As analysts scrambled to recalculate their year-end estimates for broadband subscriber growth after a worse-than-expected Q3, they might have to take out their calculators once again as video subscriber losses, once expected to accelerate as the year progressed, actually improved during the quarter and should continue that momentum for at least the next few years. 

The severity of the slowdown in broadband subscriber growth took some analysts by surprise in Q3, forcing most to rejigger their estimates for full-year growth. But video losses, which should spike for cable operators to about 2.4 million in 2021, are expected to slow as well, to about 1.98 million in 2025, per MoffettNathanson. At the same time, pay TV subscriber losses in general are expected to temper to about 4.3 million for the full year, according to Wells Fargo Securities media analyst Steven Cahall. That’s better than the 4.7 million he estimated were lost in 2020 and is tied in part to subscriber apathy as well as a sense that as streaming services continue to increase their prices, the wired bundle isn’t such a bad value after all.

Over the past few months, streaming service Disney Plus raised its monthly rate to $9.99, up from $7.99 when it launched in 2018. Hulu Plus Live TV said it would raise the monthly price of virtual MVPD service by $5 beginning on Dec. 21, adding that subscribers would get access to Disney Plus and ESPN Plus included. 

While no one suggests wireline video is making a comeback, its demise may not come as fast as first predicted. Cahall now sees pay TV subscriber losses reaching 4.7 million by 2024, while SVOD subscriber additions should decelerate from 5 million in 2020 to 1.3 million in 2024. 

Video’s Transition Phase

In an interview with CNBC’s David Faber on Nov. 18, Charter Communications chairman and CEO Tom Rutledge said that while pay TV still has its problems, improving video subscriber growth shouldn’t come as a total shock.     

“It’s a problem business in the sense that it’s a business in transition,” Rutledge said in the CNBC interview. “The cost of video has gotten really high ... It’s difficult from a pricing perspective to create value for a lot of customers. On the other hand it’s still the best product out there. … I think it’s still a business that we need to be in. I think it’s a value to our customers, [and] the rate of loss in the bundle will probably slow.”

Still, Rutledge said he sees the new “double play” bundled offering from cable as a broadband/wireless package instead of a broadband/video pairing. 

Rutledge reminisced back to 2004, when as CEO of Cablevision Systems he launched a wireline telephony product to compete with the big telcos, which were charging as much as $72 per month for service. Now, wireline phone service is priced at about $13 per month and cable has the lion’s share of that market. 

“The major share of that business has moved to our business,” Rutledge told CNBC. “I think mobile has a similar opportunity.”   

Depending on the researcher, broadband subscriber growth was between 630,000 and 726,000 new customers in Q3 2021, about half the increases of the same period in 2020 but in line with the tally from the prior two years. Pay TV video losses, on the other hand, were at  about -4.8%, better than the -4.9% of the prior year and on pace to reach 4.3 million for the full year (down 4.8%), a big improvement over the 4.7 million lost in 2020, according to Cahall‘s estimates.  

While total video subscriber losses are on a path to improve this year, the question remains whether that pace will accelerate, decelerate or stay the same. 

“It’s a tough dynamic to pick apart given the unknowns in large variables,” Cahall wrote in a note to clients. “We view potential price increases of pay TV bundles and how much incremental live content is heading to streaming either simulcast or exclusive as major swing factors.”

Sports a Leading Indicator

Cahall said sports could end up being the key determinator as to which way the video pendulum swings. So far, most major rights deals have adopted a hybrid approach to sports, with exclusive content on both linear and streaming platforms. At least for the near term it seems sports lovers will need pay TV for game content. 

“We don’t think ESPN will house its premier content on DTC [direct-to-consumer platforms] anytime soon,” Cahall wrote. “Disney and the rest of its legacy media peers are for now striking the right balance of keeping enough content on linear to drive higher affiliate fees while adding incremental content on streaming on a selective basis.”

Cord-cutting has been talked about for years, but didn’t really take a bite out of linear TV until 2019, when pay TV (cable, satellite, telco TV and virtual MVPDs combined) lost 3.8 million subscribers, compared to just 900,000 in the prior year, according to MoffettNathanson. Video subscriber losses continued in 2020 when the industry shed about 4.4 million, a combination of the pandemic and an increase in the number of major streaming services. 

