Jeff Wlodarczak, principal and senior analyst at Pivotal Research Group, has put out a bullish new report on Netflix that forecasts more subscriber growth and higher average revenue per subscriber.

Wlodarczak also boosted his target price for Netflix stock by $65 to $765 a share — among the highest estimates on Wall Street.

“Our positive investment view remains unchanged,“ he said. “Netflix has won the streaming wars and their continued strong subscriber/ARPU [average revenue per user] and free cash flow generation should drive the shares higher.” 

Wlodarczak said he expected Netflix to add 19.5 million subscribers this year, up from a previous estimate of 18.2 million. That would bring total Netflix subscribers to 356 million.

He forecasts ARPU to hit $14.37 per subscriber, up from $14.15. 

“We expect another solid result in 1Q as Netflix highlights its ability to grow even while taking material price increases,” Wlodarczak said. 

“Netflix continues to be a strong absolute and relative value to its video entertainment peers for consumers, which combined with a strong content slate, the positive effects of ad-supported and its competition (mostly) pulling back on content availability (and benefits from former piracy monetization) sets Netflix to continue to generate solid subscriber growth.”

Wlodarczak wasn’t as bullish on other streamers.

“We believe other streaming players/media players will have no choice but to continue to sell their premium library content to Netflix to offset their own poor returns in streaming (and to tap into NFLX’s approximately 800 million global viewers.”

Working with Netflix helps other media companies increase the value of their content. For example, Suits became a bigger hit when it started streaming on Netflix. And the release of the film Dune 2 got a boost when the first Dune film streamed on the platform.

Access to other media companies’ premium content “enhances the value of Netflix’s service, allowing them to drive higher subscriber growth, reduce churn and increase ARPU,” he said.

Analyst Jeff Wlodarczak of Pivotal Research, a Netflix bear who two weeks ago warned that investors should sell because there were risks in the streamer's embrace of a lower-priced ad tier, has turned very bullish, flashing a “buy” signal.

In a research note Wednesday, Wlodarczak forecast that Netflix stock could soar to as high as $375 a share, higher than most other Wall Street predictions.

Netflix shares were up more than 3% to about $301 in midday trading Wednesday.

Wlodarczak said he changed his tune after Netflix’s upbeat third-quarter earnings report, which reversed the company's stock price plunge and sent it moving higher.. 

The analyst said he increased his forecast for net new 2023 subscribers from 5.5 million to 15 million (the Wall Street consensus is 12.5 million). He said the new forecast is based on the expectation that Netflix will be successful at converting people sharing passwords into paying customers and the attractiveness of the new low-priced ad-supported tier.

“Netflix  stock appears to be a relatively attractive place for investors to be amidst major slowdowns in digital advertising (Netflix  should be able to lever pirate conversion and ad supported to grow in virtually any environment),” he said. “While competition is heating up Netflix still provides the most unique and powerful streaming experience globally with a reasonable path to accelerate subscriber growth over at least the next year."

Wlodarczak added that he thinks CEO Reed Hastings will look to sell Netflix ( most likely to Microsoft) as early as 2024. ■

Cable operators are expected to show better subscriber trends in the upcoming quarters, but forecasts suggest broadband additions will continue to soften, weighing on the stocks.

Broadband growth has been slowing for about four years. But it has become more pronounced in the past 12 months, as cable operators saw their high-speed data additions slow to 2.7 million in 2017, down from the 3.3 million they added in 2016, according to Leichtman Research Group. Broadband still commands the biggest piece of the subscriber pie for the top two cable operators: Comcast had 22.4 million video and 25.9 million broadband subscribers at the end of 2017, while Charter Communications had 16.95 million video and 23.9 million broadband customers in the same period.

Comcast, Charter and Altice USA are all expected to release quarterly results in the next few weeks, with Comcast first out of the gate on April 25, followed by Charter on April 27.

Projections show Charter will improve its video losses in the first quarter, shedding about 19,500 video customers in the period, compared to a loss of 89,000 in the prior period, according to Morgan Stanley media analyst Ben Swinburne. While cable flirted briefly with video subscriber gains — Comcast was the first cable operator in a decade to finish the year (2016) with positive video customer growth (161,000) — that isn’t expected to continue. Charter, however, is set to reap the benefits of the winding down of its integration with Time Warner Cable, even though, as Evercore ISI media analyst Vijay Jayant put it, “video and phone markets continue to shrink, while competitive intensity is increasing somewhat in broadband.”

Times Look Up for Charter

Charter is expected to continue the migration of its customers to the Spectrum brand this year, including new pricing and packaging and the rollout of all-digital service in former TWC markets.

“We believe Charter is finally realizing the benefits of Spectrum pricing and integration in the legacy assets and that the substantial subscriber bleed we saw post acquisition of [Time Warner Cable/Bright House Networks] is beginning to taper,” Jayant wrote.

Morgan Stanley’s Swinburne was equally enthusiastic, adding that as of early 2018, more than 50% of TWC/Bright House customers were on Spectrum pricing and packaging. “That should materially ramp through 2018 and accelerating growth,” he wrote.

At Comcast, the string of video losses that started in Q2 2017 will continue, and broadband growth is projected to slow significantly. That, coupled with Comcast’s Feb. 27 play for U.K. satellite firm Sky — which few believe will actually come to fruition — spooked investors and help drive its down stock even further.

Comcast shares fell 15.5% this year — 14.5% since the Sky bid — and are likely to drop further as the Sky situation plays out. In a note to clients, Pivotal Research Group CEO and senior media & communications analyst Jeff Wlodarczak said he expects Comcast will lose out on the Sky asset and won’t make a play for the Fox properties being sold to Disney.

“The bottom line is that while it may take a while to play out, we expect Comcast will not win out for Sky and Fox, alternative deals are likely to be smaller, cheaper and make more sense to investors, and in the end Comcast is simply too cheap for an entity that controls the dominant way consumers will access the internet for the foreseeable future,” Wlodarczak wrote.

Altice Ups and Downs

Altice USA has also been on a roller coaster ride for the past year — its stock has dipped 12%, mainly on concerns that it could someday be on the hook for the heavy debt load carried by parent company, European telecom company Altice N.V. Altice USA made moves to alleviate those fears — it will separate fully from Altice N.V. in June and can then focus all of its energies on its so-far-successful European approach to U.S. cable.

Altice USA has managed to significantly cut costs at the former Cablevision Systems and Suddenlink properties it purchased over the past two years, squeezing out the highest cash-flow growth rates in the industry. That is expected to continue in the first quarter: Analysts are estimating EBITDA growth will be 15.8%, slightly higher than the 15.4% growth in the prior year. In contrast, Comcast and Charter are expected to have cash-flow shifts of 4.1% and 4.5% in the quarter, respectively.

Altice USA also has managed to squeeze out cash-flow margins well above the industry norm of 38% to 41% over the past several quarters, mainly through aggressive cost cuts and greater efficiencies. While significantly higher programming costs in the U.S. could hinder the company’s plan to eventually achieve European- style growth at Altice USA, Evercore ISI analyst James Ratcliffe noted that Altice’s continued slashing of non-programming costs could eventually help pare down programming expenses as well.

Ratcliffe wrote that once it can demonstrate that its non-programming cuts are sustainable, Altice can turn to programming expenses, particularly for regional sports networks. He added that programming costs in its New York-area Optimum markets are 40% higher than its Suddenlink areas in the Midwest, largely due to RSNs.

“We believe that Altice might look to those RSNs in the future as a potential source of programming cost savings,” Ratcliffe wrote.

Stocks in the pay TV sector have been taking a beating for the past three months, with the bruising especially harsh on the two newest issues in the industry: Altice USA and WideOpenWest.

Overall, pay TV distribution stocks were down about 5.4% in the first three months of the year, with WOW (down 32%), Comcast (down 16.9%) and Altice USA (down 14.3%) the biggest losers.

Comcast’s decline is relatively simple to read: Investors are interpreting its Feb. 27 $31 billion bid for U.K. satellite company Sky as proof the top U.S. cable provider is losing faith in the domestic cable business.

Comcast has reiterated its confidence in domestic cable, saying it still sees growth in the video business and that chairman and CEO Brian Roberts sees broadband as the “epicenter” of the company. As of press time, Comcast still hadn’t even made a formal offer for Sky. But still the concern spreads, with the declining state of the traditional pay TV industry, the emergence of cheaper OTT players and the uncertainty of the deal market all playing roles in the overall malaise.

Parallels With Disney Bid

MoffettNathanson principal and senior analyst Craig Moffett opined in a note to clients that the decline in Comcast’s stock price could persuade it to back off from a Sky bid, comparing the offer to its abandoned takeover attempt of The Walt Disney Co. in 2004. Comcast dropped the Disney play after about 10 weeks, when its shares fell to a point where the all-stock deal simply became too expensive.

While the Sky bid is all-cash, the pressure remains, Moffett noted.

Pivotal Research Group CEO and senior media & communications analyst Jeff Wlodarczak sees fear that the emergence of high-bandwidth 5G wireless products could be stiff competition for broadband and that operators will get overly aggressive with their wireless offerings as another factor in the decline.

Broadband growth has been slowing down. Comcast added 1.2 million high-speed data customers in 2017, down from 1.4 million in 2016, and Charter added 1.2 million residential data customers in 2017, down from 1.5 million in the prior year. Comcast launched Xfinity Mobile last year, part of a wholesale pact with Verizon, and Charter is expected to follow suit later this year.

“Investors are quite nervous about the 5G ‘boogeyman’ blowing up cable data which I view as dramatically overdone,” Wlodarczak said.

Charter stock is down 8.8% for the year and has dropped about 20% in the past month (when it traded as high as $387.50) amid rising and falling deal speculation, as well as the data concerns. Data was supposed to be the main catalyst for WideOpenWest, which began to de-emphasize its video business about a year prior to going public.

WideOpenWest, the Denver-based overbuilder, launched its initial public offering in May, the first new issue in the pay TV sector since 2015, when Graham Holdings spun off its cable unit, Cable One. WOW has had a sketchy 10 months as a public company. Its debut came quietly on May 25 at $17 per share, short of the $20-$22 per share target the company had originally hoped for. Other than a slight run-up on its first week of trading — it hit $18.31 per share on May 31 — the stock has been on a downward slide ever since.

WOW also has undergone a few significant changes in the past three months. Former AT&T Broadband (West) chief Teresa Elder was named CEO in December, after the retirement of former CEO Steve Cochran; the company completed the sale of a portion of its Chicago fiber network to Verizon Communications for $225 million and in March issued guidance that predicted 2018 revenue would range between $1.15 and $1.17 billion (compared to $1.174 billion in 2017) and adjusted EBITDA would be between $410 and $420 million (down from $437.1 million in 2017).

Evercore ISI analyst James Ratcliffe said in a note to clients that while the guidance was below his expectations, he still sees potential upside in WOW stock. But he believes investors will have to have patience.

“[W]e doubt that we’ll see evidence that the company’s investments are bearing fruit until well into 2H18, leaving little in the way of near-term catalysts for the shares,” Ratcliffe wrote. “As a result, we retain our Outperform rating, but would only recommend WOW shares for investors with a time horizon of at least six to 12 months.”

Wlodarczak was less sanguine about WOW’s prospects. “I have a lot of skepticism toward the overbuilder model,” he said.

Leverage Weighs on Altice USA

Altice USA, spun off from European telecom company Altice N.V. in June, has fallen 14% this year, weighed down by heavy leverage at the parent company and uncertainty about sustaining double-digit cash flow growth momentum.

Altice USA has addressed the leverage problem with plans to separate fully from the European parent by the end of the second quarter. That should remove any concern that it would be liable for Altice N.V.’s debt load. The separation also will remove some complexity and increase the number of shares available to the public — the “float” — from about 10% of outstanding shares currently to around 40%.

“A larger float opens up the stock to more investors, eliminates the overhang of certain investors shorting the U.S. business against the parent and sets [Altice USA] up to also return capital via aggressive share repurchase activity,” Wlodarczak said in a client note.

Wlodarczak added that Altice USA is the most levered play in the sector, so when other stocks like Charter and Comcast start to see multiple compression, Altice gets hit even harder. He believes the June separation will solve many of the leverage issues, but there is still the task of persuading investors all is well.

“It will take time to convince investors that the U.S. is a much different market than France,” he said.

Comcast has raised eyebrows with its unsolicited $31 billion bid for U.K. satellite giant Sky, a move that both threw sand in the face of 21st Century Fox executive chairman Rupert Murdoch — who has been trying to consolidate the asset for years — and could solidify the U.S. MSO’s stature as king of all media.

Sky is the largest pay TV operator in Europe, with 23 million customers in the U.K., Germany and Italy. It owns original and licensed content and sports, including the coveted domestic rights to English Premier League soccer games. (Comcast’s NBCUniversal is the league’s U.S. rightsholder.)

Sky fits almost every criterion for a Comcast takeover — it’s a leader in its field, it is underappreciated, and perhaps more importantly it has ownership that is under pressure.

Fox, which owns 39% of Sky, has tried to consolidate the company for years. It first tried in 2011, but pulled its offer after a hacking scandal at its British tabloid newspapers made it unlikely a deal would be approved. Fox returned with a sweeter offer in December 2016, valued at £10.75 per share, but has run afoul of British regulators concerned with placing too much power in one company’s hands. Comcast’s bid, at £12.50 per share, represents a 16% premium to Fox’s offer.

Key to Disney Deal
Sky is an integral part of Fox’s sale of certain assets to The Walt Disney Co. — its content and sports assets jibe well with Disney’s own content holdings, many which are already distributed on the platform. Sky also has a compelling OTT product — Sky Now — which fits with Disney’s direct-to-consumer strategy, and Disney chief Bob Iger has called the satellite service a “crown jewel” among the Fox assets.

