VideoNuze Posts

Comcast reported its Q2 ’18 results this morning, with the good news being the addition of 260K broadband subscribers, the best Q2 the company has experienced in the past 10 years, along with the improvement of operating margins. The broadband surge was Exhibit A for management to point to on the earnings call as evidence its strategy of being a “connectivity” provider is paying off.

However, Q2 ’18 also saw the loss of 140K video subscribers, the most in a Q2 since 2014. Video sub losses have accelerated from -4K in Q2 ’16 and -34K in Q2 ’17. On the earnings call, management put the blame squarely on virtual MVPDs or “skinny bundles,” adding that they “expect pressure to continue in the video business” as virtual MVPDs ramp up.

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AT&T’s skinny bundle DirecTV Now hit 1.8 million subscribers at the end of June, per AT&T’s Q2 ’18 earnings report, released yesterday. DirecTV Now added 342K subscribers in Q2 ’18, compared with 152K in Q2 ’18 and 312K in Q1 ’18. DirecTV Now’s gains more than offset the 286K traditional DirecTV subscribers lost in the quarter (almost double the 156K loss from a year ago), with U-verse also adding 24K (vs. a loss of 195K a year ago). Overall, AT&T ended the quarter with 25.449 million video subscribers compared with 25.172 million in Q2 ’17.

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Verizon reported its Q2 ’18 earnings this morning, which included a whopping $658 million pre-tax charge for shutting down its GO90 mobile video service (previously announced) that it launched less than 3 years ago, in October, 2015. If you combine the Q2 charge with the operating expenses, capital Verizon invested in GO90 plus the OnCue acquisition from Intel, it’s highly likely that the company lost well over $1 billion on the failed initiative.

For a behemoth like Verizon, a $1 billion loss barely registers. However, it’s almost certainly the biggest single investment any company has made to try to start a mobile video service from scratch (though former DreamWorks executive Jeffrey Katzenberg, whose NewTV startup has raised over $800 million could well take the crown from Verizon).

Given the magnitude of Verizon’s loss, it’s worth trying to understand how the GO90 bet went so wrong, so quickly. From my vantage point, there are 3 key lessons to be learned:

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Another sign of connected TVs’ ascendance: in a blog post on Friday, YouTube CEO Susan Wojcicki said that its users are now watching an average of over 180 million hours of YouTube video per day on TV screens. To put that in perspective, given the 1.9 billion logged-in users YouTube says it has per month, it would mean an average of almost 11 minutes per day per user watching YouTube on TV.

No doubt that’s far less that the average Netflix, Hulu or Amazon Prime Video subscriber spends watching those services on TV. And it also pales in comparison to the over 50% of YouTube consumption on mobile devices the company has touted for several years now.

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I’m pleased to present the 428th edition of the VideoNuze podcast, with my weekly partner Colin Dixon of nScreenMedia.

This week Colin and I discuss new research highlighting how younger viewers are shifting away from traditional TV and toward OTT sources. Colin recaps research from Hub Entertainment focusing on the US while I share highlights from Ofcom’s new Media Nations report covering viewing behaviors in the UK.

While the numbers are slightly different, the general trends are similar. For example, in the US, just 26% of 18-34 year-olds consider live TV their default service. In the UK, for 18-34 year-olds, 54% of their video consumption is now from OTT sources.

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Comcast has officially dropped out of the bidding for the 21st Century Fox assets, clearing the path for Disney to move forward. Comcast still plans to pursue Sky in the UK. But by dropping its Fox bid, Comcast has also foregone the opportunity to take control of Hulu (by virtue of combining its 30% stake with Fox’s 30% stake). Presumably now Disney will take control of Hulu.

I believe this is a major missed opportunity for Comcast, leaving the company under-optimized in the fast-changing premium video industry. As we all know, today’s key industry themes include the rise of cord-cutting and consumers’ move to lower cost skinny bundles, the shift to on-demand viewing, with the accompanying growth of ad-free SVOD services (e.g. Netflix, Amazon, Hulu), the rapid adoption of connected TV and mobile devices for viewing and the nationalization/globalization of video services, among others.

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More evidence of the shifting viewership behavior of younger audiences: UK regulator Ofcom’s first annual Media Nations report found that 16-34 year-olds there now watch an average of 2 hours, 37 minutes per day of OTT content vs. 2 hours, 11 minutes of broadcast content across all devices.  

The younger group’s OTT consumption is almost double the overall population’s of 1 hour, 28 minutes. Across all age groups, 71% of viewing time is still with broadcast content. However, broadcast TV viewership on TVs dropped by 9 minutes, or 4.2% in 2017 to an average of 3 hours, 22 minutes per day. Since 2012, broadcast viewership has decreased by 38 minutes per day or 15.7%.

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Netflix reported a large miss on its subscriber forecast in Q2, with 670K net additions in the U.S. (44% below its forecast of 1.2 million) and 4.47 million net additions internationally (10% below its forecast of 5 million). From my standpoint, the international miss is almost irrelevant because the segment includes so many different countries with so many different adoption patterns that Netflix is still new to understanding. With all of those moving pieces, missing by just 10% isn’t too shabby.

Conversely, the domestic miss of 44% is a real head-scratcher which I believe raises, yet again, real questions around how well the company understands the dynamics of the domestic SVOD market, how much growth remains and how well its forecasting function is run. For eager investors, who have bid up the stock on lofty expectations, getting a handle on these issues seems critical.

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