MoffettNathanson agrees with Cahall that total video-sub losses should dip slightly to 4.3 million in 2021, and expects the slowdown to continue in 2022 (3.8 million losses), 2023 (3.3 million) and 2024 (3.0 million). In a research report issued on Nov. 30, MoffettNathanson saw access to sports and news programming as the deciding factors.  

MoffettNathanson predicts that there will be about 73.2 million pay TV customers in 2024, but sees the segment bottoming out at about 53 million subscribers. That is the number the researcher, along with telecom consulting firm Altman Solon, estimated are news and sports junkies, the stickiest segment for linear pay TV. Just when that floor will be reached is anyone’s guess, but will largely be determined by when and where distributors move more sports and news content over-the-top.

Some networks already have begun to move some sports content to OTT — NBC’s Sunday Night Football is on Peacock and CBS’s NFL games are simulcast on that broadcaster’s streaming service, Paramount Plus — but that hasn’t been enough to force sports lovers to make the switch. MoffettNathanson estimated that while pay TV subscribers (including vMVPDs) have declined by nearly 9 million since 2019, regular sports viewers actually increased by 2 million during the same time frame. A combination of the 2021 Olympic Games, legalized sports gambling and pent-up demand for sports after shutdowns likely drove that increase, but those conditions could change as leagues, teams and distributors move more and more content to OTT. 

“Meanwhile, the number of sports fans outside the linear ecosystem is rising, suggesting that sports on DTC services are driving incremental reach and viewership for the leagues,” MoffettNathanson wrote. “As such, we expect the leagues and media owners to become more aggressive in bringing sports to DTC platforms to broaden their reach beyond the pay TV base.”  

SVOD Saturation

At the same time, SVOD penetration is quickly nearing the saturation point. In his report, Wells Fargo’s Cahall estimated that SVOD penetration should rise by 1.6% per year, reaching 92% by 2024. He also predicted that the average number of SVOD products per household will rise from 1.7 in 2019 to 3.0 by the end of 2021, peaking at 4.2 per household by 2025.

Concurrently, traditional video subscriptions will fall at a slightly faster rate, Cahall calculated. He estimates that SVOD subscriber additions, 7.1 million in 2020, will dip to 5 million in 2021 and to 1.3 million by 2024. Pay TV subscriber losses, he predicts, will rise slightly from 4.3 million in 2021 to 4.5 million in 2022, 4.6 million in 2023 and 4.7 million in 2024. But that pace is dependent on the level of SVOD saturation and the pace of cord-cutting.

Cahall still expects a “healthy amount” of cord-cutting, a trend worth watching. As an SVOD service’s monthly charge is only about one-tenth of the average pay TV subscription, pricing will be a big factor.

“Ultimately, where content sits will answer a lot of these questions, in our view, but it’s worth considering that we are approaching untested levels of nearly full SVOD penetration,” Cahall wrote. ■

After an unprecedented 12-month run that saw broadband subscriber numbers reach record heights, the country’s top two cable operators urged investors to lower expectations for the current year as they focus on other avenues for growth.

Comcast was first out of the gate, reporting a fourth-quarter gain of 538,000 high-speed internet customers on Jan. 28. That was slightly below some analysts’ hopes for 550,000 additions, but it pushed the full-year gain to about 2 million, its highest total ever. Comcast warned investors that despite the strong growth — Comcast shattered subscriber addition records in the third and fourth quarters, driven mostly by pandemic-related stay-at-home orders — they shouldn’t expect more of the same in 2021. 

“High-speed internet customer additions remain healthy,” Comcast chief financial officer Michael Cavanagh said on a conference call to discuss Q4 results. “And we have all the pieces in place for 2021 to be a very strong year. We also have to remember that 2020 was exceptional on many accounts. And because of that, we view 2019, which was also very strong for us, as the more appropriate year against which to benchmark our performance.”

Not that 2019 was a bad year: Comcast added 1.4 million broadband customers in that year. At the same time, video customer losses doubled in 2020 for Comcast — a bit of a contrast to other operators that saw losses decline or, in the case of Charter Communications, become gains. Comcast lost a total of 1.4 million video subscribers in 2020, nearly double the 733,000 it shed in 2019. A return to those levels would be a welcome, although not quite feasible, outcome.