Fox had hoped to finish the Sky consolidation before the Disney deal closed and to transfer full ownership to the content giant once the deal was completed.

But now that is in limbo. According to BTIG media analyst Rich Greenfield, Fox has four choices: 1) increase its Sky offer and start a bidding war with Comcast; 2) start a conversation with Comcast for all of the Fox assets, while Comcast bids for the remaining 61% of Sky; 3) get Disney to work out a compromise with Comcast, like offering up its stake in Hulu, the Fox production studios (minus the Marvel content) and cable channel FX to back off; or 4) refuse to increase its bid, leaving Disney with the option of either selling its stake in Sky or being a minority partner with Comcast.

Options one and three seem most likely, Greenfield said.

Fox has said publicly that it stands by its December 2016 offer for Sky and hopes it will pass regulatory muster, while noting that Comcast hasn’t actually made a formal bid. Comcast, in announcing the deal publicly, said its bid was the first stage in the process and it hopes to work with Sky’s independent directors to hammer out a proposal.

The prospect of a mogul war between Comcast chairman and CEO Brian Roberts and Murdoch seemed not to sit well with some of the cable firm’s investors, who drove the stock down about 7% after the Feb. 27 announcement. But they seemed to settle down — the stock has started to slowly crawl back in subsequent trading — when it became apparent the deal makes more sense than they might have initially thought.

Gaining Global Reach
Sky would give Comcast tremendous scale, and scale is key to Comcast’s desire for Sky, Pivotal Research Group CEO and senior media & communications analyst Jeff Wlodarczak said. With Sky’s 23 million customers, its set-top box technology and its content, Comcast could create a pan-European virtual MVPD and then further leverage its position as the No.1 distributor in the U.S. and Europe to launch a global service.

Customer erosion has come to U.S. satellite TV in a big way. And though the two main players — DirecTV and Dish Network — have tried to soften the blow with their own over-the-top services, they are still getting bruised.

Comcast’s $31 billion bid for U.K. satellite giant Sky has again put a spotlight on the domestic satellite-TV business. Adding to the surprise over Comcast’s move was a perception of satellite TV’s decline here, unlike their counterparts across the pond.

For years, Dish Network chairman Charlie Ergen has been the poster boy for satellite TV losses. Over the past five years, Dish has lost a whopping 3 million subscribers and, according to Ergen, that decline does not appear to be letting up. Dish’s pioneering OTT service — Sling TV launched in 2015 — is also beginning to show signs of slowing down.

Dish revealed customer numbers for Sling TV for the first time along with fourth-quarter results: the OTT service ended 2017 with 2.2 million subscribers, up 47% for the year. That was better than expected; some analysts had estimated Sling TV had about 1.8 million customers. Dish’s satellite results, though, were stark. Dish finished 2017 with 11.03 million satellite TV customers, 3 million less than the 14.1 million it had in 2013 and 3.1 million behind 2010, its peak subscriber year.

Headed to ‘Less than Zero?’
MoffettNathanson principal and senior analyst Craig Moffett estimated Dish’s satellite subscribers are declining at a rate of 8.8% per year and cash flow is falling at a 21.5% clip.

“One doesn’t often value businesses declining that quickly,” Moffett wrote in a research note, saying an argument can be made for valuing Dish’s satellite business at less than zero.

In the past, Moffett noted, revenue hits from Dish subscriber losses were outpaced by price increases and by declines in subscriber acquisition costs. “That phase is now over as well,” he wrote.

Barclays media analyst Kannan Venkateshwar said, “Overall, these results are likely to underline the need for Dish to make a pivot away from the DBS business sooner rather than later, especially given that incremental subs clearly are coming in at lower margins and even the pace of growth of these subs is slowing.

“It is tough to believe that 2018 will change any of these trend lines, given multiple new competitors like YouTube TV and Hulu,” Venkateshwar added.

Ergen has not been shy about satellite’s decline — for years, he has said the business is maturing — and he was no less candid on a conference call with analysts to discuss Q4 results.

“There’s nothing new on the video business, other than what we’ve been saying for the last five years, which is the video business is going to change,” Ergen said.

Dish’s new CEO — 23-year company veteran Erik Carlson, named to the position earlier this year — is cognizant of the decline but still sees some growth left in the old business.

Related: Sling TV Shakes Up Top Management

“We don’t have the growth dynamics that we had in early years, but we still see some opportunity,” Carlson said on Dish’s fourth-quarter conference call with analysts, adding that the core satellite business continues to be the “engine that’s funding our future.”

Carlson said Dish has spent the past two and a half years improving its subscriber mix, focusing on keeping and acquiring long-term profitable customers. But just how long-term remains to be seen.

Dish’s cash-flow margins have shrunk over the past three years, from 20.9% in 2015 to 17.1% in 2017. Pivotal Research Group CEO and senior media & communications analyst Jeff Wlodarczak said the margin decline is mostly due to shrinking revenue, down about 5% in 2017, and Sling TV’s margins are thin in part because of the startup nature of the business. Still, Wlodarczak gave Sling credit for containing programming costs — he estimated they were up about 3% for the OTT service last year. Exerting further margin pressure is Dish’s plan to build out wireless licenses in an IoT network that will cost up to $1 billion by March 2020.

“I don’t expect margins to grow anytime soon,” Wlodarczak said. “In the end the [satellite TV] business is effectively a declining annuity that still throws off a decent amount of cash.”

Still, the subscriber declines appear to be accelerating. Adding to the pressure is the proliferation of OTT services that have come on the scene since Sling TV launched. In the past year alone, Hulu launched its Hulu Live OTT service, offering 50-plus channels for $39.99 per month, followed by YouTube TV, fubo TV and Philo. That’s on top of existing services like Sony PlayStation Vue, Netflix, Apple TV, Amazon Prime Video and Amazon Channels.

Watch MCN: vMVPDs by the Numbers

Other Options on Offer
Per Moffett, Dish reached its subscriber peak in the first quarter of 2010, finishing the period with 14.3 million customers. It ended 2010 at 14.1 million customers and see-sawed between losses and gains for the next two years, losing 166,000 customers in 2011, adding 89,000 in 2012, adding 1,000 in 2013 and losing 79,000 in 2014.

Subscriber rolls started to fall off a cliff beginning in 2015 — the year Sling TV launched — when Dish lost 607,000 satellite TV subscribers. Those losses doubled to 1.27 million in 2016 and tempered slightly in 2017, with a loss of 995,000 satellite-TV customers.

Satellite declines shouldn’t come as a surprise, and both Dish and DirecTV have been preparing for that eventuality for years. OTT services like Sling TV and DirecTV Now were supposed to take up the slack. For a moment, they did. Including Sling TV numbers in the mix, Dish lost just 82,000 customers in 2015 and 392,000 in 2016. The growth of those flanking services has begun to slow down, though.

Sling TV added 526,000 customers in 2015 and 878,000 in 2016, per Dish’s financial statements. In 2017, that growth slowed to 711,000 — a 47% increase over the prior year, but given 2016’s 141% gain, a slowdown just the same.

Part of the reason is churn, or the disconnect rate, is high at Sling TV: It was 3.09% in Q4, according to Moffett’s estimates, compared with 1.78% for the satellite business. Ergen blamed some of the volatility on customers switching services month to month to get better deals, and on those who sign up for a service just to watch a specific event and then drop their subscriptions the next month.

“One of the big factors that I don’t think is recognized totally by everyone is [OTT] is somewhat seasonal,” Ergen said on the Q4 call, adding that customers often sign on to view a specific event — mainly sports — taking advantage of a one-month free offer and then canceling when the promotion expires. “One-month churn is particularly high in the industry because people come in and out as a matter of convenience and can move around.”

That could mean that Sling TV and other OTT providers see a customer surge in March, just in time for the NCAA men’s college basketball tournament (March Madness), which begins March 13 and runs through April 2.

Related: Virtual MVPDs Growing 'Like Weeds,' Analyst Says

In addition, Ergen said hardware promotions from providers allow customers more flexibility to move around.

“I’m sure there are some college kids who are going a year and never paying a dime for multichannel TV and getting lifetime HBO from AT&T,” Ergen said, adding that pricing discipline is inevitable. “People aren’t suicidal out there in a capitalist society.”

That discipline won’t necessarily come from Dish. During the media portion of the conference call, Dish executive vice president and group president of Sling TV Warren Schlichting said Sling has no intention of eliminating its one-month promotions.

“We like where we are,” Schlichting said. “We feel like it really puts the onus on us to provide value.”

Growth Engine Has Cooled
Dish might be in the hot seat as the bulk of overall satellite losses have been attributed to the Colorado company. But it is not the only satellite-TV provider (or wired pay TV provider, for that matter) to see subscriber rolls decline. DirecTV, once the growth engine of the satellite sector, had its first full year of customer losses under new parent AT&T in 2017, shedding 554,000 net subscribers. That compares with a gain of 1.23 million customers just one year earlier. DirecTV lost about 550,000 customers in 2015, but gained them back as AT&T’s U-verse TV subscribers migrated to the satellite TV service.

AT&T chairman and CEO Randall Stephenson told analysts during its Q4 conference call that losses have been expected at the satellite unit ever since the telco purchased the company for $48.5 billion in 2015.

“Since the day we bought DirecTV, we assumed that traditional linear video would be in a declining mode since that’s kind of the nature of it,” Stephenson said on the call. “OTT and the ability to consume video on mobile devices, we believed would be the trend and the way where things went. We wanted to be in the leadership position and facilitating that kind of consumption of premium video on mobile devices. And we have been in the leadership position in that.”

The key was DirecTV Now, the virtual MVPD service AT&T officially launched on Nov. 30, 2016. DirecTV Now was supposed to take up the slack for losses at DirecTV and wireline offering U-verse TV.

Initially, the strategy worked. U-verse TV subscribers were first encouraged to switch to DirecTV service, and later to DirecTV Now, and a lot of them did. U-verse customers fell precipitously, dropping from 5.6 million in 2015 to 3.6 million at the end of 2017.

“I think if AT&T had not been ‘encouraging’ consumers to swap to DirecTV, satellite TV additions would be far more negative,” Wlodarczak said, adding that consumers focus on data service first and video second.

Cable years ago established itself as the broadband leader: It accounted for 100% of net broadband additions again in 2017. Wlodarczak said consumers looking for a reliable broadband service stop at cable first and quickly learn they can get lower prices if they bundle broadband with video. But even that hasn’t stemmed the bleeding: Cable operators lost 79,000 customers in Q4 and 780,000 for the full year.

Breaking Down the OTT Subs
Stephenson said AT&T firmly believes that it has the product — DirecTV Now — to drive subscriber growth over the next few years.

“We would expect to continue to grow video customers, with our DirecTV Now [product] outpacing our linear customer counts in the sense of net additions,” Stephenson said on the analyst call, adding that customer additions are evenly split between cord-nevers and cord-cutters/shavers. “We still haven’t seen a dramatic uptick in customers that are shifting from our full-value product to DirecTV Now, but we continue to watch that carefully and continue to come up with different ways to make sure we can prove that and track that.”

Nobody believes satellite service is going away tomorrow. For many rural customers — between 10 million and 15 million homes — it is the only reliable way to access broadcast and pay TV content. But subscriber erosion is here, and even with skinnier bundles and promotional offerings, it is likely to stay.

“I think it is going to get a lot worse for satellite TV,” Wlodarczak said.

Broadband, long the segment of the cable business that has propped up declining video performance, is showing signs of slower growth, a byproduct of both its immense popularity and a fiber push by telco competitors that threatens to take back share.

Cable has long dominated broadband, accounting for well above 90% of overall growth for at least a decade and more than 100% of new subscribers since the first quarter of 2015, according to MoffettNathanson principal and senior analyst Craig Moffett. While that dominance didn’t decline dramatically in the most recent third quarter — 111% compared to 123% in Q3 2016 — it is starting to become more pronounced for large and small providers alike.

Related: Barclays Downgrades Cable Sector to ‘Neutral’

At Comcast, broadband additions slowed to 818,000 in the first nine months of the year, 17.2% behind last year’s pace of 988,000 adds. The same has held true for Charter Communications, with 908,000 broadband additions in the first nine months of 2017, down 17.9% from a year ago.

Broadband-centric MSO Cable One actually lost high-speed internet customers in its legacy systems in the last two quarters of this year — about 3,300 subscribers — and its broadband sub base is growing at a 1.7% annual rate, according to Moffett, considerably lower than the 2.9% growth rate of six months ago.

Overbuilder WideOpenWest, another provider that has concentrated on broadband, reported its first quarter of positive broadband subscribers in nine months in Q3, with 2,400 customers.

Double-Digit Decline in Adds
In the cable sector as a whole, broadband additions have declined 15.5% from 2.74 million in the first nine months of 2016 to 2.32 million in the first nine months of this year, Moffett noted in a recent report.

The stocks are beginning to reflect the sluggish broadband growth, too. WOW stock has fallen 44% in the past six months, followed by Comcast (down 11.8%), Cable One (down 4.5%) and Charter (down 3.8%). Altice USA, which went public in June, has dipped 44% since then, but much of that decline has been due to leverage concerns for its parent company, European telecom provider Altice N.V.

Overall, though, cable valuations are down. Pivotal Research Group CEO and senior media & communications analyst Jeff Wlodarczak said that trend is expected to continue. “Cable multiples are contracting over concerns about pay TV, slowing overall data market growth and competition,” Wlodarczak said. Add in WideOpenWest’s leverage (about 5 times cash flow) and the fact that it overbuilds some of the largest cable operators and telcos in the country, and the decline becomes less shocking.

