Category Archives: CST

Cord Cutting in Q3 2016

I do a piece most quarters after the major cable, satellite, and telecoms operators have reported their TV subscriber numbers, providing an update on what is at this point a very clear cord-cutting trend. Here is this quarter’s update.

As a brief reminder, the correct way to look at cord cutting is to focus on three things:

  • Year on year subscriber growth, to eliminate the cyclical factors in the market
  • A totality of providers of different kinds – i.e. cable, satellite, and telco – not any one or two groups
  • A totality of providers of different sizes, because smaller providers are doing worse than larger ones.

Here, then, on that basis, are this quarter’s numbers. First, here’s the view of year on year pay TV subscriber changes – a reported – for the seventeen players I track:

year-on-year-net-adds-all-public-players

As you can see, there’s a very clear trend here – with one exception in Q4 2015, each quarter’s year on year decline has been worse than the previous one since Q2 2014. That’s over two years now of worsening declines. As I’ve done in previous quarters, I’m also providing a view below of what the trend looks like if you extract my estimate for DISH’s Sling subscribers, which are not classic pay TV subs but are included in its pay TV subscriber reporting:

year-on-year-net-adds-minus-sling

On that basis, the trend is that much worse – hitting around 1.5 million lost subscribers year on year in Q3 2016.

It’s also worth noting that once again these trends differ greatly by type and size of player. The chart below shows net adds by player type:net-adds-by-player-type

The trend here has been apparent for some time – telco subs have taken a complete nosedive since Verizon ceased expanding Fios meaningfully and since AT&T shifted all its focus to DirecTV following the announcement of the merger. Indeed, that shift in focus is extremely transparent when you look at U-verse and DirecTV subs separately:att-directv-subs-growth

The two combined are still negative year on year, but turned a corner three quarters ago and are steadily approaching year on year parity, though not yet growth:

att-combined-subsCable, on the other hand, has been recovering somewhat, likely benefiting from the reduced focus by Verizon and AT&T on the space with their telco offerings. The cable operators I track collectively lost only 81k subscribers year on year, compared with well over a million subscribers annually throughout 2013 and 2014. Once again, that cable line masks differences between the larger and smaller operators, which saw distinct trends:

cable-by-size

The larger cable operators have been faring better, with positive net adds collectively for the last two quarters, while smaller cable operators like Cable ONE, Mediacom, Suddenlink, and WideOpenWest collectively saw declines, which have been fairly consistent for some time now.

The improvement in the satellite line, meanwhile, is entirely due to the much healthier net adds at DirecTV, offset somewhat by DISH’s accelerating declines. Those declines would, of course, be significantly worse if we again stripped out Sling subscriber growth, which is likely at at around 600-700k annually, compared with a loss of a little over 400k subs reported by DISH in total.

A quick word on Nielsen and ESPN

Before I close, just a quick word on the Nielsen-ESPN situation that’s emerged in the last few weeks. Nielsen reported an unusually dramatic drop in subscribers for ESPN in the month of October, ESPN pushed back, Nielsen temporarily pulled the numbers while it completed a double check of the figures, and then announced it was standing by them. The total subscriber loss at ESPN was 621,000, and although this was the one that got all the attention, other major networks like CNN and Fox News lost almost as many.

In the context of the analysis above, 500-600k subs gone in a single month seems vastly disproportionate to the overall trend, which is at around 1-1.5 million per year depending on how you break down the numbers. Additionally, Q4 is traditionally one of the stronger quarters – the players I track combined actually had positive net adds in the last three fourth quarters, and I suspect for every fourth quarter before that too. That’s what makes this loss so unexpected, and why the various networks have pushed back.

However, cord cutting isn’t the only driver of subscriber losses – cord shaving is the other major driver, and that makes for a more feasible explanation here. Several major TV providers now have skinny bundles or basic packages which exclude one or more of the major networks that saw big losses. So some of the losses could have come from subscribers moving to these bundles, or switching from a big traditional package at one operator to a skinnier one elsewhere.

And of course the third possible explanation is a shift from traditional pay TV to one of the new online providers like Sling TV or Sony Vue. Nielsen’s numbers don’t capture these subscribers, and so a bigger than usual shift in that direction would cause a loss in subs for those networks even if they were part of the new packages the subscribers moved to on the digital side. The reality, of course, is that many of these digital packages are also considerably skinnier than those offered by the old school pay TV providers – DirecTV Now, which is due to launch shortly, has 100 channels, compared with 145+ on DirecTV’s base satellite package, for example.