Video Gains at Charter

Charter ended the year with a net gain of about 19,000 residential video subscribers, rising to 56,000 if business customers are included. But it said it expects a return to video losses as the pandemic wanes. 

On a conference call with analysts on Jan. 29, Charter chairman and CEO Tom Rutledge said the video additions were a result of the company’s broadband growth.

“We had good results in video for two reasons,” Rutledge said on the call. “We had growth in connectivity and as a result of that, having market share shift to us from other video providers and they bought our broadband, we grew our video against a macro trend of declining multichannel video growth. That macro trend hasn’t gone away.”

Rutledge said he expects video subscribers to continue to decline across the industry in 2021, perhaps at a more moderate pace, while broadband growth won’t be the same this year as in 2020, which should pressure video growth.

“On the other hand, we’ve been able to grow with OTT products and smaller packages and we still have opportunities there,” Rutledge continued. “We’re forecasting our internal growth in those areas to continue to accelerate. So, the net of these two things is difficult to say, but I think we’ll do better than the industry in general, if you just look at multichannel video growth. Whether that will be positive or negative, I’m not sure.”  

ALSO READ: Broadband Drives Q4 Again for Comcast Cable

After a year when cable operators saw broadband demand increase as most Americans were forced to stay home for work and school as the pandemic rages on, a falloff in demand was expected. 

“The simple fact is that broadband results have been so good in 2020 that 2021 can’t possibly meet the same standard,” Moffett­Nathanson principal and senior analyst Craig Moffett wrote in a research note. “Comcast’s blowout fourth-quarter broadband growth put an exclamation point on what was already a year for the record books.”

While no one expects cable operators to duplicate 2020’s growth this year, many analysts see last year’s milestones as laying the foundation for other potential growth areas. For Comcast, that could be Peacock, its video streaming service. For Charter, with ongoing footprint expansion and success in recent wireless spectrum auctions, it could be a combination of broadband and mobile gains.

Peacock, launched on May 27, already has 33 million signups as of the fourth quarter. Moves are being made to add more content to the service and bolster its paid subscriber ranks. The latest: NBCUniversal struck a deal with WWE to make Peacock the new home to the WWE Network SVOD service and its programming, including WrestleMania and pay-per-view events. NBCU’s USA Network and Fox would maintain their exclusive rights to WWE programming like Monday Night Raw and Friday Night SmackDown, respectively. 

Peacock Feathers Comcast’s Nest

Wrestling isn’t the only exclusive programming for Peacock. In January, Peacock began streaming The Office episodes, after the former NBC stalwart ended a rights deal with Netflix.  

On the conference call, NBCUniversal CEO Jeff Shell noted that since Peacock began offering The Office exclusively on Jan. 1, viewership is higher than it was when the show was on Netflix. Shell said the show has had a halo effect for other Peacock programming.

“What’s happening is we’re seeing that people who are watching The Office on Peacock are watching lots of our other comedies,” Shell said. “So it’s really driving Parks and Rec and really driving Brooklyn Nine-Nine, amongst others. So there’s kind of an ecosystem effect.”

NBCU has also been steering sports onto the streaming service. In addition to the WWE, Peacock began streaming some English Premier League soccer last year and will beef up the sports lineup at the end of this year when NBC’s cable sports network, NBCSN, shuts down. 

“WWE is kind of a perfect property for us because it allows us to [put] thousands of hours of programming that were behind a paywall that we’ll now put on the free service of Peacock, which will not only enhance the brand of WWE, but we can monetize in advertising,” Shell continued. “We get the events that were behind a paywall that used to be pay-per-view can drive our $4.99 premium version of Peacock. … So I think the model that we’ve constructed here to really kind of leverage our existing linear businesses and drive advertising is working. And I think comedy, sports [are] two of the success stories certainly so far.”

In a research note, Bernstein media analyst Peter Supino wrote that while Peacock still lags behind other streamers like Netflix and Disney Plus  in terms of scale, “its first year seems emphatically ahead of plan in terms of signups (33M) and engagement.”

