Cable operators appear poised for a strong third quarter on the heels of Comcast’s stronger-than-expected results, with satellite TV continuing to slide.

Comcast outpaced most analysts’ expectations by adding 32,000 basic video subscribers in the third quarter — its best Q3 showing in a decade and well above consensus estimates of about 1,000 customer additions.

The performance helped to solidify what many analysts who follow the sector have been saying for a while: Cable is king, for now.

Comcast’s performance in light of a declining overall pay TV customer base shows cable is taking back market share. According to MoffettNathanson principal and senior analyst Craig Moffett, that performance was largely driven by the success of its X1 platform — now available in 45% of its footprint — and continued strength in broadband. Comcast added 330,000 broadband customers in the third quarter, its best Q3 performance in eight years.

CHARTER, ALTICE ON DECK

While other operators aren’t expected to fare quite as well, they are expected to show improvement on both the video and broadband front.

Charter Communications and Altice USA, parent of the former Cablevision Systems and Suddenlink Communications, are expected to release their Q3 results on Nov. 3 and Nov. 10, respectively, the latter as part of Altice N.V.

Analysts generally expect marginal video-subscriber losses for Charter — ranging from about 20,000 to 30,000 customers — but with momentum building later in the year.

The same holds true for Altice USA. Pivotal Research Group CEO and senior media & communications analyst Jeff Wlodarczak expects strong cash-flow growth from the U.S. cable unit, fueled by cost efficiencies, a $5-per-month price hike for data service at Suddenlink and continued cost-cutting by the Optimum (formerly Cablevision) operations.

Wlodarczak estimated that revenue-generating units, a combination of voice, data and video customers, will decline by 25,000 for Suddenlink and by about 30,000 for Optimum.

At Charter, Morgan Stanley media analyst Ben Swinburne expects more churn as customers roll off of legacy TWC promotional pricing, leading to a loss of about 34,000 video customers in Q3.

Charter will add about 390,000 broadband customers in the quarter, well above the prior period gain of 236,000 subscribers.

Charter continues to integrate Time Warner Cable and Bright House Networks operations — the deal closed in May — and Swinburne believes that after a slight early hiccup, a strong growth trajectory should continue. “We continue to believe Charter shares offer investors a rare levered equity growth story, particularly given the visibility into that growth and capital allocation for a company of its size,” he wrote.

Swinburne said recent results — in the second quarter, video losses improved to 152,000 from 170,000 in the year-earlier period, and revenue and cash flow grew by 6.6% and 9%, respectively — reaffirms his view that Charter “can successfully implement the strategy it has proven out over the last four years on its now-larger footprint.”

Overall, cable should have a good quarter on the subscriber front. Swinburne estimated that MSOs should collectively lose about 20,000 video subscribers, amended from the 52,000 he predicted earlier when he believed Comcast would lose 8,000 customers in Q3.

If cable is to be the king for the period, though, Telsey Advisory Group media analyst Tom Eagan pegs Dish Network as a pauper.

DOWN ON DISH NETWORK

Dish is coming off a string of subscriber losses — it shed 28,000 in the first quarter and 281,000 in Q2 — and the third quarter is expected to be no different. Eagan expects Dish to shed about 125,000 customers in the third quarter, ending the period with 13.3 million subscribers.

“Dish’s business model is proving increasingly unsustainable,” Eagan wrote in a research note. While cash flow will likely increase 20% for the year, that is due more to easy comparisons with 2015. Even Sling TV, which is expected to end the year with about 700,000 customers, according to Eagan and has been the main focus of the company, could be impacted by AT&T’s over-the-top offering, DirecTV Now. AT&T said it plans to launch DirecTV Now in November at $35 per month for more than 100 channels. Sling TV sells at $20 per month for more than 25 channels.

Swinburne was equally down on Dish’s prospects — he predicted it would lose about 155,000 subscribers in Q3 and estimated it would shed between 650,000 and 660,000 subscribers per year through 2019, partially offset by average annual gains of 240,000 to 245,000 customers for Sling TV.

“We expect these trends to continue over the medium-term, particularly given cable’s investment in its product and the likely launch of new offerings in 4Q16 (DirecTV Now) and 1H17 (Hulu),” Swinburne wrote.  

Sen. Claire McCaskill (D-Mo.) slammed cable operators for customer service at the opening of the Senate Permanent Subcommittee on Investigations hearing on customer service and billing.

McCaskill released a report outlining the issues addressed and problems discovered related to a year-long investigation and based on information supplied by MVPDs. "All of the companies in this investigation have increased their prices since 2011, with the cost of some packages
increasing by as much as 33%," said the report, "while all of the providers notified customers of upcoming price increases, this notification was not always effective."

Related:Senate Report Cites Charter, TWC Overcharges

She also narrated a "nightmare" customer service call she recently placed to try to get a fee removed from her bill, suggesting she was given the runaround before a customer retention rep took various steps to keep her from dropping the service. (She got $120 bucks in credits and cancelled a $7.99 fee.)She said the industry had a long way to go to cure its customer service problems. Most of the witnesses conceded the same, but said they were working dilligently to improve.

The first witness out of the gate was Tom Karinshak, SVP, customer service for Comcast, who acknowledged that Comcast and the industry in general have not always made customer service the priority it should have been, adding: "I am sorry for that."

Renewing distribution deals with major programmers remains a focal point for the National Cable Television Cooperative, but the group’s priorities are shifting as its members — primarily small and midsized independent cable operators — continue to face rising programming costs and blossoming consumer demand for over-the-top content.