This is the new reality for TV networks – a combination of cord cutting at 1.5 million subscribers per year combined with cord shaving that will eliminate some of their networks from some subscribers’ packages are going to lead to a massive decline in subscribership over the coming years. Significant and accelerating declines in subscribers are also in store for the pay TV providers, unless they participate in the digital alternatives as both DISH and AT&T/DirecTV are already.

Cord Cutting Continues to Accelerate in Q2 2016

One of the data sets I maintain is a database on the major cable, satellite, and telecoms operators in the US and their pay TV, broadband, and voice subscribers. As such, each quarter, I dig through those numbers and churn out a bunch of charts on how those markets are performing, and one of the posts I do each quarter is a cord-cutting update. Here’s the update for Q2 2016.

TL;DR: Cord-Cutting Continues to Accelerate

This is going to be a longish post, in which I’ll dive into lots of the detail around what’s really happening in the US pay TV market. But the headline here is that cord-cutting continues to accelerate, a trend that’s been fairly consistent for quite some time.

Here’s the money chart, which shows the year on year growth or decline in pay TV subscribers across all the publicly traded players I track:

Q2 2016 Cord Cutting 560px All Public Players

As you can see, the trend is very clear, with a consistent pattern from mid 2014 onwards of worse declines each quarter (except Q4 2015), culminating in this a loss of around 834,000 pay TV subscribers at the end of Q2 2016 compared with the end of Q2 2015. As discussed in more detail below, these numbers include the positive growth Dish has seen from its Sling TV product, which has added around 800,000 subscribers over the past year or so. Without those subs, the picture looks even worse.

Read on for more in-depth analysis of these numbers and the trends behind them. Reporters who would like further comment or anyone who would like to know more about our data offerings can reach Jan Dawson at jan (at) jackdawresearch.com or (408) 744-6244.

Avoiding false trends with a proper methodology

I’ve lost track of how many headlines I’ve seen over the last couple of years which posit that cord cutting is somehow slowing down off the back of a small number of providers’ quarterly results. This poor analysis is usually based on several key mistakes:

  • Focusing on quarterly net adds rather than annual changes – this is problematic because the pay TV industry is inherently very cyclical, historically doing much better in the fourth and first quarters of the year, and doing worse in the late spring and summer months, reported as part of Q2 and Q3. You have to compare the same quarter in subsequent years to see the real trends.
  • Focusing on one or two big players, instead of the whole market. One of the key trends that’s emerged in recent quarters is that the larger and smaller players are seeing quite different trends, so fixating on the large players alone is misleading.
  • Focusing on one set of players, such as the cable companies. Though “cable TV” is often used as a synonym for pay TV in the US, it’s not a useful one when it comes to doing this kind of analysis. Cable, satellite, and telecoms players are seeing divergent trends when it comes to pay TV growth, and you have to look at all sets of players to get the full picture.

On that basis, then, I focus on year-on-year change in subs, and try to cast the net as wide as possible when it comes to players. My analysis includes all the major publicly traded cable, satellite, and telecoms (CST) providers in the US, of which there are now 17 in my data set, ranging from AT&T/DirecTV at over 25 million subs to Consolidated Communications, with just 112,000. The only major player now missing from this analysis (following the acquisition of Bright House by Charter) is Cox, which has around four million subscribers. In some of the charts below, you’ll see estimates for Cox included.

Trends by player type

So let’s stark to break down that chart I showed at the beginning, to see what’s happening behind the scenes. First off, here’s a chart that shows the year on year subscriber growth trends by player type: cable, satellite, and telecoms:

Q2 2016 Cord Cutting 560px by player type

This chart illustrates perfectly why focusing on just cable operators is utterly misleading – they’ve actually been having a better time of things over the past two years, but largely at the expense of the major telcos, who have seen plunging growth during the same period.

A tale of two groups of cable companies

It gets even more interesting when you break cable down into two groups, large and small companies:

Q2 2016 Cord Cutting 560px large and small cable

As you can see, what’s really been happening is that the four largest publicly traded cable companies have been doing much better over the last two years, while the smaller ones have if anything been doing worse. A large chunk of that improvement by the large companies comes from Time Warner Cable’s impressive turnaround during 2014 and 2015:

Q2 2016 Cord Cutting 560px cable by company

However, Comcast has also had a meaningful improvement over that same period, moving from 200k net losses year on year to positive net adds in the last two quarters. Legacy Charter has also had a slight improvement, while Cablevision has been largely static.

AT&T and Verizon have shifted focus elsewhere

The rest of the market is dominated by two large satellite companies and two large telcos, but the story here is really about the shift in focus away from TV by the telecoms guys. In AT&T’s case, it’s about a shift towards satellite-delivered TV, while in Verizon’s case it’s about slimming down its wireline operations and shifting focus from TV to broadband.

