable of their ARPU growth is that a yawning gap for slimmed down, value-oriented options has opened. In 2010, Netflix has exploited this opportunity masterfully with its $9/mo tier, and others will no doubt follow. The Q3 pay-TV gain is a small bright spot for the industry, but dark clouds still loom longer-term. How the industry as a whole responds will determine their future success.

    (note: OneTouch Intelligence assisted in compiling the subscriber data)

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