Analyst Jeff Wlodarczak of Pivotal Research urged followers to sell already plunging Roku shares after the streaming company reported fourth-quarter revenue that fell short of Wall Street expectations.

Roku also said that first quarter revenue would be lower than expected at $720 million and that 2022 full year revenue would be $200 million below expectations. At the same time, the company plans to invest in personnel and content, cutting into profits.

“In essence, Roku is going to grow revenue at a slower than expected pace in combination with a massive ramp in expenses, into potentially a global economic slowdown with increasing levels of competition," Wlodarczak said in a research note Friday. 

"The bottom line is with increasing competition, a potential significantly weakening global economy, a market that is not rewarding non-profitable tech names with long pathways to profitability and our new target price we are reducing our rating on Roku from Hold to Sell,” he said.

Roku stock was down another 20% to $114.20 a share in early trading Friday. Roku shares were down 10% on Thursday and have fallen from $482 a share last July.

Steven Cahall, analyst at Wells Fargo, said investors should hold Roku shares, given how far they’ve already fallen.

But he made a big cut to his earlier forecast, with the lower revenues coming at the same time as increased investment.

“Roku believes now is the time to invest heavily with an aim to be one of a few that survives to harvest a large global CTV O/S TAM. Maybe it's the right approach, maybe it's not...time will tell. We don't expect investors to hang on for the ride though," Cahall said. ■

Shares of what had previously been hottest company in OTT, Roku, fell another 17% and climbing today, following a declaration from Pivotal Research Group analyst Jeffrey Wlodarczak that downward market pressure on OTT devices will soon drop prices to zero.

Roku’s fast-growing revenue is now 67% generated by advertising. And in the second quarter, Roku still drove a 24% year over year increase in device sales.

“We see dramatically more competition emerging that will likely drive the cost of OTT devices to zero and put material pressure on advertising revenue,” Wlodarczak told CNBC.

Roku shares have been on a roller coaster for a year now, rising fast after its December 2017 IPO, cratering to below $30 a share in January, then rising to a high of just more than $155 a share earlier this week.

That was before Comcast made the revelation that it would start giving away its Xfinity Flex streaming players to broadband-only users, instead of charging them $5 a month as it previously had been. Roku stock promptly dropped more than 15%.

It was further disclosed that privately held Cox Communications, which licenses video tech from Comcast, had its own version of the Xfinity Flex, which it calls Contour Stream. Charter has been leasing the boxes to internet-only users since May.

“Everyone has realized the living room is too important and the big boys ... with massive leverage are likely to make Roku growth much more difficult,” Wlodarczak added.

For its part, Roku has used strategic communications to try to stem the stock slippage. On Wednesday, it put out a research report suggesting that 45% of all cord cutters use the Roku ecosystem.

And on the Thursday, the company released upgrade details on its operating system, as well as its line of OTT players. 

Facebook stock began its asthmatic ascent on Wednesday, wheezing to a $1.04 per share gain (up 0.6%) in early trading March 21 even after Pivotal Research Group analyst Brian Weiser said the social media giant’s recent problems can also be traced to poor management.

Facebook has lost about $50 billion in market capitalization in the past three days after news reports that U.K. based Cambridge Analytica, which assisted the Trump campaign in 2016, used data from more than 50 million Facebook users without their permission.

Facebook shares have plunged about 10% since Monday, shedding about $50 billion in market cap. The stock got off to a rocky start on Wednesday – it was down as much as 3% in early trading to $163.30 per share, but showed a slight gain ($1.04, or 0.6%) to $169.19 per share by 11 a.m..

Wieser, who already had a “sell” rating on Facebook stock on concerns about limited growth in digital advertising, wrote in a note to clients March 21 that not all of its problems are due to outside forces, adding that the company is “exhibiting signs of systemic mismanagement.”

“Facebook has addressed some of its problems, and presumably will address the remainder or eventually be compelled to do so,” Wieser wrote. “However, investors now have to consider whether or not the company will conclude that it has grown in a manner that has proven to be untenable or whether it needs to significantly improve how it is managed.”

He added that the former would lead to a shrinking in size of the company, the latter hints at personnel changes.

“Both of these scenarios are incremental risks to those previously contemplated in our analyses,” Wieser wrote.