And it doesn’t take much to spook the market. When Comcast said prior to releasing Q3 results in September that because of recent hurricanes and competitive factors it would lose 100,000 to 150,000 video customers in the period, shares fell as much as 7% to $38.60. The stock has not yet fully recovered — priced at $36.25 per share on Nov. 28 — even after results came in at the middle of the new guidance (a loss of 125,000 video customers). Part of the reason for that could be slower-than-expected broadband additions at 214,000 customers, behind the 330,000 additions in the prior year.

The shift started happening in the beginning of the year, when the two biggest telcos, AT&T and Verizon, reported net gains in broadband subscribers. It was the first time in almost two years that has occurred, other than a small increase in Q3 2016.

As AT&T continues to build out its fiber network, the gap is closing. In 2015, as part of the conditions around its purchase of DirecTV, it pledged to build out 12.5 million more homes with fiber by the end of 2019; now it says it will pass 14 million homes. Overall, AT&T said it expects to offer speeds of 50 Megabits per second or greater to 50 million homes by 2020. Those efforts have helped lift AT&T’s total broadband subscribers into positive territory for all three quarters this year. As Verizon’s losses decline, cable’s advantage should shrink.

Reversal of Fortune for Telcos
Cable is still expected to dominate, just not as much. Telsey Advisory Group analyst Thomas Eagan estimated telcos could end the year gaining 6.7% in broadband customers, compared with a loss of 8% in 2016. The shift is also cutting into trading multiples for the stocks. Wlodarczak noted that trading multiples have contracted between 0.5 times and 2 times in the first half of the year and will continue to fall.

Eagan also noted that Comcast’s trading multiple has dropped from about 8.2 times cash flow in the summer to 7 times after it released Q3 results. But despite the slowdown, he said, there is still plenty of growth ahead for cable broadband. “To me, it means they are underpenetrated and there is a lot of runway left,” Eagan said.

Pivotal Research Group CEO and senior media & communications analyst Jeff Wlodarczak raised his rating on Dish Network to "buy" Monday, adding that the satellite TV company could be more attractive in the wake of the failed Sprint-T-Mobile merger.

Sprint and T-Mobile officially called it quits Saturday, saying after months of talks about a possible merger that no deal could be reached.  Sprint on Sunday announced an MVNO Agreement with Altice USA, unrelated to the merger action. 

In a note to clients Monday, Wlodarczak wrote that Sprint's loss could be Dish's gain, either through a spectrum sale to another carrier like T-Mobile or Verizon, or an outright sale of the company. Dish has wireless spectrum licenses that are valued at about $10 billion, and minus a Sprint/T-Mobile merger those assets could be rising in value.

Dish stock already was on the rise in early trading Monday, up 6.7% ($3.23 per share) to $51.30 each.

"In our opinion, post the T-Mobile-Sprint deal failure there is a reasonable chance that T-Mobile could make a play for Dish or Dish spectrum as it would immediately vault the most disruptive U.S. wireless player into the leading U.S. spectrum position (w/ substantially more spectrum than underpins Verizon’s “best in class” network)," Wlodarczak wrote. "This possible move could force Verizon to counter-bid for Dish spectrum (or possibly the entire company) as Dish spectrum is ideally suited for Verizon and to keep it out of T-Mobile’s hands."

The analyst pointed to Verizon's bidding war with AT&T over Straight Path earlier this year, which Verizon ultimately won.

"In our view, we don’t see what T-Mobile management has to lose in engaging in talks with Dish about a possible deal (either they get high quality spectrum or force Verizon to overpay)," Wlodarczak wrote. " In addition, AT&T, post their Time Warner deal, could (and frankly should) be interested in purchasing Dish’s core DBS business taking advantage of a potentially more laissez faire regulatory climate/emergence of V-MVPD’s, to significantly bolster their DirecTV business (and help to justify the original questionable DirecTV deal) by creating a SatTV monopoly in ~10-15M US households, increased programming scale and massive synergies at a likely very attractive price."

Cable operators have a few years left of continued increased capital spending, but advances in customer equipment coupled with increasingly intelligent and high-capacity networks could drive spending down substantially.

Overall capital spending as a percentage of revenue could drop from its current level of about 15% of total revenue to 10% in the next five years, according to a report by U.K.-based New Street Research.

On average, New Street estimates that capex per home passed could fall from its current level of about $140 to around $120 per home passed. And that’s after some operators — Altice USA and Charter Communications — complete ambitious network upgrades aimed at increasing data speeds and improving efficiencies.

FTTH Buildout
Altice USA is well underway with its “Generation Gigaspeed” project to bring fiber directly to the home. The upgrade is expected to take five years, and the company recently said it is on track to reach 1 million homes with fiber by the end of 2018.

While Altice is expected to see capex rise slightly in the next few years as it goes through that project — Morgan Stanley media analyst Ben Swinburne estimated it would spend an additional $3 billion over the next five to six years on Gigaspeed — other operators will see their capital commitments shrink.

That freed up cash could be used to bolster other parts of the business, introduce new products or simply be returned to shareholders in the form of stock buybacks and dividends.

Pivotal Research Group CEO and senior media and communications analyst Jeff Wlodarczak said he believes how the extra money is used depends on the operator. For Charter, he sees most of that capital being reallocated to stock buybacks. In Comcast’s case, it could possibly go toward M&A; and for Altice USA, debt retirement and M&A.

“Eventually, after a couple years of decline, I think that all starts moving in the direction of Altice USA, to [fiber-to-the-home] where demand warrants,” Wlodarczak said.

Not everyone is convinced that capex is on the way down though. Moody’s Investor’s Service senior vice president Neil Begley said in an email message that while smaller operators may see some declines, the larger players will stay at or around current levels.

“I think that video product development and wireless spending will keep capex high for the large players,” Begley said. “But for the smaller players, since they do not possess the scale to develop their own software and hardware applications, and are unlikely to spend much on wireless other than to extend some fiber, there is a good chance for capex to decline to maintenance levels and commercial extensions of fiber.”

Capital expenditures have been up and down for cable operators over the years, especially as MSOs have embarked on new product and service initiatives.

Comcast, which began the national launch of its X1 platform in 2012, saw its capital spending rise sharply as it deployed new boxes and beefed up infrastructure across its markets. Capex for the company, which had normally risen by about $100 million per year prior to 2012, began to rise by about $500 million annually after that date. But that spending is expected to decline beginning this year, from $7.6 billion in 2016 to $7.02 billion in 2017 and to $6.8 billion by 2018, according to MoffettNathanson principal and senior analyst Craig Moffett.

Similar capex reductions are expected at other cable operators.

Longer CPE Life
Cable companies are approaching the end of the most recent upgrade cycle, according to the New Street Research report, written by analysts Frank Knowles and Andrew Entwistle.

What’s different this time is that new CPE in the form of set-tops and WiFi router equipment can be upgraded remotely, which should extend the life of the equipment substantially.

With the increasing trend of placing storage and functionality in the cloud, the era of the bulky set-top box also could be coming nearer to a close. New Street predicted that, long term, the typical set-top box will essentially be a dongle with IP access and encryption but with storage and intelligence housed in the cloud.

“We can see an end in sight for the expensive set-top box as storage and functionality move to the cloud, but offsetting this from a capex perspective is the increasing cost of solving customers’ in-home networking problems,” Knowles and Entwistle wrote. They added that additional costs for WiFi equipment, like home network hubs, could be offset in the short term by charging more for the service and in the long-term through reduced churn and better customer satisfaction.

Cox Communications is already doing this with its Panoramic WiFi product, a whole-home WiFi solution that costs about $9.99 per month. Comcast’s xFi product, a cloud-based home WiFi management platform, became available to existing customers in May at no additional charge.

New Street estimated that CPE costs per customer were fairly stable between 2012 and 2015 at about $100 per customer, but have fallen sharply in recent years, to under $80 per customer by the second quarter of this year.

Costs vary among operators – Comcast is deploying more expensive X1 boxes while operators like Cable One have de-emphasized video. But New Street expects CPE reductions alone to result in a 15% savings in overall capex per home passed from nearly $140 to $120.

“We think that core network spend can reduce as networks are modernized and virtualized, leading to savings in equipment maintenance and in space/power,” the analysts wrote.

Dish network chairman and CEO Charlie Ergen has managed to gain Wall Street favor by snapping up wireless spectrum at bargain prices over the past several years. But Ergen saw sentiment begin to change last week after it became clearer that not only will he not sell his spectrum to the highest bidder, he may actually be serious about building his own wireless network with it.

That has forced analysts who have been following the stock for years to take a hard — even a harsh — look at Dish. If the satellite-TV company isn’t going to sell its spectrum to the highest bidder, which at one point was valued upwards of $40 billion, and instead is going to possibly spend billions to build out a competing wireless network, what’s the point in owning the stock?

Dish shares have been on a roller-coaster ride for the past few years: they rose 26% in 2014, declined 22% in 2015, were flat in 2016 and are up about 4% so far this year. The stock closed at $60.38 on May 3, down 7% from its $65 price on April 27.

Dish bought even more spectrum in the recently closed 600-Megahertz federal auction, bidding about $6 billion on licenses it said could help it build a national network around 5G technology and the Internet of Things.

PUTTING DISH ON ‘HOLD’
Pivotal Research Group CEO and senior media & communications analyst Jeff Wlodarczak lowered his rating on the stock to “hold” from “buy” as other analysts expressed caution, adding that with a core business short on fundamentals, it’s getting harder to see the light at the end of Dish’s darkening tunnel.

Wlodarczak wasn’t as down on the company as some other analysts, basing his downgrade on the increasingly unlikely view Dish will be able to sell spectrum in the near term.

“In our view, the most logical partner/acquisition candidates may be off the table for at least the balance of ’17,” Wlodarczak wrote. “This would likely leave players that are more partners in building out Dish spectrum, which it is a more uncertain outlook than expected by the market, in our view.”

Dish has to build out its wireless network to 70% of the country by 2020. The company has said in the past that it would only do so with a partner, but last week Ergen said Dish has the balance sheet capacity to create the network on its own.

Dish is talking to vendors and could begin building the network late next year, Ergen added.

“We have a tremendous set of assets at Dish,” Ergen said on the company’s earnings conference call. “And it’s our job as management to put those assets to work in the most economic long-term model that makes sense for our shareholders and for our customers. And that’s what we’ll do.”

Wlodarczak wasn’t ready to write Ergen off just yet, adding in his note that he didn’t slap a “sell” rating on the stock because he continues to believe in “Ergen’s ability to create substantial value via his valuable spectrum holdings, and ultimately that his spectrum holdings are worth more than is implied by the market currently.”

Others weren’t so optimistic. Barclays analyst Kannan Venkateshwar wrote in a research note that while he had expected Dish to go down the buildout path, “the mere consideration of an organic path for spectrum build-out is likely to be perceived negatively by most investors. In our view, this is because Dish’s equity valuation is largely a thought experiment rather than anchored in any fundamentals.”

Telsey Advisory Group media analyst Tom Eagan wrote, “Dish’s business model is proving increasingly unsustainable,” adding that its potential list of partners is diminishing.

It doesn’t help that the core business — satellite TV — is in steep decline. Dish lost about 320,000 satellite customers in the first quarter and its over-the-top Sling TV business, once growing enough to take up the slack, is slowing. Dish doesn’t release Sling TV subscriber figures but some analysts estimate it added about 177,000 customers in the first quarter, slightly above the 169,000 additions in the prior year, but down from the 273,000 additions in the fourth quarter.

The descent of Dish’s core satellite business has been rapid. Dish ended the March quarter with 12.3 million satellite- TV subscribers, or about 1 million less than in Q1 2016. At the same time, its Sling TV over-the-top service has added about 700,000 customers, according to MoffettNathanson principal and senior analyst Craig Moffett.

SLINGING LESS REVENUE
While Sling customers are cheaper to maintain — Moffett estimated that subscriber acquisition costs for satellite- TV customers are about $850 each, while Sling TV SAC is about $50 — they also generate much less revenue. Sling TV charges between $20 and $40 per month for its service, while overall satellite-TV ARPU is about $90 per month.

That reduction in SAC (Moffett estimated that including Sling TV, blended SAC is about $539 per subscriber) and reduced gross customer additions (at 369,000, down from 496,000 in the previous year) helped Dish tick up cash flow slightly (0.1%) in the quarter, but sent revenue down 3.8%, its worst quarterly showing ever — and a possible indicator of worse times to come.

Moffett wrote that in the fourth quarter, Dish revenue was declining at a rate of about 1.4% per year. Six months earlier, it was growing. “Shrinking gross additions in order to sustain EBITDA works for a little while,” Moffett added, “but only for a little while.”

In the past, analysts and Dish itself shrugged off the satellite declines, adding that satellite TV was a maturing business and the real growth was in over-the-top services like Sling TV.

Dish isn’t the only one that feels that way — AT&T’s DirecTV has seen its core satellite growth slow and has been encouraging price conscious satellite customers to switch to its OTT product, DirecTV Now.

But with Dish, there was always the added cushion of spectrum. If times got too rough, they could always sell out to one of the many bandwidth hungry incumbents such as Verizon, AT&T, Sprint or T-Mobile.

Now that cushion has deflated, at least for the time being.

With the much-anticipated launch of over-the-top service DirecTV Now expected by the end of the month, AT&T believes it has created the pay TV delivery pipe of the future. But for AT&T’s principal video business — satellite-TV leader DirecTV — the new offering might be just another siphon for its dwindling customer base.

DirecTV has already seen customer growth wane after merging with AT&T. The telco has crowed that DirecTV has added about 1.2 million subscribers since the $48.5 billion acquisition closed in July of 2015, but the numbers are a bit misleading. Most of those DirecTV additions are former AT&T U-verse TV customers who have migrated to the DirecTV satellite platform.