The addition of programming like The Office, a deal with Disney to split carriage of Modern Family, and hopefully the Summer and Winter Olympics over the next 13 months, could pose an opportunity to attract significantly more viewers. 

Later, Shell avoided saying NBCU’s linear cable networks would become part of Peacock, but hinted that streaming content could be as profitable as linear content.   

“Cable networks obviously are a big part of the business, they are still the biggest EBITDA driver, and I don’t expect that to change anytime in the near future. But we’re looking at the two revenue streams of the business — subscription and advertising — as one business, broadcasting, cable and Peacock,” Shell said. “We’re programming it as such, we’re selling it to advertisers as one platform as such, and so over time it will be harder and harder to distinguish between the profitability of cable networks and the rest of our television business because we’re looking at it as one business.” 

Peacock is still losing money. Comcast said the streaming service generated about $100 million in revenue but lost about $700 million in 2020. Comcast expects that deficit to increase to about $1.3 billion in 2021. But that doesn’t mean it will keep losing money for long.

Flex Could Have Muscles

The increasing importance of Peacock in Comcast’s overall strategy was not lost on MoffettNathanson principal and senior analyst Craig Moffett. In a research note, Moffett pointed to Comcast’s broadband-only product, Flex, and how that offering could become a key piece of the company’s overall strategic puzzle.  

“In a perfect world, Flex could become a second Roku,” Moffett wrote. “They’ve already got the right content partnerships, and they’ve already got a distribution partnership agreement with Cox. If they could get one with Charter, Flex would have a national footprint, a prerequisite, it would seem, for both national advertising and national retail.”

Comcast chairman and CEO Brian Roberts said on the Jan. 28 earnings call that at least part of Peacock’s success could be attributed to Flex. And the hope is that influence will continue across the product line.     

“We’re seeing [that] other programmers are approaching us with their content and seeing what both the X1 platform and the Peacock platform and this Flex platform can do for them,” Roberts said, and Comcast continues to look for ways to take advantage of the Flex platform and possible bundling opportunities. “I think we’ll have more to talk about throughout the year.” 

Charter doesn’t have a Flex-type product, although Rutledge had hinted in 2019 that he would be open to licensing Flex at some point. For now, though, it seems that the second-largest cable operator in the country is focusing on expanding its footprint and the reach of its mobile services. 

ALSO READ: Charter Q4 Broadband Adds Light at 246,000, But Video Losses Improve

Charter ended the year with 53.3 million homes passed, an increase of about 1.1 million from the prior year and a clear acceleration from 2019, when it added 969,000 homes. Comcast added about 1 million homes, ending the year with 59.7 million homes passed.

Moffett said in a research note that Charter’s edge-out plans will help keep the broadband business humming and also could beef up the wireless rolls.  

Charter added about 315,000 wireless customers in Q4, below consensus estimates of 351,000 additions but well above the Q4 2019 total of 288,000. Charter ended the year with 2.4 million Spectrum Mobile subscribers, more than doubling its 2019 mark of 1.1 million wireless customers.

Charter Bulks Up Wireless

While Spectrum Mobile isn’t profitable yet, Charter has been acquiring spectrum to help boost broadband growth and cut overall costs in wireless. Charter was the top bidder in the recent RDOF auction and has amassed a large block of CBRS licenses. Moffett noted that both Comcast and Charter have amended their MVNO agreements with Verizon Wireless. The additional CBRS spectrum should help Charter offload some of its wireless traffic from the Verizon network to its own network, reducing expenses. 

“To the extent that they can offload a meaningful amount of traffic from their MVNO agreement, they will be able to reduce their variable costs more dramatically,” Moffett said of Charter.

On Feb. 1, Charter said it would spend $5 billion ($1.2 billion from RDOF funds) over the next several years to build out broadband service to about 1 million homes in 24 states within its footprint, in addition to current edge-out programs.   

Rutledge said that over the next four or five years, CBRS could potentially help Charter offload as much as two-thirds of its wireless traffic from the MVNO, depending on several factors. 

CBRS can also enhance the quality of the service, Rutledge said which in turn would enhance the consumer experience.

“That’s an unstated opportunity going forward and hard to quantify, but it’s part of our strategy,” Rutledge said. 