The transformation at AT&T over the last two years has been dramatic. Since the announcement of its plans to acquire DirecTV in May 2014, AT&T has seen plunging net adds in its U-verse TV business, while post-acquisition net adds at DirecTV have been skyrocketing:

Q2 2016 Cord Cutting 560px ATT DirecTV

This is part of a conscious strategy at AT&T to shift its TV focus to the platform with better economics, in addition to its cross-selling and bundling of DirecTV and AT&T wireless services. The net impact is still a loss of subscribers across its TV business as a whole – around 250k fewer subs at the end of Q2 2016 than Q2 2015 – but the economics of the subscribers it’s keeping are way better than for the subs it’s losing.

Dish is suffering, despite Sling TV

The other major satellite provider, Dish, is seeing worsening rather than improving trends, despite its ownership of over-the-top TV service Sling TV. It reports Sling TV subscribers as part of its overall pay TV numbers, through they’re markedly different in many of their characteristics, but even so it’s seen subscriber losses increase dramatically this quarter. The chart below shows Dish’s reported subscriber losses in blue, and adds estimated Sling TV subscriber growth in dark gray to show what’s really happening to traditional pay TV subs at Dish:

Q2 2016 Cord cutting 560px Dish and Sling

As you can see, the year on year change in traditional pay TV subs at Dish looks a lot worse when you strip out the Sling subscriber growth. The company lost almost a million pay TV subs on this basis over the past year, a number that appears to be rapidly accelerating.

Of course, we’re also including Sling subscribers in our overall industry numbers, so it’s worth looking at how industry growth numbers look when we strip out the same Sling subscribers from the overall pay TV numbers (with the Sling reduction this time shown in red):

Q2 2016 Cord Cutting 560px pay TV plus Sling

As you can see, the picture here worsens quite a bit too, going from a roughly 800k loss to a 1400k loss over the past year. The trend over time is also even more noticeable and dramatic.

Broadband may be the salvation for some

We’ve focused this analysis on pay TV exclusively, but many of these players also provide broadband services, and these services have grown to the point where they now rival the total installed base for pay TV. Indeed, a number of the larger cable operators now have more broadband subscribers than pay TV subscribers. This is another area where the larger cable operators are outperforming their smaller counterparts, as shown in the chart below:

Q2 2016 Cord Cutting 560px broadband and TV

Besides those smaller cable operators, the other company that will fare worst from cord cutting is Dish, which we’ve already discussed. Though it has a few hundred thousand broadband subscribers, it’s not remotely competitive in this space on a national basis, and as TV subscribership continues to fall, it will struggle to make up the difference in other areas, increasing pressure for a merger or acquisition that will allow it to tap into the broadband market. DirecTV, of course, now has the AT&T U-verse and wireless bases to bundle with.

Recent M&A leaves six large groups in control

Lastly, I want to touch on the recent merger and acquisition activity. We’ve already mentioned AT&T and DirecTV, but there have also been two other bits of consolidation: the creation of the new Charter from the combination of Charter, Time Warner Cable, and Bright House; and the acquisition of Cablevision and Suddenlink by French company Altice. It’s interesting to consider the scale of the groups formed by these various mergers in the context of the rest of the industry – these are now the six largest publicly-traded groups in the US pay TV market:

Q2 2016 Cord Cutting 560px Biggest groups

AT&T comes out on top, bolstered enormously by the DirecTV acquisition, while Comcast remains close behind despite not having been involved in the recent mergers (despite its best efforts). The new Charter comes in third, Dish in fourth, and then Verizon and Altice are way behind with a very similar number of subscribers a little under 5 million. After that, in turn, the companies get much smaller, with Frontier next at 1.6 million pay TV subs (including over a million recently acquired from Verizon), with no other publicly traded companies with over a million subs. And of course privately-held Cox is again excluded here, but would come in around the same size as Verizon and Altice.

This is a market increasingly dominated by large players, and that’s a trend that’s likely to continue, with Altice publicly suggesting that it intends to roll up more of the smaller assets. The four largest groups already own 78 million of the roughly 91 million owned by the publicly traded companies we’re tracking here, and the six large groups have 87 million between them. The rest of the market is becoming less and less relevant all the time, and as we’ve already seen has been suffering worse from cord cutting too.