In the third quarter, AT&T said DirecTV added about 323,000 net new subscribers, about the same as the 342,000 added in the second quarter and the 328,000 added in the first quarter — but 70% of the third-quarter DirecTV additions formerly subscribed to Uverse. Backing out those former U-verse customers, DirecTV added just 97,000 net new customers in the period.’

INTRAMURAL SKIRMISH?

Now AT&T is getting ready to unleash yet another competitor in the video market, DirecTV Now. While details have been sketchy, AT&T has revealed that DirecTV Now will have more than 100 live, streaming and on-demand channels and will be priced at $35 per month. The service has landed deals with The Walt Disney Co., Time Warner’s Turner Broadcasting System, A+E Networks, Viacom, NBCUniversal and Discovery Communications, though it still lacks 21st Century Fox and CBS programming.

Early indications are the initial package will include popular channels such as ESPN, Nickelodeon, Cartoon Network and TNT. But there is no clarity yet as to which channels would be included in the $35 entry package — and some concern that DirecTV Now’s appeal to cost-conscious pay- TV subscribers will draw from DirecTV’s base.

DirecTV Now is targeted at the 13 million to 14 million non-video broadband subscribers across the country, but is likely to take a fair share of existing pay TV customers, too.

Pivotal Research Group CEO and senior media & communications analyst Jeff Wlodarczak said swapping U-verse TV customers for DirecTV customers makes sense for AT&T because U-verse TV customers have higher programming costs — about $17 more per month per customer, he estimated. When DirecTV said it would price DirecTV Now at $35 per month, cable investors headed for the exits, fearful the OTT service would severely cut into the overall pay TV base. But that might miss the bigger point.

“By far the most at risk was AT&T itself,” Wlodarczak said. “And swapping consumers with a material margin [DirecTV] to a product with no margin [DirecTV Now], even if it lowers wireless churn or enhances wireless growth, makes no sense. That would encourage AT&T to back off if they cannibalized DirecTV.”

AT&T began migrating U-verse TV customers to DirecTV almost immediately after closing on the DirecTV acquisition. Since the fourth quarter of 2015, U-verse has shed 1.34 million TV customers, while DirecTV has added 1.21 million net new customers.

Wlodarczak believes the U-verse TV conversion will “continue to mask declines in overall satellite for a while. When that effect is over, you are likely to see pretty significant declines in satellite-TV additions in the U.S.” Cable companies, helped by broadband as part of the bundle, will be recapturing share and, to a lesser extent, virtual or digital MVPDs will also encroach on DirecTV and Dish Network, he said.

DIRECTV SUBS: BIG TV WATCHERS

Telsey Advisory Group media analyst Tom Eagan, though, is “not a big believer that we’ll see DirecTV subscribers en masse migrating to DirecTV Now. DirecTV customers are the households that watch the most channels. I don’t think the streaming service is capable of fulfilling that.”

Dish Network’s Sling TV is a test case of how an OTT service might help to erode a satellite sister offering. Dish does not break out Sling TV customers from overall subscribers, but analysts have said they think the OTT service has more than 900,000 subscribers. Some likely came from Dish, and there are analysts who think the Dish drain has had a big impact. Dish CEO Charlie Ergen said in 2015 there was “no question” that after the launch of Sling TV would eat into Dish Network’s satellite base.

In the third quarter, MoffettNathanson principal and senior analyst Craig Moffett estimated Dish Network lost about 320,000 customers while Sling gained about 204,000 subscribers. Over the past four quarters, Moffett estimates Sling has added 517,000 customers while Dish has lost 949,000.

Comcast is expected to reverse the trend of video customer losses in the third quarter, with analysts predicting it will end the year in positive territory, the first time the nation’s largest cable operator has flirted with that milestone in about a decade.

Comcast has been on track to finish the year with more video customers than it started with, adding 58,000 TV subscribers in the first quarter and losing just 4,000 in the second.

Positive growth has been a trend in the past year for the big cable operators. Charter Communications did it in 2015 with 11,000 video additions, as did Time Warner Cable (purchased by Charter in May 2016) with 32,000 additions. For both, it was the first year of positive video customer growth in more than a decade.

Q3 NUMBERS THIS WEEK

Now Comcast, which has toyed with full-year video subscriber growth in the past, is expected to join the party. Comcast has turned in several recent quarters in the black, but it hasn’t had a full-year of growth on the video side since 2006, when it posted a gain of about 100,000 customers.

That should change this year, according to several analysts, starting with the third quarter. Comcast is scheduled to release Q3 financial results on Oct. 26.

Comcast might stand alone on the video growth podium this year: most analysts predict Charter will have a small video subscriber loss in 2016 — ranging from 32,000 to 65,000 — as it integrates TWC.

Altice USA, which purchased Suddenlink Communications and Cablevision Systems in the past 12 months, has improved losses but isn’t expected to enter positive territory just yet.

For Comcast, the growth estimates for the year range from about 50,000 subscribers from Credit Suisse media analyst Omar Sheikh to 130,000 from Morgan Stanley media analyst Ben Swinburne.

Pivotal Research Group CEO Jeff Wlodarczak estimated in a September research note that Comcast would report flat third-quarter video customer growth, rallying to end the year with 109,000 more video subscribers than the year before.

With companies the size of Comcast, a loss of 30,000 customers, a gain of 30,000 customers or no growth at all is basically a rounding error, Wlodarczak said, although positive growth should help with investor sentiment.

Comcast has been working hard to reduce video customer losses for about five years — it first spoke of efforts to reduce video churn in 2011.

OPERATIONAL GAINS

During that time, Comcast has made big strides to improve the video customer experience, whether it be pushing for full-season stacking rights for shows or launching its state-of-the-art X1 platform, currently available in about 40% of its homes with the goal to be in 50% by the end of the year.

X1 has been a differentiator, offering an elegant user interface coupled with greater functionality and features. Last week, the company added to those features, including a “Team Reminder,” which notifies customers of live games, pre- and post-game shows and other programming featuring their favorite sports team.

Wlodarczak said that X1 has been a factor in video customer improvements, but he added that the competition has helped, too.

“Yes, the churn benefits of X1 help,” Wlodarczak said. “It also helps that AT&T is focused on marketing DirecTV and Comcast can lever their best-in-class data product to get consumers to sign up for video services.”

Prominent analyst Craig Moffett’s decision to downgrade Charter Communications stock to “neutral” last week was a bit of a contrarian move — most of the other analysts covering the sector rate the stock at a “buy” or equivalent — but it raises an important question about cable distributors overall: how long can the euphoria last?

Moffett still has high hopes for Charter, figuring the company will generate about $30 per share in free cash flow by the end of the decade and should meet integration targets for its recent purchases, Time Warner Cable and Bright House Networks.

Charter’s expected entrance into the wireless market could prove risky — both it and Comcast have said they have exercised their mobile virtual network operator (MVNO) rights with Verizon Communications — but that isn’t expected to have a material short-term impact on the stock.

The issue is whether Charter’s success and potential are already baked into its stock price.

“Given Charter’s strong [year-to-date] performance, it is now more difficult to see significant near-term upside for Charter’s stock,” Moffett, the MoffettNathanson principal and senior analyst, noted.

TARGETED AT $305

That said, Moffett still has one of the highest 12-month price targets (at $305 per share) on Charter, one of several distribution stocks that have performed well this year.

In the past 10 months, Charter shares have risen 27.3%, from $202.50 per share to $257.86 on Oct. 11. That’s only slightly behind Liberty Broadband, the vehicle that holds cable legend John Malone’s 27% interest in Charter, up 29.9% for the year.

The top performer so far this year is Cable One, up 35% to $584.80, mainly on speculation it could be a takeover target in an expected consolidation wave.

Comcast is in third place, up 15.1% to $64.96 per share on Oct. 11.

Even slower-growth stocks like AT&T, which purchased DirecTV in July 2015 and lost about 391,000 Uverse TV customers in the second quarter, and Verizon, which has seen customer additions for Fios TV product slow down, have seen their stocks rise.

Shares in AT&T are up about 14% so far this year to $39.33 from $34.41, while Verizon has risen 9% to $50.30 from $46.22.

Cable stocks have been on a phenomenal run since 2013, when Charter and Malone first goosed the market with their initial pursuit of Time Warner Cable. After a brief hiccup — the attempt by Comcast to buy TWC that was later abandoned — Charter sealed the deal last May.

Cable distribution stocks were up 50% in 2013, 15% in 2014 and 10% in 2015. So far this year, despite two fewer stocks in the mix, the sector is up about 25%. (Charter absorbed Time Warner Cable and Altice USA took in Cablevision Systems.)

Programmers, by contrast, have been hit hard due to uncertainty around over-the-top services, skinny bundles and falling ratings and ad revenue.

After a strong run in 2013, when the sector was up 52%, programming stocks began to slide in 2014 (down 1.7%) and fell 15.4% in 2015. So far in 2016, programming stocks are down 4%.

CASH RISE IN LATE 2017?

Other analysts still see runway for Charter. Telsey Advisory Group media analyst Tom Eagan raised his 12-month price target to $302. Eagan said new pricing and packaging slated for select TWC and Bright House markets in the second half of the year should be completed system-wide by mid-2017. Cash flow, expected to reach $13.96 billion by the end of this year, should rise to $15.3 billion by the end of 2017, according to Eagan’s estimates, fueled by cost synergies ($600 million in 2016 alone) and customer growth.

Eagan predicted Charter would add about 30,000 residential video subscribers and 1.75 million high-speed Internet customers in 2017.

Pivotal Research Group CEO and senior media & communications analysts Jeff Wlodarczak, who has had a “buy” rating on Charter since it came out of bankruptcy in 2009, still sees plenty of upside in cable stocks going forward, fueled by their broadband dominance. Wlodarczak also has a $350 per share target price on Charter.

“My cable thesis remains unchanged,” Wlodarczak said. Cable’s position as the primary provider of high speed Internet service to residential and commercial customers should allow cable companies to continue to “take data share, raise prices and create a halo effect for phone and TV additions,” he said.

John Malone’s systematic transformation of Liberty Media continued last week, after the former programming juggernaut agreed to purchase international racing icon Formula One in a $4.4 billion deal.

After the deal is sealed — expected in early 2017 — Liberty Media Group will change its corporate name to Formula One Group and retire its NASDAQ stock exchange ticker symbol “LMCA,” replacing it with “FWON.”

The Liberty Media Corp. name will live on, at least in the ether — Liberty Media Group is officially a tracking stock of Liberty Media Corp., along with Liberty Braves and Liberty Sirius, which will remain separate.

Malone, Liberty Media chairman, has spent the better part of the past decade breaking apart and spinning off the Liberty assets in a flurry of deals. Liberty Media, which used to house interests in major programmers like Discovery Communications and QVC, has long since spun those holdings out to shareholders.

DEALMAKER’S LATEST DEAL

The deal is the latest over the past three years by the mogul known for dealmaking, beginning with his purchase of a 27% interest in Charter Communications in 2013. In the wake of that deal, Malone helped engineer Charter’s $78.7 billion purchase of Time Warner Cable and its $10.4 billion buy of Bright House Networks.

Other Malone holdings have gone on international buying sprees, like Discovery Communications, which earlier this year bought sports network Eurosport in 2015 and European Olympics rights for the 2018-2024 games.

In addition, Malone was a key part of Lionsgate’s $4.4 billion purchase of premium channel Starz in June.

Liberty has been in pursuit of Formula One since 2014, when speculation was high Liberty would team with Discovery to buy a 49% interest in the racing icon for about $4 billion. That deal never materialized, but with the most recent transaction, Liberty will get control of one of the hottest properties in international sports.

Formula One splits its revenue between race promotions — it holds the FIA F1 World Championship, among other races — broadcasting, advertising and sponsorship, and other businesses including TV production, hospitality and licensing, according to Liberty. With revenue of about $1.8 billion in the past 12 months, Formula One said it has $9.3 billion in revenue under long-term contracts through 2026.

Liberty shareholders will own 35% of Formula One’s equity (including about 3.1% for Malone personally), with partner CVC Capital Partners controlling 65%. In addition, former 21st Century Fox executive Chase Carey, long a confidante of Fox chairman Rupert Murdoch, will become Formula One’s new chairman after the deal closes, replacing Nestle chairman Peter Brabeck-Letmathe. Controversial British financier Bernie Ecclestone, who built Formula One into a global operation after nearly 40 years, will remain as CEO.

In typical Liberty fashion, the deal is a complicated one. Liberty closed the first part of the deal on Sept. 7, purchasing an 18.7% stake in Formula One for about $746 million. In the second stage, expected to be completed in the first quarter of 2017, Liberty will purchase the remaining voting interest in the company for about $300 million in cash, $350 million in notes and by issuing about 138 million shares of stock worth about $2.9 billion.

On a conference call with analysts to discuss the transaction, Carey said he would build Formula One’s fan base by telling its story. Formula One already is one of the most popular sports properties in the world, with more than 400 million global viewers, but has had difficulty cracking the U.S. market, which is dominated by NASCAR stock car racing. But U.S. viewership is growing, up by about 40% since NBC Sports won domestic broadcast rights in 2013.

DIGITAL GROWTH OPPORTUNITY

Liberty Media CEO Greg Maffei said on the call that the company believes there is opportunity to grow Formula One’s “underdeveloped” digital assets, adding that the company could grow its fan base and revenue through new technologies like virtual reality and via video games.

“There’s interest in this sport around the world,” Carey said on the call. “We want to continue to intelligently explore the opportunities and continue to grow it.”

Pivotal Research Group CEO and senior media & communications analyst Jeff Wlodarczak, called Formula One a “prototypical Malone investment” in that it has a high barrier to entry, a lasting business, evidenced by the $9.3 billion in long-term contracted revenue, and appears to have strong expansion opportunities.