Netflix stock, on a 70% run-up through August, has been on a retreat over the past two months as its subscriber growth has waned. And though a short bump after a planned rate increase helped goose the shares in early November, a combination of near saturation in the U.S. and a shift in focus toward more profitability could impact the stock even further. 

Netflix stock has performed well this year — it was up 48.4% between Dec. 31 and Nov. 10, when it closed at $480.24 per share. But since Sept. 1, when the stock peaked at $556.55, Netflix shares have declined nearly 14%. And as the company warns that subscriber growth will likely slow down in the second half of this year, euphemisms like “Netflix and chill” are taking on new meaning. 

In a research note, MoffettNathanson media analyst Michael Nathanson said after that impressive run, it is likely that Netflix shares will take a breather.

“While it is no surprise that Netflix stock has been on fire over the past few quarters, perhaps now, after posting underwhelming 3Q net subscriber adds of 2.2 million and citing a pull-forward effect in their guidance for the next couple of quarters, this is the time for Netflix’s stock to chill,” Nathanson wrote.   

The analyst stressed that he is in no way claiming that the Netflix growth engine has stalled, and said he expects the streamer to continue to grow revenue, subscribers and earnings over the long term. 

“Our issue is the stock has clearly benefited from COVID-related tailwinds, emerging as a winner among a tall pile of relative losers,” Nathanson wrote. “That could all change in the final quarter of this tumultuous 2020 and into the early quarters of 2021 if some cyclicality impacts the market, breathing new life into the stocks weakened by the pandemic and the economy while perhaps hindering the winners’ upside during these unprecedented times.” 

Netflix added about 2.2 million paid new subscribers in Q3, less than one-third of the 6.8 million it added in Q3 2019 and just below the 2.5 million it had projected. The decline came after two straight quarters of record subscriber growth — 15.1 million additions in Q1 and 10.7 million in Q2 — fueled by the pandemic. Netflix had warned that the second half of the year would see slowing growth: Its fourth-quarter target is 6 million additions, lower than the 8.8 million added in Q4 2019, but enough to push the company past the 200 million subscriber milestone to 201.5 million global paying customers.

Netflix’s domestic subscriber growth has been slowing for several quarters. It added 180,000 new paid subscribers in the U.S. and Canada in the third quarter, down from the 610,000 it added in the same period last year. The slowdown was even more pronounced when the pandemic months are taken into account. Netflix added 2.9 million and 2.3 million domestic customers in Q2 and Q1, respectively, the height of lockdown orders associated with COVID-19. 

Recovery and Reversion

“The state of the pandemic and its impact continues to make projections very uncertain, but as the world hopefully recovers in 2021, we would expect that our growth will revert back to levels similar to pre-COVID,” Netflix said in its Q3 note to shareholders. “In turn, we expect paid net adds are likely to be down year over year in the first half of 2021, as compared to the big spike in paid net adds we experienced in the first half of 2020. We continue to view quarter-to-quarter fluctuations in paid net adds as not that meaningful in the context of the long run adoption of internet entertainment, which we believe is still early and should provide us with many years of strong future growth as we continue to improve our service.”

Shortly after the Q3 results were released, Netflix initiated its second monthly rate increase in two years. Consumers on the standard plan would see rates climb to $13.99 per month from $12.99, while premium plan subscribers would pay $17.99 per month, up from $15.99. Entry-level rates would stay the same at $8.99.

Wall Street shrugged the rate increases off just as it had the slower subscriber growth. Netflix stock was up about 5% in the two days after the announcement, rising from $480.24 on Nov. 9 to close at $490.76 each on Nov. 11 as investors were encouraged by the rate hike and its prediction that it will add about 34 million subscribers in 2020, soundly beating the old mark of 28.6 million additions in 2018. That rise didn’t last too long though, as the stock fell back to about $480 per share on Nov. 13. 

At the same time, other direct-to-consumer streaming services are seeing their subscriber growth wane as well. Disney Plus added 16.2 million subscribers in fiscal Q4, less than the 24 million it added in fiscal Q4. While that could be due to a possible pull-forward of some subscribers in the early days of the pandemic, with 73.7 million global customers, the Disney streaming service is rapidly gaining ground on the larger Netflix. At its current pace, Disney Plus should end the calendar year with nearly 100 million customers less than 14 months after its launch, a milestone it took Netflix about 10 years to reach.