Q1 2016 Cord Cutting Update

I gather data on a quarterly basis on the major cable, satellite, and telecoms companies in the US and their reported numbers for pay TV subscribers (as well as broadband and voice subscribers). I package this up into a slide deck for subscribers to the Jackdaw Research Quarterly Decks Service, but it’s also available as a one-off standalone purchase. This post analyzes the data on pay TV subscriptions for Q1 2016.

Cord cutting continues to accelerate

The headline here is that cord cutting continues to accelerate, a trend we’ve seen now for several quarters. As a reminder, in order to really gauge this trend, you can’t look at quarterly adds, because those are highly cyclical, and you have to look at the full set of players in the market, and not just largest, and certainly not just one type of player, such as cable or satellite companies. I’ll provide some more insight into this later in the post. On that basis, then, the chart below shows the year on year growth numbers for the industry, based on all the major public companies in the US and estimates for Cox and Bright House, two of the larger private companies. Pay TV yearly adds incl Cox and Bright House Q1 2016As you can see, the year on year declines that began a year ago in the first quarter of 2015 have grown every quarter since, and are now at over 800k. There’s no doubt at all based on these numbers that cord cutting is happening, and that it’s accelerating. More people are canceling pay TV service from these players than are signing up for service, and the gap between those two numbers is growing every quarter. The rest of this piece talks through additional detail around this trend, in several areas:

  • The additional impact on cable networks of the rise of skinny bundles and over-the-top services
  • The resurgence of cable and the decline in telco TV
  • The huge difference between trends facing larger and smaller pay TV providers.

Skinny bundles and OTT

Of course, cord cutting isn’t the only behavior that’s affecting how many customers subscribe to these services. Two particularly additional trends are the move to “skinny bundles” and the rise of over-the-top alternatives to traditional pay TV. Skinny bundles are a trimmed-down version of pay TV services from traditional providers. Verizon has Custom TV, which is one of the more extreme forms of this trend, while many other pay TV companies have also been providing similar packages with fewer channels. On its quarterly earnings call, Verizon reported that 38% of its new FiOS TV customers in the first quarter signed up for Custom TV packages, which it characterized as lower-revenue but higher margin than its traditional offerings. On the OTT side, perhaps the biggest player is Sling, from DISH. The issue from a reporting perspective is that DISH reports Sling subscribers along with its traditional satellite TV subscribers in its overall totals, without breaking them out. As such, the numbers in the chart above include several hundred thousand Sling subscribers that are generating far less revenue monthly and taking far fewer channels than the traditional pay TV subscriber. If you strip those out of the reporting (as shown by the red bars), the numbers start to look even worse:Cord cutting Q1 2016 with SlingAs you can see, you’re now talking about an annual decline that’s about twice as big, at over 1.6 million rather than 800 thousand. Why is this important? Well, if you’re a cable network, you could be affected just as much by skinny bundles and these smaller OTT bundles as you are by outright cord cutting. This is evident in the numbers reported at least annually by the major cable networks, almost all of which have declined by 2-3 million subscribers year on year in recent quarters. The only exceptions have tended to be newer networks that are still growing from smaller bases, and some of the premium networks like HBO and to a lesser extent Starz.

A cable resurgence

Another important trend we’ve seen over the last year or so is a dramatic change in the trajectories of two major groups of companies within the overall base of pay TV providers in the US. The cable companies have had a resurgence of sorts, while the telcos have faded dramatically in their ability to grow TV subscribers. The chart below compares year on year growth in subs for just these two groups:Cord cutting by cable vs telecomsAs you can see, the telcos regularly added over a million subs a year in 2012 and 2013, but since 2014 things have been heading rapidly downhill and have been increasingly negative for the last two quarters, while the cable companies have been returning closer to flat growth. Hence all those stories you’ve been seeing around earnings time for the last few quarters about the cable companies doing so well in TV sub growth, despite the overall cord cutting trend.

It’s really about large cable companies

In fact, it’s not even just about the cable companies versus the telcos, but about a division even among the cable companies. If you split cable company results by large and small companies, you see quite a disparity again:Cord cutting big vs small cable Q1 2016Here, you can see that the gains have been made almost entirely by the large cable companies, and that the small cable companies (which are even collectively much smaller) have been seeing worsening trends if anything. So it’s really that the large cable companies are making gains, while smaller cable companies and telcos are losing subscribers. The satellite providers are the last group here, and they’ve been seeing a more mixed bag of trends, with AT&T driving a resurgence at DirecTV thanks to bundling and heavy promotional activity, while DISH’s performance has been more mixed, especially if you strip out the Sling results.