Some recent missteps like the distribution of “fake news," racist but legal uses of the platform and users who commit crimes and then document them while in the act on Facebook Live could be chalked up to bad luck or bad choices, Wieser wrote. But he added that other problems – like its failure to follow up on the Cambridge Analytic data leak (which was first reported on in 2015), its failure to take down some illegal content and flawed advertising metrics point to operational issues, which are a whole new class of problems for the social media giant.

“By contrast, operational failures are in some ways more problematic, because they strongly suggest that even when the company intends to comply with its legal and commercial obligations it is not always able to do so,” Wieser wrote. “They are worse when third parties find the errors, because the company should have been looking to anticipate those errors before others found them. While we have in the past described some of these problems as occurring as a consequence of rapid growth on massive scale, responsible managerial choices probably should have involved actively slowing growth in order to ensure that sufficient processes were put in place to avoid the problems that occurred. Although Facebook is certainly subject to more scrutiny because of its successes, we are unable to think of another company which has had as many operational problems as those which Facebook has experienced over the past few years.”

Wall street analysts are typically concerned about cable programmers’ cash-flow and affiliate fees during earnings season, but these days consolidation is commanding the conversation.

As earnings season begins for big programmers such as The Walt Disney Co., 21st Century Fox and Viacom, investors are concerned about the scale needed for content companies’ plans to stream direct to consumers.

“While advertising and subscriber trends are arguably not set to improve, they’re also not top of mind,” RBC Capital Markets media analyst Steven Cahall wrote in a note to clients, adding that tax reform and consolidation will more probably be the dominant themes. “There’s likely to be as much, if not more, debate around the [Department of Justice] view of media consolidation as there will be around cord-cutting.”

Disney and Fox have already announced their deal plans. In December, Disney agreed to purchase certain Fox assets for $66.1 billion.

Viacom and CBS are reportedly revisiting the possibility of recombining the companies — they split in 2005 — in a move that in the past many believed to be more favorable strategically to the cable programmer than its broadcast cousin.

Related: CBS, Viacom Form Special Committees to Evaluate Possible Merger

But as ratings have declined and cord-cutting accelerates, some analysts believe drafting a viable direct-to-consumer strategy is more important than ever, and consolidation is the only way to get there. “Viacom and CBS simply cannot wait any longer,” BTIG media analyst Rich Greenfield wrote in a recent note. While CBS already has a direct-to-consumer product in CBS All Access, the analyst said that alone isn’t enough.

The Fox deal would strengthen Disney’s programming dominance, adding Fox’s 22 regional sports networks, its 20th Century Fox movie and television production studio, and cable networks FX, FXX and National Geographic, as well as Fox’s 39% stake in U.K. satellite-TV service Sky. With the transaction expected to close by the end of the year — and already receiving a ringing endorsement from President Donald Trump — Disney appears to be taking the more-is-better approach as the content distribution sands continue to shift.

With viewers increasingly moving away from traditional distribution methods for mobile, over-the-top and online offerings, Disney is bulking up its already hefty content coffers to ensure no matter what method viewers use to consume content, they are likely to run into at least one Disney-owned property. As for sports, Fox’s regional sports assets should add fodder to Disney’s planned ESPN Plus OTT offering, scheduled for later in the spring.

Related: It’s Game On for ESPN After Disney-Fox Deal

Fox Takes a New Stance
Fox, in turn, is taking the sniper’s tack as opposed to Disney’s shotgun approach. By keeping its broadcast network and TV stations, perennial news ratings champ Fox News Channel, Fox Business Network and national sports channels FS1, FS2 and Big Ten Network, Fox is honing in on what it believes can still attract robust ratings and ad dollars — live sports and news. It further solidified that stance with its deal to pay about $3.3 billion over five years for rights to 11 NFL Thursday Night Football games.

Whether either, neither or both approaches win the day remains to be seen. But the fundamental truth behind both moves is apparent — traditional TV audiences are shrinking and are not expected to recover soon.

Disney seemed to verify the real impact of cord-cutting when it revealed in 2015 that sports channel ESPN had lost 3.2 million subscribers in the prior 12 months, a figure that rose to a collective 13 million viewers between 2011 and 2017. Since then the losses for pay TV programmers in general have averaged about 3% to 4% per year, although some networks, such as Fox, have experienced far less erosion.

According to Pivotal Research Group senior research analyst, advertising Brian Wieser, using Nielsen Universe data, the median growth rate for Fox networks improved to -1.6% in December from -1.9% in November. Nielsen’s February estimates show an even sharper improvement (-1.2%) compared to the prior month (-1.6%). But according to the Nielsen data, Fox is one of the exceptions.