Disney’s other streaming service, Hulu, added about 1.1 million customers in fiscal Q4, with about two-thirds of those adds coming from virtual MVPD Hulu Plus Live TV. 

In a research note, Nathanson wrote that the slowing subscriber growth at the Disney services could mean that they will need to boost their content spend. 

“Given the increasing competition in original content that is being funded by the likes of Netflix, Amazon Prime Video, Apple TV Plus, HBO Max and soon-to-be-launched Paramount Plus, it appears Hulu is in need of a massive original content spending boost of its own, which is now the table stakes in the general entertainment DTC space,” Nathanson wrote.  

Further weighing on Disney Plus subscriber growth is the Nov. 12 expiration of a promotion allowing Verizon Wireless’ unlimited data customers to receive the service gratis for 12 months. Several million customers were believed to have taken advantage of that promotion and many could drop the streaming service.  

Even if that doesn’t happen, Netflix still has a strong advantage over the competition: With 195.1 million global subscribers (73.1 million in the U.S. and Canada) it still dwarfs Disney and HBO Max combined. 

And not every analyst predicts a big subscriber growth slowdown. Bernstein media analyst Todd Juenger wrote in a late October note to clients that he expected the pandemic’s impact to last longer, increasing consumer demand for streaming video and reducing the amount of content available from other sources because of production shutdowns. 

Originals a Strength

Netflix’s slate of original content is strong, Juenger added. The streamer expects more originals each quarter in 2021 than this year.  

“We believe there is a much greater chance of over-delivery, vs. under-delivery, over the near/mid-horizon,” Juenger wrote.

But with costs rising — Netflix spent about $15 billion on programming in 2019 and is expected to spend more than $36 billion annually on content by 2035 — and only one major revenue stream (subscription fees), rate hikes are inevitable. As the subscriber base continues to grow — at 73.1 million paid members in the U.S. and Canada, Netflix has about 55% of the TV homes in both countries — and with more streaming services competing for attention, the SVOD pioneer may have to look for other ways to wow investors.

 “After a huge 2020 for sub growth, we think the new Netflix narrative is going to focus on how profitability scales,” Wells Fargo Securities media analyst Steven Cahall wrote in a note to clients. “The flywheel is well understood, but competition also abounds both in video streaming and entertainment more broadly. That leaves a lot of room for debate about what a Netflix sub is ultimately worth.”

In his report, Cahall calculated the lifetime value of a Netflix customer, adding that over the next 15 years, its average customer would be worth about $719, compared to the -$106 he estimated a Netflix customer is worth in 2020. 

“[W]e see the story transitioning along with Netflix’s maturity to less about quarterly/annual sub gains and more about operating leverage through the business model,” Cahall wrote. “The recent Q3 miss on net adds but significant positive surprise on 2021E FCF is a great example of this shifting narrative.” 

Netflix has operated its business at a loss of $1 to $3 per subscriber between 2015 and 2019 as it concentrated on building global scale, Cahall estimated. This year (2020), when the service is expected to cross more than 200 million global paid customers, should be the year it turns the corner. 

With modest paid customer growth (churn at around 5% per year), annual rate increases of about 5% and a reduction in content spend from 60% of total revenue to about half of that by 2035, Cahall estimates that Netflix could boost profitability from $10 per subscriber in 2020 to $30 per subscriber by 2025, rising to more than $100 per subscriber by 2035.

“Taking the medium to long-term view, it’s now more of a story about the expected level of return that Netflix can achieve,” Cahall wrote. 

After a second quarter that saw the top publicly traded cable companies report record broadband growth fueled mostly by stay-at-home orders during the pandemic, analysts are expecting a mixed third quarter, as video losses pick up and the torrid pace of high-speed data additions begins to slow. 

Pay TV shed about 1.8 million video customers in Q2, a record that was fueled by a combination of the pandemic, heavy satellite losses and the years-long shift toward streaming video. Broadband reached record highs in Q2 — Charter Communications alone added 850,000 high-speed internet customers in the period — again, driven by pandemic-related issues. While most analysts don’t expect that pace to continue, they do see strong gains for most operators.