Cord-cutting Update Q3 2015

I wrote a post last quarter about cord-cutting and the numbers I collect on pay TV subscribers in the US, and with all the major pay TV providers now having reported their results, I thought I’d do a quick update, especially since I’m seeing some misguided and misleading stuff out there based on others’ estimates. To be clear: cord-cutting is now a very real phenomenon, and it appears to be accelerating. A focus on single quarter results, especially on a sequential rather than year-on-year basis, can easily muddy the waters. But looking at the long-term trends makes the underlying pattern very clear.

Note: the charts and analysis here are based on the data I gather for my clients at Jackdaw Research, and a deck with lots more charts based on this data is part of the Jackdaw Research Quarterly Decks Service. You can learn more about that service and sign up here. The Q3 deck is available now to subscribers and can also be purchased on a one-off basis for $10 by clicking here. The deck from a year ago, which is similar in content, is available on Slideshare.

The three mistakes observers make

There are three fundamental mistakes people trying to measure cord-cutting frequently make:

  • They focus solely on quarterly trends, in what’s an extremely cyclical industry. Comparing this quarter’s net adds to last quarter’s tells you nothing about the underlying trends, because every calendar quarter has its own regular pattern. Ignore those patterns, or look at quarter-on-quarter trends rather than year-on-year trends, and you’ll get things totally wrong.
  • They focus only on some categories of players, such as the cable companies alone, or just the cable and satellite companies. There are three major sets of players in the US pay TV industry: cable operators, satellite operators, and telecoms operators. Ignore any one of these, or focus just on one – however large – and you’ll again come away with the wrong picture. For the last few quarters in particular, telecoms TV net adds have fallen quite a bit – leave those out of the picture, and you get a very distorted view.
  • They focus purely on the larger players. It’s very easy to focus on the largest publicly-traded pay TV providers – they’re by far the largest and  most impactful in industry terms. But even if these players serve the majority of the market, they by no means serve all of it, and in the last couple of years many of the losses have come among these smaller players. Ignoring those losses again risks distorting the picture.

A balanced view of cord-cutting

With that out of the way, I present here what’s as balanced a view as is possible to provide of what’s really going on. It’s very hard to build a truly complete picture, but if you want a representative picture, you have to include all three categories of players, and at least the largest of the smaller players too, while focusing on year on year trends. My post last quarter outlined the players I cover and the definitions I use, so I refer to you to that post if you’d like more context.

First, here’s the view of year on year video net adds for all the publicly-traded players whose reported results I track:Year on year video net adds all public playersAs you can see, the trend is consistent over the last five quarters – from almost 400k net adds in Q2 2014, the number has fallen each quarter, dropping into negative territory in Q2 2015 for the first time, and almost doubling in Q3, with almost 500k net losses among this group of pay TV providers.

The two bigger players we’re missing here are Cox and Bright House, neither of which is publicly-traded. Based on past reporting and estimates, I’ve estimated their results for Q3 2015, and adding them into the mix makes the picture look even worse:Year on year video net adds including Cox and Bright HouseLosses are now just above 500k for the quarter, and the first negative quarter (though it’s invisible in the chart) was actually Q1, when these providers lost 2k subs, according to my estimates. However, again, it was Q1 2014 that was the high point.

The dynamics between player groups are changing

Of course, underlying these dynamics is a set of different trends affecting different players. One of the reasons why some of the early commentary this quarter got things so wrong was an undue focus on the good results from some of the big cable companies. In fact, the cable companies have done better this quarter, but only because two of the big telcos – Verizon and AT&T – have dialed back their efforts in selling their TV offerings. The chart below shows year on year video net adds for these different groups of players (with cable excluding Cox and Bright House):Year on year video net adds by groupAs you can see, the cable recovery which began in late 2013 has coincided pretty much exactly with the telco slump that began around the same time. Telco adds year on year have dropped from around 1.5 million to just a couple of hundred thousand. This quarter, AT&T de-emphasized selling U-verse and actually lost subscribers for the second quarter in a row. Verizon is still gaining subscribers, but so slowly that it’s penetration rate in its addressable markets has actually begun to shrink. The satellite providers largely cancel each other out most quarters, such that their performance impacts overall market performance fairly little, but those slowing adds at the telcos are more than offsetting the slightly smaller losses at the cable companies.