Those declines have begun to eat into affiliate-fee growth, although some networks are more affected than others. MoffettNathanson senior research analyst Michael Nathanson estimated that calendar Q4 affiliate fee growth would range from 11% at Fox to -6.9% for Viacom. Disney fees should rise about 2.5% in its fiscal Q1, while Discovery Communications and Scripps Networks should gain 3.2% and 5%, respectively.

Less Subs, Less Ad Bucks
Fewer subscribers and declining ratings (Nathanson predicts a 13% drop in primetime C3 18-49 ratings for broadcast and cable in Q4) translates into lower advertising revenue, and in the calendar fourth quarter, total national TV ad sales are expected to fall 2.7%, according to the analyst. Viacom once again is expected to show the biggest declines (-4.5%), with Disney not far behind at -3.6%.

Despite the erosion of core fundamentals, Nathanson urged investors to focus on names that have affiliate-fee pricing power, exposure to live sports and news and unique global content. “These companies are cheap and should likely hold their value when the next wave of worries come,” he wrote.

With a new president generating a lot of attention, news viewing rose 6% in 2017, according to an analysis of Nielsen figures by analyst Brian Wieser of Pivotal Research Group.

Sports viewing declined 12% in a year without the Olympics. Removing the Olympics from the equation, sports viewing was still down 6%, Wieser said in a report Wednesday (Jan. 3).

News and sports are key categories for TV, accounting for about 23% of all viewing, based on live-plus-same-day metrics. Those two categories are mostly viewed live, as opposed to entertainment programming, which is increasingly viewed on a delayed basis or on demand.

“News is important for media owners because of the absolute scale of the genre, its potential for profitability, the political influence that follows from these divisions and because of the significant growth they have recorded in recent periods,” Wieser said.

Related: New Year, New Trump Attacks on Media

In the news segment, Weiser said NBCU’s MSNBC was the biggest beneficiary of the surge in news viewing, gaining 49%. Fox News Channel viewership grew 8%, and CNN rose 4%. Overall, viewing of the three big cable news networks was up 15%.

The big three broadcast networks’ news programming was down 7%.

Among individual shows, ABC’s Good Morning America was most popular, but was down 12% year over year. The second most popular news show was Fox News’s Fox & Friends, which was up 25%.

"In contrast to news, sports has struggled generally, although the genre still remains an important source of viewing of traditional TV," Wieser said. "In aggregate, it represents an outsized source of costs, revenues and strategic leverage between networks and distributors."

Disney networks, including ESPN, accounted for 33% of all sports viewing; nonetheless, sports viewing on Disney-owned nets was down 8% despite a 1% increase in programming hours.

Related: Return to New Year’s Day Boosts ESPN's Bowl Games

NBCU properties accounted for 16% of sports viewing and were down 39% because of the absence of Olympic programming. Viewing was down 11% on average in non-Olympic weeks on NBCU networks.

Fox-owned networks had a 21% share of sports viewing, and average viewership was up 13%, thanks in part to the Super Bowl.

Football accounted for 42% of sports viewing, with NFL programming generating 27% of total consumption. NFL viewing was down 8% despite 9% more programming hours. College football programming accounted for 12% of consumption and was flat year to year.

As earnings season for content providers rapidly approaches — most are scheduled to release their quarterly financial results in the first two weeks of November — investors are increasingly wondering if programmers, who have for years exerted their dominance over distributors, are beginning to lose their grip.

Already, two high-profile carriage renewals are in the books — The Walt Disney Co.’s renewal with Altice USA in the New York market and Viacom’s carriage pact with the second largest cable operator in the country, Charter Communications.

Related: Viacom’s Schireson Says Charter Deal Could Be Blueprint

While most analysts had seen those two programmers as prime examples of how quickly the fortunes of once-dominant content providers could change — each were facing shrinking subscriber bases due to cord-cutting and skinny bundles — both were able to hammer out deals without going dark. That seemed especially surprising for Viacom, which already had seen its channels go dark on systems owned by Cable One and Suddenlink (since renewed). Viacom has struggled with ratings declines and was said to be ripe for getting dropped by Charter.

But instead of testing those waters, Charter, according to reports, agreed to carry eight Viacom channels on its most popular tiers, relegating the rest to pricier packages. And perhaps more importantly, Charter extracted a reduction in affiliate-fee pricing some analysts estimated could be between 10% and 15%. That could have been sweetener enough to discourage Charter from experimenting with dropping the channels.