Sanford Bernstein media analyst Peter Supino predicted Comcast, Charter Communications and Altice USA will add about 1.1 million high-speed data customers combined in the period — down from the 1.3 million added in Q2. At the same time, he expects their combined video subscriber losses to be about even with the prior period. 

Supino expected Comcast to add about 580,000 internet customers, up from the 340,000 it added to the rolls in Q2. Last month Comcast chairman and CEO Brian Roberts said he expected strong Q3 broadband gains for the company at the virtual Goldman Sachs  Communacopia conference, saying that Comcast had already added more than 500,000 broadband customers with less than a month to go in the quarter. 

Content Pressures at Comcast

At the same time, Comcast, which will report Q3 results on Oct. 29, has been under pressure from its programming business. In late September, activist investor Nelson Peltz’s Trian Fund Management said it had accumulated about $900 million worth of Comcast stock and has had “constructive discussions” with company leaders, but wouldn’t say what its intentions are. In the past, Peltz has pushed for board seats and asset divestitures in the companies he has taken a stake in, but Trian’s interest in Comcast is small (0.4% of outstanding shares) and the likelihood it could force meaningful change without a nod from Roberts (who controls 33% of the company vote) is low. 

Supino has been a big proponent of Comcast divesting its NBCUniversal and Sky programming units by spinning them off to shareholders. In a June 30 note to clients, he noted that Comcast stock “is demonstrably undervalued and that the pendulum of investor confidence now underappreciates Comcast's strategic intelligence and commitment to long-term value creation.”

Comcast, to be a great stock instead of just a good one, needs to rethink its content strategy and structure, he added.  

“The NBCU television, film and cable network businesses, which Comcast bought well and for good reasons in 2009, have more recently diluted shareholder returns through revenue shortfalls, expense growth, and deteriorating expectations,” he wrote. “Sky, for which Comcast paid a stunning premium in 2018, fell badly short of expectations even before COVID-19 ravaged it.”

Programmers in general have been battered by the pandemic and the move to streaming. Evercore ISI media analyst Vijay Jayant wrote in a research report last week that although ad spending trends bottomed out in Q2, he expected another 14% decline in Q3, driven by an uncertain upfront and falling volumes. The continued decline of pay TV subscribers is also expected to affect affiliate fees, which he predicted would continue to deteriorate, despite any lift caused by the return of sports. Jayant estimated that traditional pay TV distributors would lose about 2 million subscribers in the period, with virtual MVPDs like Sling TV, on a downward path over the past few quarters, would add about 1 million customers. 

While both analysts expected strong gains on the broadband side of the business, Barclays Research media analyst Kannan Venkateshwar warned that robust growth may not last for long. 

In a research note, Venkateshwar wrote that although new-home growth reached a record 2.28 million in Q2, that isn’t likely to be repeated, and broadband providers will have to count on projects to build out their footprint to drive high-speed data penetration. In addition, federal programs to boost high-speed internet availability in rural markets should also help drive the numbers.

“However, we believe that despite these factors, the second derivative of cable unit growth may start slowing in the next two to three years,” Venkateshwar wrote. “More immediately, growth seen in 2020 may also be more difficult to replicate in 2021 given the unique circumstances as well as the segments driving this growth.”

Broadband to Cool a Little

Cable operators should add about 4.3 million broadband customers in 2020, Venkateshwar noted, up substantially from the 3.1 million added in 2019. But he expects the pace of those additions to slow down to 3.1 million in 2021 and to 2.4 million by 2025. 

Supino is more optimistic, adding that while Charter won’t have the same performance it had in Q2, Q3 should be a period of strong growth. He predicted Charter would add 450,000 broadband customers and lose about 200,000 video customers in Q3. At Altice USA, broadband additions should be at about 60,000 in Q3 (down slightly from the 70,000 added in Q2), according to Supino. But the analyst added that he sees upside potential in its more rural Suddenlink Communications unit, which should be positively impacted by the RDOF program and other government efforts to bridge the rural digital divide.

“In the near term, we expect positive 3Q results to help rebuild trust with investors as we believe the underlying fundamentals bottomed in early 2020,” Supino wrote. “We believe that core residential revenue growth, sequential advertising recovery, a political tailwind and structural cost reductions all suggest compelling upside for 2H EBITDA.” 