A trend likely to accelerate

Hidden within these results is the fact that DISH now has its own over-the-top streaming video service, which is a potential substitute for some of these pay TV services. Sling TV subscribers are reported within DISH’s total base of subs, such that we can’t see the dynamics between the two, but others have estimated that without Sling DISH would have seen a significant drop in subscribers over the last couple of quarters. And of course Sling isn’t the only company providing these services – whether it’s indirect substitutes like Netflix and Hulu or direct substitutes like Sling, Sony’s Vue, and whatever Apple might eventually announce, a big part of the reason for the cord-cutting that’s now very evident in the market is the availability of substitutes. To date, DISH is the only one of these companies that has a competing product within its own walls, and that may turn out to be a smart strategy. But whether these companies eat their own lunch or lose share to others, it’s increasingly clear that cord-cutting is real, and accelerating.

An update on cord-cutting

The last of the major pay TV, broadband, and phone companies has now reported, so we have a pretty good sense of how the industry fared in Q2. As I do every quarter, I’ve put together a series of charts on the industry for subscribers to the Jackdaw Research Quarterly Decks service. As usual, there’s been tons of press about cord-cutting lately, but so often numbers that are bandied about only tell part of the story, so I wanted to provide an update with as much transparency as possible about where these numbers come from and what they represent.

A lot depends on what you measure

The reality is that this was a down quarter for the pay TV market, almost no matter how you look at it. Some of the numbers people report only provide a partial view, whereas I look at three discrete groups of companies in my reporting:

  • Major Public Players: The largest publicly-traded cable, satellite, and telecoms providers, a group that includes AT&T, Cablevision, Charter, Comcast, DirecTV, DISH, Time Warner Cable, and Verizon. These companies account for a large majority of overall pay TV subscribers in the US, but by no means all of them.
  • Public Players: A longer list of publicly-traded companies in those categories, which adds Cable ONE, Consolidated Communications, Frontier, Mediacom, Suddenlink, Windstream, and WideOpenWest to that list. This list gets even closer to covering the whole market, but is still not comprehensive. However, it doesn’t rely on estimates, and so is the most robust of the sets of numbers in its mix of comprehensiveness and foundation in actuals.
  • Public Players plus Cox and Bright House: That list plus estimates for two other companies: Bright House and Cox, the two largest privately-held cable companies, which don’t report their subscriber numbers publicly. I’ve used a combination of my own estimates and those provided by companies like the Leichtman Research Group to fill in these gaps. This longest list still isn’t utterly comprehensive, but accounts for the vast majority of US TV subscribers, though it relies on some estimates.

In the charts below, you’ll see these groups denoted as “big players”, “all players”, and “incl. Cox/Bright House” respectively.

A down quarter, no matter how you look at it

However, no matter which of these three groups you look at, it’s clear that the industry had a poor quarter, and arguably its second in a row. What’s important to note about this industry, however, is that it’s extremely cyclical, and the second quarter is usually the worst quarter of the year. As a result, I tend to look at year on year comparisons because that eliminates the cyclicality somewhat. The three charts below show net year-on-year changes in pay TV subscribers for the three groups described above:Year on year video adds big playersIf we look first at the “big players”, the trend is already obvious: year on year growth is well down on all the quarters in the past two years, albeit still marginally positive. But of course these numbers don’t include the smaller players, which often lose subscribers to the big ones. When we wrap those numbers in, we see the following:Year on year video adds all playersAs you can see, now we’re suddenly talking about a real decline year on year, and not just slowing growth. Those smaller players between them lost quite a few subscribers, and when they’re factored in we see a more complete picture. However, we’re still missing the two privately-traded companies, but based on past numbers and extrapolation we can add a reasonable estimate for them, too:Year on year video adds including Cox Bright HouseAnd now we see that this is not the first, but the second, quarter of negative growth for the industry. And you can also see that the trend started a year ago, as year on year net adds began declining then and have fallen every quarter since. Behind all this, though, is a series of interacting dynamics between the various groups of players in the market – cable companies, satellite providers, and telecoms operators. The results for these different groups are shown below:Year on year video net adds by categoryWhat you can see here is that the cable companies have actually been doing better over the past year or two, reducing their total net losses from 1.5 million to 1 million in that period, while the telecoms operators’ growth has slowed much more significantly, falling from 1.5m year on year to just over five hundred thousand. As the two major satellite providers have also seen a combined slowing of growth, the net result is that the industry has contracted for the last two quarters. There’s a little short-term stuff in here – last quarter AT&T focused on profitability in its TV base and actually saw a slight loss in subscribers, while Verizon’s marketing was constrained by its legal scuffle with content providers over its Custom TV bundles. So it’s possible we’ll see some recovery next quarter for the telecoms side of this business. But it’s increasingly clear that this is a zero (or negative) sum game, and that if telecoms gains do grow, they’ll likely come at the expense of the cable companies.