“As we have seen with the NFL, you can expand your broadcast rights fees and create alternative distribution channels (national nets, to DirecTV [NFL] Sunday Ticket, to Thursday Night Football to the RedZone channel),” Wlodarczak wrote in an e-mail message. “They could also look into expansion of races from 21 to the current contractual limit of 25 (the U.S. could be a massive driver of growth long term), repricing of TV contracts materially higher, leveraging ‘sister’ Liberty companies [Liberty Global] and [Discovery’s] Eurosport, expanding digital opportunities.”

As the earnings season rapidly approaches, analysts see a strong second quarter for cable distributors, a combination of continued momentum and benefits from the six-week strike by Verizon Communications employees in April and May.

Comcast is expected to be the first cable operator out of the earnings blocks, releasing its Q2 results on July 27.

Consolidation catalysts Charter Communications and Altice N.V. — Charter completed its acquisition of Time Warner Cable and Bright House Networks on May 18, while Altice finished its purchase of Cablevision Systems on June 21 — are both slated to release results on Aug, 9.

Actual numbers for Verizon — expected to show subscriber declines, or at least slower increases — aren’t expected until July 26, when the telco officially releases results. That hasn’t stopped some analysts from estimating the damage.

Verizon employees walked off the job on April 13 and stayed out until May 27, when a deal was struck that increased hourly wages and avoided pension cuts for nearly 46,000 unionized workers. The six-week standoff ground Fios installations to a crawl, as contractors were brought in to take up the slack.

UBS Securities telecom analyst John Hodulik predicted Verizon would lose about 33,000 Fios subscribers in Q2, compared to a gain of 26,000 customers in the year-ago period.

Verizon has experienced a steady decline in Fios TV customers over the past several three-month periods: it gained about 178,000 customers in 2015, down from 387,000 additions in 2014. But the strike apparently pushed the telco into the red in the second quarter. Hodulik expects the telco to return to positive video subscriber growth in the third and fourth quarters (about 10,000 each), but at a slower pace.

Verizon chief financial officer Fran Shammo has said in the past that total wireline customers, including non-video subscribers, could flirt with negative territory because of the strike. At a Bank of America Merrill Lynch media conference in London in June, Shammo said because most of the strikers were in installations and maintenance, Verizon was in “catch-up mode” and expected broadband additions to be negative in Q2.

Comcast is expected to continue to temper basic-video subscriber losses in Q2, shedding just 10,000 video customers compared with a loss of 69,000 subscribers in the same period in 2015.

In a note to clients, Hodulik said the results were helped by the Verizon strike as well as the transition of former Fios properties in California, Texas and Florida to Frontier Communications, which wasn’t ready to do a lot of subscriber acquisition marketing while absorbing the territories with some 1.2 million Fios customers.

Overall, Hodulik estimated cable operators would lose a collective 500,000 video subscribers in the second quarter, slightly better than a year ago.

Other analysts weren’t quite as optimistic. Morgan Stanley media analyst Ben Swinburne expects Comcast to shed about 24,000 video customers in the quarter, with Charter dropping 86,000. Analysts share an enthusiasm for improvements in the cable sector for the full year, though. Swinburne estimated Comcast and Charter will both end 2016 on a positive basic-video subscriber note, with Comcast adding 100,000 subscribers and Charter adding 58,000 customers.

“We see another strong sub quarter for cable at the expense of its telco/satellite competition,” Swinburne wrote.

Pivotal Research Group CEO and senior media & communications analyst Jeff Wlodarczak reduced his estimates for Q2 subscriber losses at Comcast from 50,000 to 20,000, based on his belief that churn trends continue to be solid and to better reflect the effects of the Verizon strike.

“We expect a solid cable result in the seasonally weak 2Q,” he wrote.

Comcast reinforced its commitment to a wireless product last week after naming longtime executive Greg Butz to head up its new Comcast Mobile division, a unit that could be the next step in the cable company’s journey toward offering customers full mobility.

The move, part of broader changes including the departure of chief network officer John Schanz and cable division chief financial officer Cathy Avgiris (see sidebar), comes about eight months after Comcast notified Verizon Communications last October of its intention to activate its Mobile Virtual Network Operator agreement with the carrier.

The MVNO agreement, part of the deal by SpectrumCo (a consortium of Comcast, Time Warner Cable and Bright House Networks) to sell its wireless licenses to Verizon for $3.9 billion in 2012, would essentially allow Comcast to resell Verizon wireless service under its own brand name, a dramatic change from its past endeavors in the wireless business.

Comcast has been part of wireless partnerships that all went bust: Sprint PCS and Pivot with Sprint; and one with WiMax pioneer Clear-wire. An MVNO would allow Comcast to resell a reliable service with lower upfront costs.

Selecting Butz to head up the group was no accident. As executive VP of sales and marketing, Butz has been a key part of Comcast’s sales success, and past wireless endeavors have lacked a strong marketing component, according to some people familiar with the company.

“Selling to the base is going to be critical, and Greg [Butz] knows how to sell into Comcast’s customer base,” one source said.

Butz helped create Comcast’s broadband business in the early days of high-speed data, responsible for product strategy, business strategy and marketing. He also has a cellular business background, serving stints at Comcast Cellular and Bell Atlantic Mobile.

Comcast declined to comment on the Comcast Mobile unit, but sources familiar with the company said its formation is a logical next step in what may be a slow and steady process. Comcast Cable CEO Neil Smit has said publicly that the cable operator was in “test and learn” mode concerning its wireless plans, and that still appears to be the case.

“I expect Comcast to go about this pretty slow,” Pivotal Research Group CEO and senior media & communications analyst Jeff Wlodarczak said, adding that it could be one to two years before Comcast unveils a product.

While Comcast isn’t letting on what that could be, most analysts believe a hybrid WiFi-cellular phone could be first out of the gate — a mainly WiFifirst phone that hands off to the cellular network when the customer leaves a hotspot. It could give Comcast the ever-elusive quad play of video, wireline voice, data and wireless that operators have chased for decades.

The timing is better now than in the past, Wlodarczak said, for two reasons: Wireless pricing is high and wireless usage is off the charts.

Wlodarczak said offering a service over an already reliable wireless network at a cheaper price could gain traction. However, operators would have to be careful as to how low they go.

“If you really only need the MVNO as a fill-in — the tech is not quite there yet — you could seriously squeeze the telcos using their own network,” he said. “But this is the flaw with MVNOs; at some point the deal ends.”

Integrating apps from subscription video-on-demand services into cable set-top boxes could go a long way toward tapping into an underserved demographic for subscription video-on-demand — older viewers — while providing pay TV with another retention tool, according to some analysts.

Several cable, telco TV and satellite-TV providers already have integrated apps from Netflix and Hulu into their set-tops, and digital video recorder pioneer TiVo has had a Netflix app incorporated into its boxes for years. And TiVo’s newest product — TiVo Bolt — integrates Netflix, Amazon Prime, Hulu and other Internet streaming services with the box, while also serving as a DVR. But Morgan Stanley media analyst Ben Swinburne said there a few key operators missing, notably Comcast and Charter Communications.

POSSIBLE WIN FOR BOTH

Getting Comcast and Charter into the set-top integration fold could help the cable operators’ retention efforts while giving the SVOD services access to older customers.

That could be a key demographic for Netflix in particular. After a strong first quarter of domestic subscriber growth — it added 2.2 million customers in the period — Netflix said subscriber increases would slow in the second quarter to about 500,000. Netflix could make up the difference by targeting older pay TV customers, Swinburne said.

According to a survey by researcher AlphaWise and Morgan Stanley, about 63% of respondents aged 18-29 were Netflix subscribers while just 30% of those aged 45-64 and 19% of those aged 65 and up used the SVOD service. Ease of use was one of the reasons those nonsubscribers gave for not being Netflix customers.

Attracting the older demo could be a coup for Netflix. Swinburne said older viewers watch more TV on their TV sets: about 19 hours a week, compared with 11 hours for 18-to-29-year-olds.

They also are more likely to subscribe to pay TV: 92% of consumers 65 and up and 88% of 45-to-64-year-olds were pay TV subscribers, compared to 86% for the 18-to-19-year-olds.

“Set-top integration would introduce Netflix to this customer base through a service the cohort is already using frequently, and reduce the friction associated with Netflix consumption on a TV set,” Swinburne wrote in a note to clients.

Swinburne has some data to back that up. In the U.K., cable operator Virgin Media saw Netflix subscriptions rise significantly after it began rolling out TiVo set-tops.

Swinburne said there was a direct correlation between customers with TiVo boxes and Netflix usage. Virgin began rolling out TiVo boxes with a Netflix app in November 2013, when Netflix usage among its customers was less than 20%. By September 2015, when 78% of its customers had an integrated TiVo box, Netflix usage grew to 28%.

Virgin Media wasn’t the only U.K. provider to experience the same phenomenon. At telecom and video service provider TalkTalk, Netflix usage increased from 17% in September 2014 to 25% in September 2015. TalkTalk began integrating the Netflix app in its boxes in January of 2015.

While there are issues that would have to be worked out still, Swinburne said he believes that adding the nearly 40 million video customers from Comcast and Charter to the mix could help tip the scales for Netflix. Comcast’s X1 platform could easily accommodate a Netflix app as it continues to roll out across the country. Although Comcast has been mum on the possibility of integrating Netflix into X1, Charter CEO Tom Rutledge has said publicly that the cable operator would investigate the possibility.

Comments like those have helped fuel Swinburne’s optimism, adding that Charter and even Comcast could be “willing partners with Netflix in the near or medium term.”

ENHANCING BROADBAND

Pivotal Research Group CEO and senior media & communications analyst Jeff Wlodarczak said integrating the app with set-tops makes sense.

“It is pretty easy to get Netflix, but for some folks — mainly the older generation — anything that makes it easier to sign up would be beneficial for Netflix subscriptions. If Netflix is willing to give up part of the economics, it becomes more palatable for distributors.”

While cable operators may be skittish, thinking that integrating Netflix could cut into pay-per-view revenue, Swinburne believes the impact would be minimal.

And as broadband becomes more prevalent — all the major operators now have more high-speed Internet customers than video customers — making them happy becomes even more important.

“At two hours daily of viewing per member, cable operators — increasingly more ISPs than MVPDs — have growing reason to bring Netflix into the tent,” Swinburne wrote.

As the weather gets hotter, pay TV customers could be shedding their television subscriptions — along with their long pants and sweaters — in greater numbers, according to Sanford Bernstein media analyst Todd Juenger.

Juenger took a deep dive into the trend of pay TV customer “seasonality,” the annual summer decline in monthly video subscriptions as customers purportedly moved to summer residences or to more permanent homes. Summer is traditionally the most popular time of the year to move, primarily because it allows parents to settle in before the school year starts.

On a conference call, of which the analyst provided a transcript to clients, Juenger conceded that the seasonality phenomenon is nothing new. But what he found in his research is that summer pay TV disconnects could be a trigger for cord-cutting because, unlike in past years, the customers who cancel service in the summer don’t seem to be coming back. He pointed to last summer, when pay TV subscriptions rose substantially in the second and third quarters.

TRIGGERED LOWER GUIDANCE

Juenger said year-over-year pay TV subscriptions declined by 0.6% in the second quarter of 2015 (compared to a gain of about 1% in Q2 2014) and by 1.4% in the third quarter (compared to a 0.9% gain in Q3 2014). That sharp decline, he said, helped to trigger decisions by The Walt Disney Co. and Time Warner Inc. to reduce subscriber and financial guidance, which, in turn, fueled even more cord-cutting fears.

Cord-cutting wasn’t as bad in Q4 2015 and in the first quarter of this year, when video subscriptions were down about 0.9% and 0.4%, respectively. But Juenger said he sees the signs.

“We have a theory that summertime is now always going to be the worst time for cord-cutting, because that’s when people move and that’s their chance to cut the cord,” he said. “We have serious concerns that this summer is going to look like last summer.”

Not everyone agrees.

Pivotal Research Group CEO and senior media & communications analyst Jeff Wlodarczak said seasonal churn is commonplace in the pay TV business, and he sees no correlation with cord-cutting.

“I doubt it is that material of a driver,” Wlodarczak said.

Telsey Advisory Group media analyst Tom Eagan pointed to recent gains in the cable-subscriber universe — both Charter Communications and Time Warner Cable reported full-year video subscriber gains, while Comcast has consistently improved losses and reported a gain of 53,000 video customers in the first quarter, its best Q1 showing in nine years.

“If you look at the numbers, they continue to be pretty good,” Eagan said, adding that the summer is usually when churn is highest, and that’s likely to remain so. “Video is looking better than it has ever looked.”

The key to any increase in cord-cutting would be how attractive the alternatives are, Eagan said. While there have been some changes in products like Sling TV, which is testing a multistream service that includes regional sports networks, for the most part over-the-top offerings don’t offer the same value as pay TV.

“They [OTT] are nominally more attractive, not materially more attractive,” Eagan said.

Juenger argues that distributors aren’t the only ones affected by cord-cutters. With a declining subscriber base, network affiliate fees also fall. Couple that with an expected dip in advertising revenue growth and it could indeed be a long, hot summer for programmers.

Most networks have guided to slower growth in the second half of the year, Juenger noted, so that is not a surprise.

“The issue is how fast it will slow down,” Juenger said, adding that the Summer Olympics will be good for NBC’s ad sales but bad for every other network. He added that the loss of fantasy-football ad money — several states are deciding whether daily fantasy sports sites like FanDuel and DraftKings are gambling operations, or games of skill, which has caused a pullback in advertising on TV — and what he thinks will be the replacement of higher-priced scatter ad revenue with lower-priced upfront inventory all “conspires for an advertising slowdown.”