Related: The Pendulum Swings Back

With the Charter deal, Viacom has basically completed the latest round of renewals — MoffettNathanson media analyst Michael Nathanson estimated that Verizon Communications, the National Cable Television Cooperative and one smaller operator are likely next on the renewal calendar for the programmer over the coming three years.

Distributors Gaining Ground
Pivotal Research Group senior research analyst- advertising Brian Wieser said that while it depends on the network, programmers are increasingly getting pushback on carriage of their least popular channels. And unlike in past years, the distributors appear to be gaining ground.

“The writing is on the wall,” Wieser said. “ ‘VH1 Classics for Women, Jazz Version’ as a digital network does not have a future.”

Wieser was joking, but the gist of what he said rings true. The current cast of cable networks was created during a period when distributors wanted more inventory to fill up their 150-plus channel lineups. Also at that time, consumers saw real value in larger channel offerings and were willing to pay for it. Today, less is more as consumers are seeking out smaller bundles of programming.

“I think the future is worse now than what everyone thought it would be a few years ago,” Wieser said.

That shift will likely translate into lower affiliate fee increases and carriage for fewer networks, he said.

“The Discoverys and Viacoms of the world will end up negotiating lower price increases and end up with lower carriage,” Wieser said. He added that fewer channels also means lower costs for the programmer, so they should “end up in the same place.”

Wieser is not alone. Credit Suisse media analyst Omar Sheikh estimated annual subscriber declines for major domestic cable networks of about 2%, while affiliate fee growth would fall from 9% in 2018 to 7% in 2019 and 5% by 2020.

The affiliate-fee erosion comes as the years-long ad market decline continues. In a note earlier this month, Nathanson estimated national TV ad growth will be -10%, with cable down 4% and broadcast down 19% (+1% ex-Olympics).

Wieser predicted a 2% decline in national television advertising, while Sheikh estimated that ad growth would shrink from 4.3% in 2018 to between 2.4% and 2.5% by 2019-20.

Some analysts have predicted that distributors could use this newfound clout to finally break the bundle, or at least cease carrying networks they no longer feel are worth the trouble, but Wieser doesn’t see that happening on a wide-scale basis yet. He pointed to the recent Charter-Viacom and Disney-Altice deals, which allowed the distributors some carriage flexibility.

No Wholesale Exodus
Sources familiar with the Altice-Disney deal have confirmed reports that Altice won’t carry ESPN Classic as part of its Disney deal, in return for raising the minimum carriage bar for its other networks.

Other analysts such as Sanford Bernstein’s Todd Juenger have worked out the math to justify dropping channels. But even Juenger, who has believed the content business has been in structural decline for years, doesn’t predict a wholesale exodus from ESPN, whether the math works or not.

The economics look better as the fees increase. In a recent note Juenger estimated that dropping ESPN and its $11.44 per month per customer in affiliate fees would make sense even if Charter lost 42.5% of its customers. But he didn’t think any distributor was likely to drop bigger content owners.

“The problem, of course, is no [multichannel video programming distributor] wants to risk (yet) touching Disney (or Fox, Turner, CBS),” Juenger wrote. “Rightly or wrongly, the fear is that too many subscribers care too passionately about certain networks in those families.”

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.

With all of the major media companies that own TV networks having reported their latest financial results, analyst Brian Wieser of Pivotal Research calculated that national advertising was down about 1% during the second quarter.

While the second-quarter loss was an improvement on the first quarter's 3% decline, “a generally flat to slightly negative advertising environment should persist for the foreseeable future,” Wieser said in a note.

During earnings calls, Wieser said, executives talked about strong pricing in the scatter market, changes in audience measurement and advances in audience targeting as reasons to be optimistic about future ad revenue growth.

Related: Fox Seeing Big Gains in Non-Linear Advertising Sales

But Wieser isn’t buying it. He tackled those arguments in his note, one by one:

“Pricing does not necessarily reflect changes in demand.”
Weiser noted that ad sales execs have more information about their inventory, giving them advantages in negotiations with buyers, who usually want spots in specific shows. Some scatter advertisers pay higher prices for their advertising because they are newer advertisers, automatically resulting in scatter prices that are higher than upfront price.