Household context worsens the picture

However, things can get even worse. The US population isn’t static, of course – the number of households is actually growing fairly rapidly, so that even static TV subscribership would mean falling penetration. Even the change from 2013 to 2014, when subscribers grew, represented a slight reduction – around half a percentage point – in penetration. And the last six months, with real year on year shrinkage, just accelerates that trend. We’re somewhere around 79% penetration at the moment, but it’s likely that this number is likely to fall by around 1% or so per year over the next few quarters. Cord cutting really is happening at this point, and it will only accelerate as more and more alternatives to the traditional pay TV bundle become available. That’s not to say it’s going to go to zero – there are still lots of barriers to adoption of alternatives, not least sports programming – but for many users, the alternatives are becoming good enough, especially as cable mainstays like HBO become available outside the bundle.

The challenges ahead for Apple’s TV service

The Wall Street Journal is reporting that Apple is finally beginning to get somewhere with its TV service, and has several key content providers on board. Techpinions readers won’t be surprised by any of this, because I’ve been talking up this strategy for some time now, starting a year ago in March 2014 and most recently this past week following the HBO Now announcement. At this point, the outcome I pointed to in that first piece seems more likely than ever, but it’s still not certain that it’ll be a success. As such, I wanted to talk about some of the details of the power struggle that remains ahead for Apple (and for other would-be providers of new pay-TV services) which I haven’t said much about previously.

From lots of little games of chicken to one huge one

What’s ahead is really a huge game of chicken, with the players being Apple (and other would-be new pay TV providers), the major existing pay-TV providers (and especially the major cable operators), and the content owners, both broadcasters and cable networks. There’s already a power struggle between the content owners and the pay TV providers over the fees the latter pay the former, due to two major evolutions:

  • the shift from must-carry to retransmission consent models for local broadcasters, which means they’re now insisting that would-be carriers pay them for carriage
  • the steady increase in affiliate fees for both some individual channels and for ever-expanding packages of channels from some of the major content owners, driven in particular by the rising cost of sports rights and additional sports channels, but also by the increasing investment in original content.

We’ve seen one carriage dispute after another in recent years, with several short-term blackouts, some smaller cable operators dropping Viacom or other content providers entirely from their lineups, and most recently Verizon dropping the Weather Channel, which had hitherto been the most widely-available cable channel in the US. These carriage disputes represent smaller games of chicken, with both sides calling the other’s bluff, and waging public battles for the minds of end users. In most cases, the pay TV providers have ended up caving to some extent and ponying up the required money to keep channels on air, but it’s no longer a sure thing. The relationship between these two sets of players has become increasingly tense, but with these traditional pay TV providers the only channel to market for cable networks in particular, and realistically the main route to market for broadcast channels too, there’s been little alternative but to reach terms and move forward. But many of the content owners would love a real alternative to the traditional hegemony of major cable and satellite providers. The two major telecoms companies, AT&T and Verizon, have provided some competition, but operate very much on the same basis as the old guard.

Incentives to deal, but also penalties for stepping out

All this gives the content owners huge incentives to find alternative routes to market, both as insurance against future carriage disputes and as leverage over the pay TV providers. Few of the content owners, though, have the broad, recognizable brands that would enable them to go it alone in any meaningful way, though CBS is one of a few to be testing the waters. What they would much prefer is to partner with a player which itself has leverage and a huge potential market for TV services, and that’s where Apple comes in. To be sure, Apple today is a tiny player in the overall video market, which generates about a hundred billion dollars in the US each year, the vast majority of it going through the cable providers. But what Apple has is eyeballs, credit cards, and platforms, all of which could be applied to such a service. Apple’s leverage is entirely in its potential as a provider.

The problem, though, is that any such move by the content owners would be seen for what it is – a gambit to break down the power of the traditional pay TV providers. And as such, those providers would retaliate. They have power over these content owners in several forms, with the harshest being refusing to carry channels, but the more moderate (and more realistic) being withholding marketing dollars from promoting those channels and the packages that contain them. Until such a time as any new partnership delivers equivalent benefits (which seems far off at best) they simply can’t afford to sacrifice their existing relationships.

Apple tried one way, but now for plan B

All this creates a dilemma, and a need for a strategy which balances these competing demands. The content providers need to forge partnerships which allow them to build leverage over the pay TV providers without alienating them. For this reason, and because Apple understands the inherent challenges of going up against the pay TV providers, Apple’s plan A was to work with the pay TV providers, rather than against them. It reportedly worked with Time Warner Cable before the Comcast deal was announced, and then switched to Comcast itself, but apparently without success. Comcast is unwilling to yield two things: the customer relationship, and the lucrative set top box fees that go with controlling the delivery of the TV service. Apple would have displaced both of those in a deal with Comcast, which meant it could never happen. Comcast apparently made this clear, and so Apple went to plan B.