ACCOUNT REVIEWS CITED

Eagan said his main concern about the ad market is how much it will be driven by the slowdown of last year. In 2015, he said, several advertisers put their accounts up for review, which had an effect on total ad revenue.

“There was a slowdown in spending because of all the account reviews,” Eagan said. “To a degree, the significantly higher agency changes are catching up with us now.”

As a result, Eagan predicted that ad revenue could rise by the mid-to-high single digits for most programmers in 2016, compared to 1% to 8% declines in the prior year.

But that growth will depend on the company, Eagan said. In a research note last week, he predicted that ad sales would dip 2.5% for CBS in the second quarter, rising to 4% growth in the third quarter and 5.8% in the fourth quarter. At 21st Century Fox, ad revenue should spike 10.5% in the second quarter — fueled by Fox News Channel and the presidential election — and 11.9% in the third quarter before settling to 0.7% growth in the fourth.

The election, he said, could also impact local TV advertising.

“A lot of the regional advertisers that would spend locally, and spend higher on a CPM basis, can’t go local because of the elections,” Eagan said. “That should continue for the balance of the year.”

In a decision that could have far-reaching implications for the nation’s Internet-service providers, the Federal Communications Commission imposed a condition on Charter Communications’s acquisition of Time Warner Cable and Bright House Networks that will bar the post-merger Charter from imposing data caps and usage-based pricing policies for a period of seven years.

That condition, alongside others that prevent New Charter from charging interconnection fees and entering programming deals that could harm online video distributors, clearly are in place to keep the MSO from erecting barriers that could tamp down OTT competition.

The FCC so far has not moved to pursue rules that would fit similar collars on other ISPs, but chairman Tom Wheeler has tasked the commission with investigating the impact of data caps, usage-based policies and zero-rated offerings that exempt some services from an ISP’s or mobile carrier’s usage policies.

CAUSE FOR WORRY

That posture is cause for concern for ISPs that have implemented or are testing usage-based policies that are being built into their business models. While ISPs that use such policies preach that it’s about fairness — those who use the most bandwidth pay more than those who don’t — critics see them as a tool to keep over-the-top video competitors in check.

Industry analysts offer various opinions as to how the Charter conditions will affect ISPs that currently use data caps and usage based pricing. And it’s still too early to tell if those conditions will put much pressure on other ISPs to voluntarily toss out their capping and usage-based data policies, at least in the near-term, Jeff Wlodarczak, CEO and senior media and communications analyst of Pivotal Research Group, said.

Wlodarczak also doesn’t believe the lack of a usage-based pricing option will have much of an effect on the MSO’s current business strategy, which is focused on driving revenue generating units (and revenue) without being super-aggressive on price.

It’s also possible that Charter could try to compensate in other ways, such as driving customers to higher-end, more expensive tiers of service. Charter’s entry-level speed — 60 Megabits per second downstream — is already faster than the lower-end services marketed by many of its MSO peers.

Though it’s not clear if the FCC’s condition on Charter will affect other ISPs directly, some have recently tweaked their policies and begun to offer new unlimited data options that are OTT-friendly (see sidebar, below).

MoffettNathanson principal and senior analyst Craig Moffett said that the Charter conditions and recent data policy changes implemented by ISPs do change the game, because they effectively take usage-based pricing off the table as pay TV operators continue to face off against rising OTT competition.

‘CALM BEFORE THE STORM’

“It’s hard not to see this as simply the calm before the storm,” Moffett noted earlier this month in a semi-regular “Cord-Cutting Monitor” report, citing Hulu’s coming multichannel service, new OTT options from DirecTV and Amazon, and a virtual pay TV service called “Unplugged” that YouTube reportedly has in development.

“If and when the rains come, cable operators won’t have the umbrella of usage-based pricing,” he wrote. “We’ve always described UBP as an insurance policy, not to forestall OTT video but simply to make cable operators economically indifferent to it.”

On that note, Moffett has long considered usage-based pricing as a mechanism for MSOs to preserve a “transport charge” for video.

“With Charter committing to no UBP for seven years, and with Comcast … raising usage caps from 300 GB to an all-but-irrelevant 1 TB per month, UBP is now essentially off the table,” Moffett said. “That doesn’t make cord-cutting any more likely. But it does leave cable more vulnerable.”

Some ISPs that have implemented caps and usage-based pricing clearly are troubled by the FCC’s condition on the Charter-TWC deal and the potential threat it might pose to their future policies.

“Charter’s concessions related to usage-based pricing and data caps are certainly concerning,” Thomas Larsen, Mediacom Communications’ group vice president of legal and public affairs, said in a statement soon after the FCC’s proposed conditions were circulated. “Promoting a model in which the vast majority of a company’s broadband subscribers subsidize the behavior of a small group of heavy bandwidth users seems to go against the fundamental principles of American commerce.”

When the FCC was still considering the order that was eventually issued that bans Charter from using caps and usage-based broadband pricing for seven years, AT&T said it was “apparent that some or all of the conditions will have a broad effect beyond the parties to the merger.”

SIDEBAR: Fitting Customers With Different Data Caps

U.S. ISPs, both big and small, have been gravitating to unlimited data plans and soft caps that charge extra when monthly limits are exceeded. Here’s a snapshot of policies that have been deployed or are in the pilot phase:

Comcast: Starting June 1, Comcast will move to a monthly 1-Terabyte data plan in its current group of test markets, including Atlanta; Tucson, Ariz.; Chattanooga, Tenn.; and Charleston, S.C. Customers who exceed that ceiling can buy an additional 50 GB of data for $10, or move to a new unlimited data plan that costs $50 more per month.

AT&T: In March, the telco introduced an unlimited data plan for its U-verse and GigaPower residential broadband service that costs an extra $30 per month for customers who take a standalone data service, but, as an incentive, drops that charge for customers who bundle Internet with U-verse video or DirecTV service and pay on a single bill. Customers without unlimited data plans must pay $10 for an additional 50 GB when they exceed their monthly limit.

Mediacom: Also sells additional data buckets of 50 Gigabytes for $10 each when customers exceed their monthly limit, which scales up and down depending on the speed of the customer’s data tier. Mediacom has set a high monthly allowance of 6 Terabytes for its new 1-Gbps residential broadband service.

Suddenlink: The Altice-owned operator launched an unlimited data plan that is available to customers who take its two fastest tiers in a given market. Subs not on Suddenlink’s unlimited plans may pay $10 for an additional 50 GB when they exceed the limit.

BendBroadband: The operator, now owned by TDS Telecom, has set different monthly data limits based on the speed of the customer’s data subscription, and charges $10 per month for an additional 50 GB when customers exceed their limit. On May 9, BendBroadband began to exempt customers from those policies if they bundled Internet service with pay TV. BendBroadband estimates that more than half of its Internet customers are now longer subject to its datausage policy.

GCI: The Alaska-based operator’s “No Worries” data policy sets monthly data caps that scale up and down depending on speed, with the option to buy an additional 30 GB of data for $10 each when subscribers exceed that; upgrade to a different plan with a higher monthly limit; or get moved to a “basic level of service” (less than 1 Mbps) with no overages.

SOURCE :Multichannel News research

Broadcasters continued to eke out double-digit percentage increases in retransmission-consent revenue in the first quarter, despite mounting evidence that the pay TV universe is shrinking.

A look at some of the top broadcast station groups show that retrans revenue, while still rising at a healthy double-digit percentage clip, leveled off a bit from the triple-digit increases of a year ago. But overall growth at the top five publicly traded broadcasters rose a collective 25% in the period, slightly behind the 35% increases in the first quarter of 2015.

SCRIPPS LEADS THE CHARGE

Leading the charge was E.W. Scripps, which boosted its quarterly retrans haul 92% to $53.6 million, behind the 123.8% increase in the same period last year. Sinclair Broadcast Group — the largest station owner with 172 broadcast properties in 81 markets — maintained a high-single digit percentage increase in the period, although it told analysts those raises will taper off in the next three years as its deals mature.

Sinclair said its next big retrans negotiation will be at the end of the year, with Comcast, and it expects 2017 retrans increases to be in the mid-single digits, dipping to the low-single digits by 2018.

The company, which has been aggressively accumulating stations over the past five years — it had only 58 stations in January 2011 — will have some added leverage in retrans negotiations going forward. It agreed to purchase sports network Tennis Channel in January (the deal closed on March 1), adding to its growing stable of cable networks that include American Sports Network, Ring of Honor and Comet TV. While Tennis Channel had little impact on the first quarter — it had only been officially under the Sinclair umbrella for a month in the period — the network is expected to have influence in future negotiations.

The second-largest station owner — Nexstar Broadcast Group, with 104 properties in 54 markets — saw retrans revenue rise 46.2% to $97.3 million in the quarter, less than the 89.5% increase in the same period in 2015.

Of the top six station owners, all except Tegna, the former Gannett broadcasting group, reported a smaller percentage increase in Q1 2016 than in the prior year. That could be in part because of a declining pay TV subscriber base, as total pay TV customers fell by 1.2% in the quarter. But it is more likely tied to the timing of retrans renewals and overall market maturity. Tegna said it expected retrans to grow more than 30% for the rest of the year.

MVPDs reached several retrans deals with station owners in the first quarter, including Cox (with Nexstar), Time Warner Cable (with Scripps) and Dish (with Cordillera Communications), which likely had an impact on revenue growth. Most of those deals — except for TWC and Scripps — also included brief blackout periods, which one pay TV industry group believes has a huge impact on rates.

The American Television Alliance, a group that includes the traditional pay TV distributors such as Charter Communications, Cablevision Systems, DirecTV and Dish Network, said there were 193 blackouts in 2015 — a new record and more than twice the 94 blackouts in 2014. So far in 2016, 26 blackouts have occurred, and more are expected as deals come up for renewal, usually around major sporting and entertainment events.

The ATVA sees a direct correlation between blackouts and higher retrans fees, adding that oftentimes consumers are forced to pay higher rates after a dark period has ended.

“Each broadcaster’s quarterly earnings report is further confirmation that the retrans cash grab is driving the TV blackout crisis,” said ATVA spokesman Michael Hacker in a statement.

Back in July 2015, SNL Kagan raised its estimates for overall retrans revenue growth to $10.3 billion by 2021, a 63% increase from the $6.3 billion in 2015. CBS alone has said it will generate about $1 billion in retrans revenue in 2016, growing to $2.5 billion by 2020.

RETRANS TAKES UP THE SLACK

Retrans fees have been a savior for some broadcasters, taking up the slack in recent years as the advertising market has tanked. But even as ad sales have begun to rebound — Morgan Stanley media analyst Ben Swinburne said in a recent note that the first quarter was the strongest for national TV ads since Q3 2013, with broadcast advertising revenue up between 8% and 10% — retrans fees continue to rise.

While overall percentage growth appears to have slowed in the first quarter, Pivotal Research Group CEO and senior media and communications analyst Jeff Wlodarczak said it probably won’t last long, adding that it could simply be a result of the “law of large numbers.”

“As they keep getting bigger, the growth is going to slow,” Wlodarczak said. “I see broadcasters trying to push through higher fees on distributors to offset lost revenue from cord cutters/shavers, which will of course only exacerbate the problem.”

A two-year grace period that shielded veteran Netflix subscribers from a 2014 price increase expires next month, an event some think could cause the subscription VOD pioneer to actually subtract customers during the second quarter of 2016.

The May switchover could be tricky: It’s the biggest price increase since 2011, when the company announced a rate hike for its streaming/mail-order DVD combination from $9.99 to $15.99 per month. Back them the backlash was swift — Netflix stock fell 40%, and customers called for Netflix CEO Reed Hastings to resign.

This time around, the company has been careful, buying itself time in the two-year wait for the initial outrage to wane. And analysts point out that customers intent on keeping the $7.99 price point can do so by dialing back their tier of service to the single-stream, standard- definition Basic Plan.

The pricing details: Netflix hiked the monthly fee for new customers in May 2014 to $9.99, but allowed existing customers at the time to remain at the previous $7.99 and $8.99 monthly rates for two years.

UBS media analyst Doug Mitchelson estimates about 17.8 million Netflix customers in the U.S. (37% of its total base) were at the $7.99 price point. He thinks the $2-permonth increase will be too high for between 3% and 4% of those customers, who will probably cancel service.

‘U.S. MATURITY FEARS’

Netflix is offering those grandfathered customers an opportunity to stay at the $7.99 rate, but they would have to downgrade service to one streaming device in standard definition, as opposed to two streaming devices in HD. While that could offset some of the cost-conscious churn, it isn’t expected to be much.

The churn from the grandfathered base amounts to about half of Netflix’s quarterly subscriber gains; in the fourth quarter it added about 1.5 million U.S. customers. Couple that with a maturing market — subscriber growth has softened in recent periods — and Netflix could be heading into its first negative streaming quarter ever.

“Investor concerns regarding the potential churn from such a large price increase are compounding the U.S. maturity fears already plaguing Netflix’s stock,” Mitchelson wrote. “Add in the fact that 2Q is the seasonally softest quarter, and some investors are even questioning whether Netflix will have its first quarter ever of declining U.S. streaming subscribers.”

In the past several quarters, Netflix has seen a steady softening of domestic subscriber additions, from 2.3 million adds in Q4 2013 to 1.5 million in Q4 2015. Most analysts who follow the company aren’t expecting the worst, but anticipate that the slower growth trend will continue.

Morgan Stanley media analyst Ben Swinburne revised his Q1 subscriber estimate downward to 1.8 million from 2.2 million after the SVOD pioneer missed his Q4 estimates.