“Advertisers already know that not all viewing is measured.”
Wieser said a measurement system that increases viewership by 5% won’t be accepted by buyers unless it comes with a 5% discount in price.

“New forms of audience targeting help media owners identify different value for their inventory, but won’t cause most advertisers to change how they budget for the medium, either.”
Large advertisers have TV budgets that probably won’t change, even if more of their TV budgets are spent on more targeted products, Wieser said.

The changes media executives are talking about won’t affect TV, Wieser said. And the large advertisers that dominate TV are mostly losing sales to newer competitors and looking to cut costs. New TV advertisers are not coming along to replace older ones.

“We don’t see many new categories of marketers emerging who drive TV – those who are large, consumer-focused, differentiate themselves on the basis of awareness of attributes, budget on a share-of-voice basis and operate in nationally oriented and oligopolistic sectors,” Wieser said. “Towards these ends, we don’t see a rebound in growth for traditional national TV advertising any time soon.”

The number of pay TV households continues to fall, according to an analysis of the latest Nielsen data by Brian Wieser of Pivotal Research Group.

Wieser said Nielsen estimates of the pay TV universe for June show a decline of 2.9%, a dip that comes despite a 1.7% increase in total TV households. That total includes only traditional cable, satellite and telco subscribers.

Related: TV Screen Dominates Adult Viewing in Q4, Nielsen says

The cable universe numbers are studied for clues about the health of the pay TV business, which has been under pressure from cord-cutters looking to save money by dropping their subscribers and younger cord-never consumers.

Data on virtual multichannel video programming distributors (vMVPDs) such as Hulu and DirecTV Now are only starting to come in. Wieser said that for June a broader Nielsen measure called “Total Cable Plus” adds about 1.3 million homes to the total.

“VMVPDs would reduce the decline, although probably not by much more than a percentage point or so,” Wieser said in a report Tuesday (May 30).

Related: Pay TV's Day of Reckoning Arrives

Among the companies that own cable networks, Discovery, Disney, Comcast-NBCU, Scripps Networks, Time Warner and Viacom were all down abou 3%. Fox was down less than 2%, while AMC Networks was up 9.9%, Wieser said.

The networks taking the biggest lumps included Boomerang and CMT, each down 9.6%. Other secondary networks, including Destination America, Science and DIY, also showed declines of more than 7%.

Disney’s closely watched ESPN and ESPN2 were down 3.8% and 3.7%, respectively.

Wieser said that data from the virtual MVPDs suggest the companies with the biggest network portfolios, NBCUniversal and Viacom, have lower penetration on the new distributors. NBC’s media network is picking up only 0.5 million subscribers, and Viacom is adding only 0.3 million.

Viacom has been excluded from a number of vMVPD packages, including Hulu and YouTube TV.

“Despite the gloomy story generally conveyed by this data, we think an underappreciated positive story lies in the data not explicitly included in Nielsen’s Universe Estimates," Wieser wrote. "Broadcast networks’ growth in penetration effectively matches the rise in TV households, meaning that if we were to look at ABC, CBS, The CW, Fox and NBC we would see gains of around +1.7% year over year. This growth in penetration provides support to viewing levels at those networks, at least to the extent that viewing arrives there by default when broadcast-only homes choose to watch linear TV.”

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.

The battle for sports rights could heat up considerably this year as digital distribution becomes an increasingly viable option for professional leagues, according to Barclays media analyst Kannan Venkateshwar.

The first test of that theory could come with the upcoming renewal of broadcast rights for Thursday Night Football in 2018, the somewhat ratings-challenged National Football League offering that was split last season between CBS, NBC and the league’s own NFL Network. Venkateshwar believes that the emergence of digital TV providers and the possibility that the league might go direct to consumer with the games could drive up prices and affect other sports deals.

HOW LONG ON SIDELINES?
He’s not alone. Pivotal Research Group senior research analyst-advertising Brian Wieser also sees an opening in the sports fray for virtual MVPDs, but he thinks they’ll wait on the sidelines for now.

“I think the vMVPDs could very well become players in sports, but it seems likely they’ll want more scale before they do anything unique,” Wieser said. “However, the streaming SVOD services — which do have scale — are probably less likely to do anything, as sports is still mostly consumed live.”

There’s a potential wild card, Weiser said: Any service provider that might want to jump into the sports-rights arena merely has to write a check, and most have ample cash on hand.

“But I think it’s unlikely this would occur, as most of them seem to be relatively disciplined,” Wieser added.