If Apple is successful, of course, Comcast will lose both the things it refused to sacrifice in a much worse way than it would have done had it dealt with Apple instead of shutting the talks down. At this point, its greatest leverage is its NBC Universal holdings, with NBC apparently the major holdout broadcaster, but that’s far from a deal killer for the service Apple is creating. Disney is arguably the most important content partner, with its ownership of ESPN, but with the other major broadcasters on board too along with several others, and the recent HBO deal, Apple suddenly has a pretty compelling proposition on the way. The big question now is how the larger game of chicken plays out. So much of the success of Apple’s service will depend on the exact pricing and structure, and the completeness of its content offering. And that’s where the game of chicken comes back in. If the content owners provide overly attractive terms to Apple, they undercut their relationship with the pay TV providers. If the terms aren’t that attractive, Apple’s service won’t be priced competitively.

The challenges ahead

Some of the content owners – Viacom among them – are likely to be more desperate than others, and will sign up with Apple at decent rates. Others have already shown their willingness to break ranks with the pay TV operators through their deals with DISH’s Sling TV. But others will want to tread a more careful path, and that’s the other challenge Apple faces: being truly disruptive to the current model when it can’t undercut on price, and may well end up building a comparable bundle without the a la carte options some consumers (think they) want.

One other interesting piece of leverage Apple has with the content providers is its ability to track usage across its various devices, and across live/linear, DVR, and VoD, something advertisers are particularly keen on and which traditional pay TV providers have struggled to deliver. At some point, all of this reaches a tipping point where Apple’s TV service (and those like it, from Sony and potentially others) gains enough momentum and customer and content provider support that all the content providers can swing their support fully behind it. At this point, Comcast’s refusal to play ball with NBC content will become increasingly untenable, and I would bet Apple would make it very clear (either directly or through the media) that Comcast is to blame for NBC content being absent. The big question is how long it takes to reach this tipping point, and whether Apple can get enough support in the meantime to make things worthwhile.

Of course, for some consumers, simply being rid of the cable operator would be benefit enough, but of course Apple won’t be providing the broadband service over which these services will be delivered. The cable company will still play a role in many cases as the broadband provider, and with the loss of valuable TV revenue it’ll be tempted to compensate by raising broadband prices. If cable operators then also offer comparable over-the-top TV services as a retention strategy, the appeal and impact of Apple’s TV service may be further blunted. Apple’s differentiation will be greatest in the areas it specializes in – creating great user experiences across devices. Apple can apply some of what it’s acquired through Beats to develop recommendation features, and surely has plenty else up its sleeve. The effectiveness of this differentiation is ultimately what will drive Apple’s success or failure as a truly disruptive TV offering.

US cable, satellite and telco provider review for Q3 2014

As a counterpoint to the US wireless market trends deck I published last week, today I’m making available a review of some of the major operational metrics and revenue trends for the largest publicly-held cable, satellite and wireline telecoms providers in the US market. This deck focuses on pay TV, broadband and voice telephony services, and shows growth on an annual and quarterly basis as well as total revenues and revenues per user for these services. Some of the key messages are:

  • TV subscribers aren’t shrinking – if looked at annually, to overcome the inherent cyclicality in the market, subscribers are actually growing very slightly
  • Broadband is still growing rapidly, adding several million subscribers each year
  • Voice is shrinking fast, though the rate of decline has slowed recently, as decent cable growth fails to offset the rapid shrinkage among the telcos
  • Pay TV is around a $100 billion a year market, and shows no sign of shrinking despite the shift in viewing habits towards DVR, VoD and online consumption.

I’ve embedded the deck below. You can also see it directly on SlideShare here, where you can find the code to embed it elsewhere or download it as a PDF. As with the wireless trends deck, the data behind these slides is available as a paid service from Jackdaw Research. Please contact me if you are interested in this option.

Analysis of Q1 2014 cable, satellite and telco numbers

I’ve been gathering data on the major US cable, satellite and telecoms providers for the last few weeks, as they’ve been reporting earnings. This post compares their consumer financials – revenues, profits, ARPU, as well as their subscriber growth (shrinkage), and draws conclusions about the state of the market and prospects of individual players. It also provides some analysis of the likely impact of the announced merger between Comcast and Time Warner Cable and the rumored merger between AT&T and DirecTV.

A full set of diagrams and charts in addition to analysis is available in this slide deck on SlideShare (which is also embedded below).

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