“We are accelerating our efforts around creating OTT deals for our members,” said Rich Fickle, the CEO and president of the NCTC, which inks programming and equipment deals for nearly 1,000 U.S. operators, a number that will likely rise as the co-op looks to add Canadian pay TV firms.

The OTT part of the plan is to “seek alternative content models for video” that can also lower costs for set-top boxes and other types of consumer premises equipment, Fickle said.

The general plan is to find new sources of content, accelerate the enabling of video-on-demand services (many NCTC members didn’t invest in VOD or don’t have a strong offering today), establish more flexible packaging and, lastly, to ensure all content is delivered in a “super bandwidth-efficient” manner.

The co-op is open to working with existing programmers on the initiative, but is also looking for new content sources, Fickle said.

“It’s not a toe-in-the-water thing,” he said. “It will take a lot to get all of this organized, but it’s one of two major initiatives for us in 2015.” The other is getting those aforementioned big carriage renewals salted away, Fickle added.

TIGHTENING TIVO TIES

Separate, but connected to the initiative, is the NCTC’s recently struck agreement with TiVo, which has built an operator-optimized platform that weaves a provider’s traditional video services with OTT fare from such companies as Hulu and Netflix.

TiVo has been successful at notching deals with midsized MSOs such as RCN, Mediacom Communications, Suddenlink Communications, GCI and Grande Communications. The NCTC deal will make TiVo more economically attractive to a broader range of co-op members, Fickle said.

“They’ve built over time a pretty good product,” Fickle said of TiVo. “But the problem with any of those advanced platforms that are trying to service the traditional QAM worlds is that it’s pretty expensive.”

The TiVo-NCTC plan is to provide a standardized, more templated technology approach with shared integration costs. Additionally, they’ll offer a back-office and interface solution that will hook into multiple billing systems, reducing some of those integration costs.

“[The agreement] was driven around an initiative to drive a much lower cost structure for NCTC members to get into TiVo,” Fickle said.

Video-cost pressures have taken a toll on cable providers, especially the co-op’s smaller members. Last month, the American Cable Association, citing NCTC figures, told the Federal Communications Commission that content costs were a major factor in the shutdown since 2008 of 1,169 small cable systems serving more than 55,000 customers (including 91 system closures last year).

As smaller pay TV operators focus more heavily on lucrative broadband services, some might exit video altogether, or perhaps offload the management of their TV business, to keep costs in check for a product with shrinking margins.

Fickle said he believes that his members plan to stay in the video business for the long term, though.

VIDEO STILL MATTERS

“Video is important even if your primary focus is on broadband,” he said. “Video still is an essential offering in their quiver of services.”

Besides, given the rising popularity of OTT, “you’re in the video business even if you’re just a broadband provider.”

The NCTC has been meeting with companies that could provide co-op members with a national video platform that could help to subsidize the costs, Fickle said, though he won’t identify potential partners at this point.

“We’re acting as a catalyst and will continue to act as a catalyst to bring partnering options to our members,” Fickle said.

Kansas City-- Finding a small cable operator complaining about high programming costs at the Independent Show is easier than finding a barbeque joint in this city.

But a group of analysts tried to persuade the cable faithful here that programmers shouldn’t be the focus of their fear and ire…Silicon Valley should be. 

The panel, “Wall Street Update for Main Street MSOs,” was featured at The Independent Show, the annual confab for small and mid-sized cable operators hosted by the American Cable Association and the National Cable Television Cooperative

Indeed, far from carping about increased programming costs, cable operators should feel good about their business. New digital entrants destroyed the newspaper, music and Yellow Pages business, but the cable industry has largely avoided the mass migration of subscribers and revenue to new digital entrants. 

“This is the only industry to date that has been able to fight the onslaught of digital platforms, and so far no leakage”  said Laura Martin (pictured), a managing director at Needham & Co. -- a testament to the collaborative relationship between cable operators and programmers. "If that fractures, said Martin, "seventy percent of gross revenue will disappear.”

Overall viewing of TV content on more devices in the home is up, Martin said, which should provide more cover on price increases. In round numbers, cable’s $75 billion of subscription revenue, in addition to $75 billion in advertising revenue, is up roughly 20% over the past five years.  Moreover, “all those consumers that are whining to you that they can’t possibly pay more money are paying another $3 billion to Netflix and another $1 billion in subscription fees.” 

“You’ve got a better mousetrap – it’s just a question of execution,” said Naveen Nataraj, a senior managing director at Evercore Partners. 

Martin suggested the operators in the room think more holistically about their business. True, video margins are getting squeezed, compared to broadband margins, but video content, in not so many years, will be moving to toward a more interactive, real-time experience. Cable operators have a strategic advantage with the double bundle – and far better discovery than online sites such as YouTube.

“You should think of your video and broadband product as integrated” because of interactive possibilities around the corner…”only you can do those fast speeds two way.”  “Keep the bundle… the bigger the bundle the better,” Martin said.

“These Silicon Valley companies are much more threatening enemies to you than your content companies are,” said Martin. Google, for example, has 50,000 employees and $55 billion in revenue last year with $20 billion in free cash flow. “They lose money on Google Fiber and they don’t care.”  Their intent is to disrupt and they have “plenty of money to play with” 

All disruption starts at the low end where there’s no economics and in time it moves up into the profit pool, Martin said. Google Fiber is “losing a fortune”  trying to get cable to invest in higher speeds.  “They want free access to fast speeds so they can innovate and deliver things over your pipes for free… they’re coming after you and they have big teeth…”