Thursday Night Football would appear ripe for vMVPDs mainly because of ratings shortfalls last year that were blamed on poor matchups and competition with news networks during a contentious election year.

But if vMVPDs choose to wait, a lot of opportunities lie ahead over the next decade. Among the sports-rights contracts set to roll off are NBC Sports Group’s deal with the National Hockey League (2020); ESPN’s Monday Night Football deal (2021); ESPN, Fox and Turner’s agreement with Major League Baseball (2021); Sunday NFL games for CBS, Fox and NBC (2022); and DirecTV’s NFL Sunday Ticket deal (2022).

MoffettNathanson senior analyst Michael Nathanson said in a report that Amazon could be a digital participant in those deals, but vMVPDs could test the waters earlier, perhaps with Twitter’s expiring NFL streaming rights or Thursday Night Football.

Venkateshwar likened the possible entry of digital bidders to the emergence of Fox in the mid-1990s for NFL broadcast rights, followed by cable networks like ESPN and TNT bidding for major sports, events that helped drive rights fees into the stratosphere.

According to Venkateshwar, sports-league revenue has risen at a 7.5% annual clip for the NFL between 2010 and 2015, fueled by a 12.3% hike in rights fees. Other leagues have seem similar gains, with Major League Baseball rights fees climbing 15%, the National Basketball Association up 3.5% annually and even the NHL up 18.3% in the same time frame.

STREAMS COULD FLOW
Digital bidders are likely to serve more as spoilers in early rights negotiations, helping to drive up prices for the ultimate winners. But as technology improves — current live-streaming capacity can’t handle a major sports event like the Super Bowl, but could handle smaller, more targeted events on Twitter or Facebook — so do the opportunities.

“This could be one of the major considerations for leagues in the coming years given that the quality of experience is a major factor in their distribution decisions,” Venkateshwar wrote.

Related > Viewer Watch 2017: Download the Complete Report

Though TV has long been a numbers game, hard data showing changes in the way consumers access video remains a hotly debated subject.

It’s not just that there’s considerable disagreement over how to interpret these changes among executives overseeing what Magna calls the $67 billion TV ad market and PwC describes as the $101 billion subscription pay TV business. There is also much grumbling over the kind of data that is available to answer these multibillion-dollar questions.

“I don’t think we’ve made as much progress as we should have made” in measuring the consumption of video on all platforms and devices, Turner Broadcasting System chief research officer Howard Shimmel said.

There also isn’t much agreement on how the growth in multiplatform video consumption will affect pay TV subscriptions. Some contend that the rise of over-the-top streaming options will sharply reduce the pay TV subscriber ranks; others believe the issue is much more complex.

“From its peak in the first quarter of 2012, the major providers have lost about 1.8 million subscribers,” Bruce Leichtman, president and principal analyst at Leichtman Research Group, said. “The industry is clearly saturated and in a slow decline.”

Interpreting those numbers remains controversial, in part because data on the size of the pay TV universe rests on different assumptions. Leichtman, for example, includes data from services like Sling TV in his company’s estimates, while SNL Kagan does not.

Nielsen also provides different numbers. It reports the number of homes that have TVs connected to a pay TV service, which is different than the number of total pay TV subscribers reported by operators, Nielsen executive vice president of research Glenn Enoch said.

“You have to be very careful about the numbers you use and [about] drawing a straight line from those numbers to revenue, because things are much more complicated than that,” he said.

Related > New Normal: Digital Distribution

CORD-CUTTING CALCULUS

A number of researchers agreed. The proportion of “people dropping pay TV subscriptions is now about 2.6%,” Leichtman noted, which is about the same rate as 10 years ago, when the industry was growing.

“The problem is that the number of new customers has declined,” Leichtman said. “We only see 1% [of homes] moving into pay TV. That is down from 3.5% a decade ago and it has had a real impact on the dynamics of the pay TV industry.”

The declines have been smaller than some had expected, SNL Kagan research director Ian Olgeirson noted. “We are seeing a slight acceleration in the decline in subscribers for multichannel services from a roughly 1% decline in 2015 to a decline of what will probably be 1.3% or 1.4% in 2016,” he said.

The causes of those declines are also hotly debated. “Service providers would say that a lot of those declines are driven by price” and economics, Olgeirson said. But that isn’t the whole story, as the economy has rebounded and housing starts have grown over the past two years, he said.

