Bottom Feeding

By GlacierNPS -, CC BY-SA 4.0,
(Image credit: By GlacierNPS -, CC BY-SA 4.0,

The first shocking thing that came out of MoffettNathanson principal and senior analyst Craig Moffett’s latest quarterly cord cutting monitor was that traditional pay TV companies have lost more than 1 million video subscribers for nine straight quarters. The second most shocking thing is that nobody cares.

There was a time when video subscriber losses were seen as a sign that the cable business was fading away, to be replaced by whatever technology was the latest thing, much like cable pushed broadcast aside in the 1980s and 1990s. But thanks to broadband, current cable investors are hoping for continued video losses -- as long as they coincide with high-speed internet gains -- because they mean higher margins for the overall business.

Moffett noted that Q3 had all the signs of cable video customers bottoming out -- subscribers fell at 4.1% rate, about the same as the previous period. Overall traditional pay TV penetration dipped to 61% -- its lowest point since 1994 and well below its peak of 88% in 2010. At the bottom or near bottom, cable losses will either get better or, more likely, “less bad,” according to Moffett, as the base whittles itself down to a core of sports enthusiasts and rural customers with fewer alternatives.  

In his latest cord cutting report, Moffett noted that cable, satellite and telco TV lost 1.45 million subscribers in Q3, or a decline of about 7.4%. That was actually an improvement over the previous quarter, where the rate of decline was about 7.7%.  

Satellite TV service providers Dish Network and DirecTV were responsible for 863,000 of the total subscriber losses in the quarter, and telcos made up about 155,000 of the decline. Cable operators actually fared a little better in Q3 on the subscriber front -- Moffett estimated the sector, which includes privately held companies, lost about 430,000 in the period, slightly better than its year-ago numbers. Charter Communications, which added 53,000 video customers in Q3 (and 112,000 in Q2) helped ease the decline. 

On the upside, virtual MVPDs like Sling TV, Hulu Plus Live TV, YouTube TV and others saw subscriber gains in the period, despite each raising their rates during the period. According to Moffett, vMVPDs added about 1.5 million customers in Q3, meaning that overall pay TV could have shown a gain in subscribers, or at least broke even for the quarter. Others like Leichtman Research Group have predicted that total pay TV customers (MVPDs and vMVPDs) pushed the sector into the black during the quarter. 

What makes that even more remarkable is that the vMVPDs gains came after significant increases in rates. YouTube TV raised its monthly charges by 30% in Q3 -- from $49.99 to $64.99. Hulu Plus Live TV didn’t raise rates in Q3 but is expected to hike prices by $10 per month to $65 beginning in December.

According to Moffett, YouTube added about 400,000 customers in Q3, twice the 200,000 additions it had in the previous quarter. Hulu Plus Live TV added 700,000 customers in Q3 compared to 100,000 additions in Q2.      

But Moffett warned that the gains aren’t likely sustainable. The third quarter was when every major professional and college sport returned to the airwaves, and a contentious Presidential election kept many tethered to their TV sets. 

“Against that backdrop, it’s not surprising that the rate of decline slowed,” Moffett wrote. “That set up won’t be repeated.”  

He added that the forces that had chipped away at the traditional pay TV subscriber base -- rising sports costs and the shift of non-sports content to on demand and streaming platforms -- aren’t going away either.

“That the improvement came during a quarter when broadband and even wireless phone subscriptions also surprised to the upside only raises more doubts about sustainability,” Moffett wrote. “And, lest we get carried away, the rate of decline, particularly for traditional video distributors, only slowed a little.”

So that will likely mean an eventual return to increased video subscriber churn in later quarters, but you know what? Nobody cares. In particular, cable investors really don’t care about video anymore, evidenced by the rise in the stock prices of the major publicly traded cable companies. 

Related: Wireline Broadband Just Had Its Biggest Growth Quarter in Over 11 years 

Since Oct. 29, when Comcast reported its Q3 results -- losing 273,000 video customers but adding a record 633,000 broadband subscribers -- the stocks as a whole are up a collective 14%. 

In that short time frame Comcast shares have risen 14.1% to $49.14 from $43.06; Charter is up 11.5% to $642.44 from $576.00; Altice USA gained 19% to $31.52 from $26.40; and Cable One increased 15.1% to $1,981.11 from $1,721.72 per share. I would hazard to guess that the vast majority of those increases were due to rising optimism about broadband growth, not because video customers are jumping ship at a less alarming pace.  

Margin growth is the new mantra for cable companies, and has been for the past several quarters. The three major publicly traded cable companies -- Comcast, Charter Communications and Altice USA -- each boosted margins to 42.7%, 38.5% and 46.3% in Q3. At Cable One, which began focusing on broadband over video service in 2013, Q3 margins were 51.4% compared to 49.1% in the prior year, tops in the business.

Moffett had done a report last year looking at the possibility of 50%-plus margins in the cable business, fueled by broadband increases, and what that could mean for valuations.  The pandemic has only proven that broadband is a necessity, and cable operators are moving to bring service to as many people as they can, by extending fiber in their existing footprints, to participating in federal RDOF auctions to fund extending wireless broadband service to rural areas. So whether video subscribers hit bottom or not, cable operators should continue to feed nicely as broadband rises to the top.