“When you have as large of a subscriber base as Netflix, minor changes in churn can have a material effect on net subscriber additions,” Pivotal Research Group CEO and senior media & communications analyst Jeff Wlodarczak said. “I would be surprised if it goes negative even with negative 2Q seasonality, but you cannot completely rule it out. I figure they can do at least a couple hundred thousand.”

Mitchelson said in his report that the bear case for Netflix to lose subscribers in Q2 is unlikely, and he estimated the company would end the period with an increase of about 450,000 customers in the U.S.

Of the customers paying the old $7.99 monthly rate, Mitchelson estimated that 229,000 would churn off in Q2, with another 360,000 dropping the service in Q3.

Swinburne was a little less optimistic. He estimated that total additions would be about 150,000 and paid customer additions would be flat in the second quarter.

Fueling Mitchelson’s optimism is Netflix’s programming lineup. The company, the analyst wrote, has a strong original content slate with hit shows like Orange Is the New Black, Jessica Jones and Daredevil.

This year is expected to be especially strong — Netflix is increasing its original scripted series slate to 31 in 2016 from 16 in 2015 with shows like The Crown, Marvel’s Luke Cage, Frontier and The Ranch and has 10 feature films released or in production.

“We feel comfortable the slate supports our view for low levels of churn,” Mitchelson wrote in a report.

GROWTH MARKET: THE WORLD

While domestic growth is slowing, Netflix’s real opportunity is international, Mitchelson said. UBS estimates that the U.S., which represented 60% of total gross customer additions in 2014, will shrink to 38% by the end of 2016. Taking up the slack will be areas like Latin America, Europe and Australia.

Swinburne, also in a research note, figured international subscriber additions would rise to 3 million in the second quarter (from 2.4 million last year), with full-year additions at 15 million — 28% higher than the 11.75 million added in 2015 and outpacing his estimates for 4.1 million domestic additions in 2016.

Swinburne said he thinks international streaming customers will overtake their domestic counterparts in 2017, with 54.6 million subscribers (compared with 52.6 million domestically), reaching nearly 80 million customers by 2020. Domestic subscribers could reach 60 million in 2020 by his figures.

Wlodarczak added that, while international growth is important, so is stable U.S. growth, which validates Netflix’s increasing its original programming spend.

Pay TV service providers are doing a better job of keeping customers satisfied, but that isn’t doing much to quench their subscribers’ desire to cut the cord, a new Morgan Stanley survey has found.

In its sixth annual Streaming Media Survey of 2,500 adults 18-34 conducted in March, Morgan Stanley media analyst Ben Swinburne and Internet analyst Brian Nowak found that nearly 90% of respondents who have a pay TV subscription were satisfied with their service, an increase of 400 basis points over the prior year.

At the same time, the share of respondents who said they plan to cut the pay TV cord increased 550 basis points, to 26%.

Swinburne said that while “it’s a little hard to circle that square,” the paradox seems to highlight what other analysts and operators have been saying for months — broadband service is becoming the most important part of the pay TV bundle.

A deeper look at the survey seems to bear that out. Telco service providers, which generally have higher data speeds than cable companies, had the highest satisfaction rates at 55%, but also had the highest intent to cut the cord at 22%.

Cable service providers had their best performance in the six years the study has been conducted, with just 5% of respondents saying they intend to cut the cord in the next 12 months.

Younger respondents showed the greatest desire to cut the cord — 33% of those aged 18-29 and 37% aged 30-44. But Swinburne said recent carriage disputes may have played their part. AT&T and DirecTV customers showed the greatest desire to cancel service during the survey period — 43% and 29%, respectively — while the Spanish-language broadcaster Univision has been in a carriage spat with U-verse TV. (AT&T owns both U-verse and DirecTV.)

Consumers also seem to be more willing to pay for streaming services: Those who said they would shell out for online subscriptions nearly doubled to 39% in 2016 from 19% in 2011.

More than half of total respondents cited price as the largest concern against buying TV and movies online a la carte, with more respondents willing to purchase at lower prices.

Netflix once again was first choice among services consumers would replace their pay TV subscriptions with — 35% — followed by You Tube (29%). Amazon Prime Video and Hulu Plus tied for third at 27%.

Original programming continued to drive Netflix use, with 45% of respondents saying that was a primary reason for subscribing (up from 43% last year).

Pivotal Research Group CEO and senior media & communications analyst Jeff Wlodarczak said the survey results point to a common problem when people are asked about switching pay TV service.

“When push comes to shove, people may say they want to cut the cord but, for most, that is incredibly difficult,” Wlodarczak said. Last year’s survey seems to back that up: 20% of respondents said they intended to cut the cord, but pay TV penetration only dropped 1 percentage point, to 77.5% from 78.5% in 2014. Wlodarczak also pointed out that telco TV providers don’t have an obligation to offer service to everyone, adding, “So a survey  of telco TV is effectively a survey of higher per-capita-income households that are better able to afford price increases, while cable offers service to many lower income households that feel the pinch from continued video price increases.”

CHART: Satisfaction Guaranteed

Customer satisfaction in the pay TV universe is on the rise from last year, according to Morgan Stanley research.

                                                             2016          2015

Very/Somewhat Satisfied . . . . . . . . 88% . . . . . 85%

Very/Somewhat Dissatisfied . . . . . .12% . . . . .16%

SOURCE : Alpha Wise and Morgan Stanley research

It looks like cord-cutters may not have the cable sector to kick around much longer.

While overall pay TV subscriber numbers were down in the fourth quarter — typically a seasonally strong period — customer declines came from losses on the telco TV side. Cable operators, long the target of consumer consternation over high prices and poor service, reported video customer gains for the period.

Not all of the news was good. Overall pay TV subscriber numbers were down for the first time in the fourth quarter, indicating that customers are still cutting the cord. It also was the fourth consecutive quarter of overall losses in the pay TV sector.

On the bright side, though, cable outperformed the overall pay TV sector for the first time since 1994.

SECTOR DOWN OVERALL

MoffettNathanson principal and senior analyst Craig Moffett, estimated pay TV, excluding subscriber results from Dish Network’s over-the-top service Sling TV (which Dish counts within its overall satellite-TV results), lost about 49,000 video subscribers in the fourth quarter. With the Sling TV results factored in, the pay TV business is pushed into the black with a gain of 80,000 video customers, although that growth is still down from previous years.

Other analysts had slightly different numbers. Pivotal Research Group CEO and senior media & communications analyst Jeff Wlodarczak estimated that pay TV added about 105,000 video customers in the period, but he also included the Sling TV results. Evercore ISI Group media analysts Vijay Jayant and David Joyce estimated a pay TV loss of about 123,000 in the period, not taking the Sling TV results into account.

Cable, long pay TV’s laggard, actually ended the quarter on a positive note. MSOs added about 102,000 video customers in the period, according to Moffett, fueled by gains at Comcast (89,000), Time Warner Cable (54,000) and Charter Communications (33,000).

In contrast, the telco-TV sector, punished by heavy losses for AT&T’s U-verse TV (down 240,000), lost about 224,000 video customers. Satellite-TV providers gained about 73,000 net new subscribers.

In a note to clients, Moffett said the cable growth came in a period of sluggish new household formation. While that shows that cable’s growth is likely coming from its competitors, it also shows a dramatic change of fortunes among the players in the pay TV business in a very short period of time.

It wasn’t long ago that cable operators were considered to be a dinosaur business heading for extinction.

Overall full-year 2015 cable losses slowed to 1% from 2.6% in 2014, while satellite subscriber losses accelerated sharply to -1.3% in Q4, compared to a 0.1% gain in the prior year, according to Moffett.

The sharpest dropoff, though, came in the telco sector. According to Moffett, telco TV reported a 1.3% video customer deficit in Q4, compared to a 9.9% gain in the previous year.

“The improvement in cable is dramatic,” Moffett wrote. “And the deterioration in telco is breathtaking.”

While a big part of that telco TV decline is probably due to AT&T’s plan to migrate its U-verse TV subscribers to satellite provider DirecTV (which AT&T purchased in July), Moffett said that isn’t the whole story. Growth in the satellite sector slowed in the fourth quarter to 73,000 subscribers, compared to 86,000 in the same period in 2014, despite DirecTV having AT&T’s marketing engine behind it.

While broadband was a big reason for cable’s Q4 gain, Moffett noted that the sector has been steadily reducing its losses since 2010. According to Moffett’s research, cable has reduced quarterly subscriber losses from a peak of 3.5% in Q2 2011 to a 1.1% decline in Q4 2015.

DATA STILL A STRENGTH

In a note to clients, Wlodarczak wrote that cable again dominated the broadband market in Q4, despite price increases implemented in some systems.

According to Wlodarczak, net new data subscribers (including dialup) increased 19% in the quarter to 850,000. Cable again had its best share result ever, taking all net new data additions (about 980,000 additions, a 31% increase), while telcos saw a negative data result for the third straight quarter, losing about 40,000 customers.

“The cable investment thesis is all about data; cable successfully managed the entrance of the RBOCs into video and they should successfully manage through changes to the pay TV model,” Wlodarczak wrote, adding that cable’s broadband dominance “provides the ultimate hedge for cable against the effects of potentially accelerated pay TV losses and slimmed-down pay TV bundles.”

CHART: Pay As You Go

Pay TV subscriber losses have increased over the past four quarters, while cable TV ended the year on a high note.

                                                     Q1 2015      Q2 2015        Q3 2015         Q4 2015

Total Cable Adds (Losses) . . . . . . (105) . . . . . .(337). . . . . . . (200) . . . . . . 102

Total Satellite Adds (Losses) . . . . .(74). . . . . . .(284) . . . . . . .(173) . . . . . . .73

Total Telco Adds (Losses). . . . . . . . 136. . . . . . . .(3). . . . . . . . . (53). . . . . . (224)

Total Pay TV Adds (Losses) . . . . . .(44). . . . . . .(624) . . . . . . (426) . . . . . . (49)

SOURCE: Company reports, MoffettNathanson estimates. Numbers in thousands.

AT&T’s plans to phase out its U-verse TV service in favor of satellite giant DirecTV makes sense on the surface, as the move allows the telco to take full advantage of the larger distributor’s cheaper programming deals. It also could open a window of opportunity for some cable competitors, according to analysts.

AT&T has indicated that satellite TV will become its primary traditional pay TV offering by the end of the first quarter of 2016, according to Sanford Bernstein analyst Paul de Sa. The move will allow the company to take better advantage of DirecTV’s programming contracts, de Sa said — the satellite service has 19 million customers vs. 6 million for U-verse.

It also potentially frees up 20 megabits per second of wireline capacity that could be used for broadband service. While some U-verse TV subscribers probably won’t switch to DirecTV, the company thinks that number will be negligible.

AN OPENING FOR CHARTER

Not de Sa though. In a report, the Sanford Bernstein analyst mapped out what he thinks could be a golden opportunity for Charter Communications, which has a largely rural footprint and the greatest exposure to U-verse TV at 29%. While Charter is expected to complete its merger with Time Warner Cable by the end of the first quarter, which would reduce its U-verse exposure to about 26% of homes passed, the analyst believes the opportunity is still there.

De Sa noted that Charter also is susceptible to the more aggressive DirecTV promotional activity that is expected as AT&T transitions away from U-verse TV. But he believes at least for the short term, the tradeoff is to Charter’s advantage.

De Sa thinks that de-emphasizing U-verse TV will ease the competitive pressure in those markets — reducing video competition from four providers to three — and he believes a “material number of subscribers will shift to cable rather than take a DirecTVbased bundle.”

While AT&T could aggressively discount DirecTV service in its U-verse TV territories to make its package more palatable to consumers, de Sa believes that won’t happen for at least the next 12 to 18 months, as AT&T concentrates on post-merger integration, deploying its planned unified satellite/managed IP platform and neutralizing overall content costs.

“We are inclined to think that the opportunity for cable outweighs the risks,” de Sa wrote.

Pivotal Research Group CEO and senior media & communications analyst Jeff Wlodarczak wasn’t too convinced that AT&T would scrap U-verse TV, but he did see an opportunity for cable to assert its best-in-class broadband chops.

“Cable is all about leveraging their best in class fixed broadband,” Wlodarczak said. “AT&T is relying on inferior technology to try to leave more bandwidth to increase their U-verse DSL speeds. Cable should inevitably take back the vast majority of DSL subs.”

Telsey Advisory Group media analyst Tom Eagan added that moving U-verse TV subscribers to DirecTV will free up more capacity for broadband, which could make the product more compelling, rather than less.

“I’m not sure necessarily that Charter is going to win out on that because it has the largest satellite exposure,” Eagan said. “Anything that enhances DirecTV’s competitive market share isn’t necessarily a good thing for Charter.

“At the same time, AT&T also is aggressively marketing its wireless service, last week unveiling an offer that gives new and existing AT&T wireless customers who have or add DirecTV or U-verse TV unlimited video streaming, data talk and text for $180 per month. Couple that with up to $500 in discounts for DirecTV customers who are not current AT&T wireless subscribers to add that service, and the phone giant appears to be laying the groundwork for an aggressive quad play.

Eagan said the wireless moves could be a test of the viability of the quad play of voice, video, data and wireless, which up to now has fallen flat in the U.S. market.

MAKING A QUAD PLAY

In the past year, however, several cable operators have hinted at future wireless products including Comcast, which in October activated its mobile virtual network operator (MVNO) agreement with Verizon Wireless.

Eagan said that while the quad play has had more success in Europe — Virgin Media and Liberty Global have made inroads with their respective wireless offerings — in the U.S. it could have more value as a retention tool. He added that Virgin Media offered free cellular minutes to subscribers who took all four products.

“It was a low-cost way to combine the various services,” Eagan said. “What we saw was that the lowest churn of any customer anywhere was the quad-play customer.”  