Cable distribution stocks, battered by the fear that a prolonged pandemic would wreak havoc on their businesses, proved their resilience once again by clawing back from their low points in March to strong gains in Q2. And though some analysts expect the tide to rise in the second half of the year, they warn of a potential broadband pullback as people return to work could hurt the stocks in early 2021.

The four major cable distribution stocks — Comcast, Charter Communications, Cable One and Altice USA — all posted strong Q2 gains; Charter led the way with a nearly 17% gain in the period. The increase was a welcome change from the first quarter, when every stock in the sector hit new 52-week lows.

FBN Securities media analyst Robert Routh said COVID-19 helped cable on the broadband side because customers were working from home and, in some cases, their employers helped pay for higher-speed tiers. That could change once people start returning to offices.

“I don’t think you have to worry about it this year,” Routh said. “But after that, that’s what I’m worried about.”

A Case-by-Case View

MoffettNathanson principal and senior analyst Craig Moffett said investors are no longer looking at cable as an individual market sector. “There is no monolithic ‘cable sector’ anymore,” Moffett said. “Each company now has a different story to tell.”

For example, he noted Charter outperformed its peers in Q2 after showing better-than-expected video and broadband results, while vertically-integrated Comcast shares, despite a strong broadband showing, grew at a slower pace. Pure-play cable operators Altice USA (up 1.1%) and Cable One (up all year despite the pandemic), had varying results.

“Comcast has lagged Charter badly, not because its cable business isn’t as good, but because the rest of its portfolio is an albatross,” Moffett said. “Altice has struggled because it is so much more mature … making it harder to forecast long-term growth. And Cable One is just so inexplicably overvalued that it doesn’t really get discussed in the same conversation.”

Comcast, which still relies on cable distribution for most of its revenue (56% in Q1), was hit hard by declines at its NBCUniversal content unit. The rapidly eroding advertising market, declining pay TV subscriber rolls (which means less affiliate fee revenue for programmers) and the rise in streaming services have all helped batter the content sector. And though NBCU launched its own streaming offering (Peacock) in July to strong reviews, some analysts have called for Comcast to separate or spin off the content business to unlock greater value on the distribution side.

“A lot of investors I have talked to who own Comcast are upset because they think they would have done much better if there was some way to value the two separately,” Routh said.

Routh isn’t alone in that thinking. Sanford Bernstein media analyst Peter Supino wrote an open letter to Comcast chairman and CEO Brian Roberts at the end of June, pleading for a spinoff of NBCU and British satellite company Sky. Supino argued that spinoff would result in a doubling of the price of a pure-play cable Comcast stock in three years.

Content companies are facing growing uncertainty as streaming services proliferate and traditional pay TV distributors, which have pulled most of the freight regarding affiliate fees, lose subscribers.

Content Headwinds

That perception has proven itself in the stock prices of even the biggest programmers. While the programming sector improved its position during Q2 — five of the six stocks in the segment rose above their Q1 lows — many have just barely squeaked by.

The biggest, The Walt Disney Co., finished Q2 up 15.4% to $111.51. But even with one of the most successful streaming services (Disney Plus, with about 55 million global subscribers in June) Disney stock was still far short of its Dec. 31 close of $144.63. AMC Networks, down 38.5% in Q1, fell another 3.8% in Q2. Other stocks like ViacomCBS, which fell 66.6% in Q1 to $14.01, gained more than 60% in Q2. But at $23.32, it was still nearly half the price it was at the beginning of the year.

Wells Fargo media analyst Steven Cahall said in a note he expects Disney Plus to climb to 62 million global subscribers in fiscal Q3 and to 81 million by year-end. But he believes that torrid pace will slow down, estimating 95 million subscribers by 2025.

Even Disney Plus’s exponential growth won’t be able to stem the bleeding elsewhere. Cahall estimates that total revenue for Disney, which reports results on Aug. 4, will fall 39% in fiscal Q3 to $12.4 billion.

Cahall’s caution is proven in his $118 per share 12-month price target on the stock: it closed at $118.12 on July 23. He expects shares to “remain range-bound as very strong content assets offset significant end-market uncertainty.”