SIDEBAR: The U-Verse Multiverse

Cable operators could see a window of opportunity open as AT&T transitions its pay TV customers to DirecTV. And the operators with the biggest exposure to the service could have the biggest chance to benefit.

MSO                             % of Total Footprint

Charter. . . . . . . . . . . . . . . . . . . . . . 29%
Time Warner Cable . . . . . . . . . . . .26%
Comcast . . . . . . . . . . . . . . . . . . . . 26%
Cox . . . . . . . . . . . . . . . . . . . . . . . . .21%

After a year dominated by news of a rise in pay TV subscriber losses, the emergence of “skinny bundles,” falling ratings for programmers and the continued consolidation of cable distribution, several top analysts said they believe 2016 will be a year when the media business begins to sort out its top priorities.

Telsey Advisory Group media analyst Tom Eagan believes ratings measurement — especially Nielsen’s release of its Total Audience Measurement product — could be a game-changer by offering accurate viewer data across content platforms. Falling ratings have hammered networks across the board as younger viewers move to mobile devices to watch content. With the ability to track those viewers, Total Audience Measurement could change that.

“Maybe we’ll see ratings be flat to up in 2016,” Eagan said. “We’ll know some of that when they roll this [Total Audience Measurement] out and when we see negotiations start in earnest for the upfronts in April. We may actually see a slowing down of the ratings declines, which have been occurring for the past three or four years.”

Being able to accurately measure viewing across all platforms and devices will be the final nail in the coffin for the old media business model, Eagan added.

“The old media model on the content side, which was roll out as many cable networks as you can because you’re going to get affiliate fees, is no longer the model,” he said. “You don’t want to have any weak links in your media stable.”

THE DISTRIBUTION DEALS

Pivotal Research Group CEO and senior media & communications analyst Jeff Wlodarczak said obtaining regulatory approval for the biggest merger deals of the year — Charter- Time Warner Cable and Altice’s purchases of Cablevision Systems and Suddenlink Communications — will be the top stories of 2016, but for a different reason than most suspect.

Wlodarczak said the industry will watch the Altice deals closely on the cost synergy fronts. Altice has said it believes it can squeeze $900 million in costs from Cablevision and another $215 million from Suddenlink, figures some analysts have said are too high. (The Federal Communications Commission gave the nod to Altice’s Suddenlink acquisition on Dec. 18.)

“If they do have the magic cost-cutting bullet, then others in the industry can implement the same strategies to boost EBITDA [earnings before interest, taxes, depreciation and amortization] margins,” Wlodarczak said.

As far as Charter, Wlodarczak said cable operators will be watching closely to see if bringing CEO Tom Rutledge’s business strategies to the combined entity will eventually drive low double-digit cash flow growth in 2017 and beyond.

The emergence of skinny bundles — smaller programming packages for cheaper prices — also made a big splash this year, with Verizon Communications’s FiOS TV Custom TV package, and are expected to continue to be news in 2016. FiOS Custom TV includes 45 channels — minus ESPN — for $54.95 per month initially, stepping up to $84.95 per month after a year. Subscribers also can choose from other programming packages, grouped by genres like Lifestyle, Entertainment, News & Info, Pop Culture, Kids and Sports, for an additional $10 per month.

Skinny bundles caused a bit of a stir at first — ESPN sued Verizon over dropping it from the Custom TV lineup — but haven’t really taken hold yet, mainly because existing programming contracts make it hard for distributors to break up the existing “fat” bundle. And several cable CEOs have said customers may come in inquiring about skinny packages, but the vast majority end up taking the full product suite.

Still, some over-the-top services like Dish Network’s Sling TV, which offers about 23 networks (including ESPN) for $20 per month in a single stream, have claimed success. Others, like Verizon’s go90 mobile-only service and Sony’s PlayStation Vue, are still searching for a market.

Eagan said skinny bundles could end up diluting demand for OTT.

CORD-CUTTING, SHAVING

Subscribing to skinny bundles “is the same as cord-shaving, but it’s voluntary cord-shaving,” Eagan said. “I think it will help offset the popularity of some of the OTT bundles.”

The emergence of more OTT players coincided with an acceleration in cord-cutting in Q2 and Q3, but cable operators were largely spared, due mainly to cable’s dominance in the broadband arena.

The rollout of DOCSIS 3.1, expected in the second half of the year and offering cable customers 1 Gigabit-per-second to 10-Gbps speeds, should help solidify that dominance, Wlodarczak added.

With cord-cutting not as big a concern for cable operators, MoffettNathanson principal and senior media analyst Craig Moffett said he believes the biggest overhang on the stocks will be the fear that Comcast or other operators will participate in the upcoming federal spectrum auctions as buyers.

“In the past, dalliances with wireless have been a significant negative for the stock, and we suspect some of the recent weakness in the shares owes to fears of reckless spending on either spectrum itself or on a network thereafter,” Moffett wrote, adding that it “is honestly not something we worry too much about.”

Cable’s WiFi-cellular prospects got a shot in the arm last week with news that the largest U.S. cable operator is making moves that could lead to a hybrid WiFi-cellular phone and data product.

Comcast wouldn’t say what, when or even if a wireless product would come to life, but it’s putting together the pieces. The first step was to exercise a MVNO (mobile virtual network operator) option with Verizon Communications, and Comcast is planning to begin evaluating a potential offering in about six months.

“We believe that wireless obviously is an important area for consumers,” Comcast chairman and CEO Brian Roberts said during the company’s third-quarter earnings call. “We are going to trial some things, we are going to test some things after we activate and we’ll update people as that progresses. But it’s an opportunity to take the network and the successful investments that we’ve made, and try and see if we can continue relationships and product innovation that the team is working on.”

One of those successful investments was SpectrumCo, a consortium that also included Time Warner Cable and Bright House Networks and which sold wireless licenses to Verizon for $3.6 billion in 2012. The MVNO rights spring from that sale.

CHARTER, TWC ON DECK

Comcast might not be alone in its wireless aspirations, MoffettNathanson principal and senior analyst Craig Moffett said. Charter Communications, which is in the process of purchasing both Time Warner Cable and Bright House, believes the MVNO rights are transferable and has expressed a desire to at least entertain the idea of a quad-play service.

Charter and Comcast could partner on a service, Moffett said in a note to investors, and jointly bid for broadcast spectrum. That would make economic sense but would likely draw an unfavorable reaction from regulators.

A WiFi-first phone and data product — one that uses the cable company’s WiFi network and hands off to the traditional cellular network to round out coverage — could be the answer to the elusive quad play of video, voice, data and wireless.

In the past, cable operators have tried their hand at offering a wireless product, through failed partnerships with Sprint and Clearwire. But this time may be different. The popularity of cable WiFi products, the low cost of the spectrum and the growth of mobile video could make a WiFi-first offering a success.

Adding to the urgency are recent moves by cable’s telco competitors. AT&T, which completed its $48.5 billion merger with DirecTV in July, has pushed heavy discounts for wireless and video service. Verizon, which already has about 5 million subscribers to its wireline FiOS TV product, also launched a free, ad-supported mobile-only video service — go90 — to limited audiences.

Cable companies have spent years building their WiFi networks. Cablevision Systems, which in September agreed to be acquired by European telco Altice, was the first, committing about $300 million to a WiFi buildout.

Other operators were later to the game but have stepped up efforts in past years.

But WiFi remains mainly a broadband retention tool except in the case of Cablevision, which launched Freewheel, a $9.95 per month WiFi-only phone and data service, in February.

Pivotal Research Group CEO and senior media & communications analyst Jeff Wlodarczak said a wireless play makes sense for cable operators that have already ramped up their WiFi offerings. “Why not offer consumers a low-end add-on wireless service that defaults to the WiFi network initially and then uses an MVNO to fill in the blanks?” he asked.

With about 80% of wireless data usage occurring in the home or office — two areas where cable is uniquely positioned — there is a high potential to offer a low-cost wireless service, as cable did with wireline phone service.

SPECTRUM AUCTION NEXT?

Moffett said he believes Comcast’s MVNO decision is the first in a series of dominoes to fall. The next could be its participation in the upcoming 2016 broadcast-TV spectrum auctions.

Bidding on and winning the lower-frequency broadcast licenses would allow Comcast to offer a service that would use WiFi in more populated areas and low-frequency spectrum in less dense locations.

On the earnings call, Roberts said Comcast hasn’t decided if it will bid on spectrum, saying it doesn’t feel the need for “owner’s economics” in a wireless offering. (Comcast-owned NBCUniversal expects to participate in the auction as a seller, Roberts also said.)

Whatever Comcast decides to do, they will be just the first steps in “what is likely to be a rather long and slow evolution,” Moffett said.

NUMBERS: Hot to Trot

Cable companies have been beefing up their WiFi networks, substantially increasing the number of hotspots available to their customers.

Company               No. of Hotspots
Comcast . . . . . . . . . . .11.7 million *
Cablevision . . . . . . . . . 1.1 million *
Time Warner Cable. . . . 400,000 +
Charter . . . . . . . . . . . . . . . N/A

* Includes indoor, outdoor locations in hotspot numbers
+ Per Cable WiFi Consortium, which includes Comcast, TWC, Bright House Networks, Cox and Cablevision

SOURCE: Individual companies, published reports

After a seasonally weak second quarter, analysts and investors hope better broadband subscriber results and continued improvement in basic video-customer growth in the third quarter will lead to better days for the sector.

Pay TV took a beating in the second quarter, as steady basic subscriber performance by cable companies was off set by greater telco and satellite losses. Like the previous period, the third quarter also is seasonally weak, as students return to campus in September, but analysts are optimistic that stronger broadband growth will off set any video declines.

“The good news about Q3 which, like Q2, is a seasonally weaker time of the year (all the additions are weighted to September) is that whatever the results, Q4 trends should be seasonally stronger, so they will likely be able to point to solid Q4 trends,” Pivotal Research Group CEO and senior media and communications analyst Jeff Wlodarczak said. “The overall focus, though, for cable investors should be on data subscriber results, which is clearly the key in the cable investment thesis.”

EARNINGS CALENDAR

Comcast, Time Warner Cable and Charter Communications are slated to be the first two out of the box with third-quarter results — Comcast is scheduled to release earnings on Oct. 27 with Time Warner Cable and Charter following on Oct. 29.

Both cable giants managed to report strong second-quarter customer growth — Comcast reduced its basic-video losses to 69,000 from 144,000 in the year-ago period, while keeping broadband customer additions relatively stable (180,000 in Q2 2015 vs. 203,000 in Q2 2014.)

Time Warner Cable, which is currently winding through the regulatory approval process in its $78.7 billion merger with Charter, reported some of its best quarterly subscriber growth in years in the second quarter — basic-video losses were down to 45,000 (compared to a loss of 152,000 in the prior year) and residential broadband additions were 172,000, nearly triple the 67,000 adds in the prior year. The consensus is that both companies will continue on that path in the third quarter.

Telsey Advisory Group media analyst Tom Eagan said the momentum of the past few quarters should continue for cable operators.

“We expect the numbers to be better than last year,” Eagan said of third-quarter results. He added that satellite TV providers DirecTV (now part of AT&T) and Dish Network are expected to continue their subscriber slide. And while telcos are expected to report video gains, growth is likely to be slower. That was evident last week when Verizon Communications said it added 42,000 FiOS TV customers in the third quarter, compared to 112,000 additions in the same period last year.

Charter lost about 33,000 basic-video customers in the second quarter, on par with the 29,000 it lost in the prior year.

In a note to clients, Morgan Stanley media analyst Ben Swinburne wrote that he expects third quarter pay TV subscriber losses to be slightly higher than last year — 90,000 compared to 55,000 in Q3 2014. But he expects cable to fare much better in the period — he predicts overall cable customer declines of about 110,000 compared to 345,000 last year.

All eyes will be on Time Warner Cable, which has dramatically changed its subscriber fortunes in the past year, Eagan said.

“They were one of the worst performers last year in terms of customer loss,” Eagan said. “Now [TWC chairman and CEO] Rob Marcus has said most recently they expect to add subscribers this year. That’s probably the biggest turnaround.”

The Charter deal is supposed to close by the end of the year and is currently winding through the regulatory approval process. While some analysts believe that the actual closing will take a little longer, possibly lasting into the first quarter of 2016, Eagan said investors are confident the transaction will be completed. He noted that the spread between Time Warner Cable’s trading price and the Charter offering price has narrowed from 7.2% to about 6.8% in the past few days, “which shows that the market feels better about the deal closing.”

Several companies have come out in favor of the deal and even its opponents said they would change their stance if certain conditions — mainly involving net neutrality and access to content — were adhered to. The Federal Communications Commission is shifting its focus away from distributors that could potentially restrict access to over-the-top video to another aspect of the industry, Eagan said.

“We think the sector most impacted by the FCC in 2016 is going to be content, not cable,” Eagan said, adding that the agency will be especially interested in retransmission-consent fees and network nonduplication rules that prevent distributors from importing distant broadcast signals into local markets.

NOT MUCH OTT IMPACT

The analyst added that fears of over-the-top video taking a chunk of cable subscribers for the most part have been unwarranted and that SVOD services like Netflix and Hulu, as well as OTT offerings like Sling TV, have proven to be a complement to the pay TV subscription.

“Every five to seven years there’s a new competitor — first it was satellite, then it was telco and now it’s over- the- top,” Eagan said. “I think, ironically enough, OTT will be less of a competitor than satellite and telco were to cable. You’re seeing those customers already being pay TV customers or they were never pay TV customers in the first place. OTT isn’t a replacement. ”

That could change if over-the-top offerings offer more channels at an affordable price, though.

“I would say cable has to get significantly worse or more expensive or OTT service has to get significantly better or cheaper for them to take material market share,” Eagan said. “I don’t think we’re quite there yet, especially with the average viewer watching 149 hours a month.”