A recent Frank N. Magid Assoicates survey found that 75% of likely cord-cutters said the ability to watch content via the Internet and OTT platforms was a key reason to drop pay TV service, Magid Advisors president Mike Vorhaus said. Only 29% of respondents cited costs.

Research also challenges the prevailing assumption that pay TV and SVOD services are competing offerings, said Howard Horowitz, president and founder of Horowitz Research, who sees them as complementary to traditional pay TV.

Horowitz survey data shows that 52% of whites and 58% of Hispanics have both a multichannel subscription and a subscription VOD service, while only 5% of whites and 6% of Hispanics have just a SVOD service.

STAGNANT AD SPENDING

Much unease also surrounds the ad market. Brian Wieser, senior research analyst, advertising at Pivotal Research Group, said the economy faces considerable uncertainty over the next year.

“I don’t think anyone can say with any certainty what is going to happen next and that uncertainty is going to curtail advertising,” he said.

National TV ad revenue will drop slightly by 0.4% in 2017 to $44.6 billion, Wieser predicted, and remain essentially flat through 2020, when it will hit $45.2 billion.

Magna’s Letang also sees a weak TV ad market combined with bullish prospects for digital media. “In 2017, we see high single digital inflation [in pricing] but high single-digit declines in ratings,” Letang said. “National TV will be up 1% in 2017 from 2016 if you exclude P&O” — meaning the 2016 revenue from political ads and the Summer Olympics — “and down 1% if you include P&O.”

With political and Olympics spending included, Magna projects that total TV spending will drop by 4.8% to $64.2 billion in 2017, declining further to about $62.2 billion in 2021.

Digital spending, though, will continue to grow rapidly. By 2020, Magna forecasts that mobile advertising will more than double to $78.4 billion (38.2% of all advertising) and social media will hit $31.8 billion in 2020 (a 15.5% share). TV, meanwhile, will slip to a 32.4% share.

Given the uncertainty over the ad market and pay TV subscriptions, programmers and operators have been rethinking their operations.

NEED TO BE NIMBLE

The drive to adapt to new consumer habits has prompted a number of projects to make operations more nimble, Discovery Communications chief technology officer John Honeycutt said.

For example, Discovery’s recently deployed “On Ramp” project allows about 80% of the content produced by 600 production suppliers to be uploaded to the Amazon cloud, where it can be immediately available to Discovery employees and channels all around the world.

“Going from 0% to 80% makes us so much more flexible and efficient,” Honeycutt said.

Equally dramatic upgrades are occurring in the pay TV infrastructure. After ticking off a long list of new products and initiatives to deliver more content to more devices, Comcast Cable executive vice president, general manager, video and entertainment services Matthew Strauss noted that these efforts are built on major improvements to the MSO’s infrastructure.

“We are rolling out DOCSIS 3.1,” he said. “We are rolling out Gigabit speeds. We are transitioning more and more to all-IP, which will allow us to innovate and deliver more of these newer services.”

Rapid innovation has also become the norm for digital platforms. “In 2016, we launched 30 new products and made hundreds of enhancements on dozens of platforms,” Alex Wellen, senior vice president and chief product officer at CNN, said.

Much remains to be done, particularly in the area of measurement. This year will mark a notable improvement on that front, with Nielsen planning to begin syndicating its Total Content Ratings on March 1.

“But some of the networks have been saying they won’t be ready for Nielsen’s public rollout in March, and it isn’t clear if everything will be ready in time for the upfronts,” Jane Clarke, CEO and managing director of the Coalition for Innovative Media Measurement (CIMM), said. “It is a very complex process to get it implemented in the apps for every kind of player and all the devices.”

Others worry about the TV industry’s ability to maintain its share of ad spending without better data. “Measuring crossplatform video consumption is important, but it is a 2006 problem,” Turner’s Shimmel said. “Today, when we talk to advertisers, what they really care about is outcomes [such as sales] and I don’t see that kind of measurement anywhere in Nielsen or comScore’s future.”

More debates surround commonly held perceptions of the OTT market.

Michael Leszega, senior analyst of market intelligence at Magna, said that “in 2016, we have [more than] 25 million cord-cutters and cord-nevers,” and that this group will continue to grow. By 2020, he predicted, about 28.6% of all households will be outside the traditional pay TV ecosystem. “It is a sizable portion of the population that can’t be ignored,” he said.

That has prompted a number of companies to develop streaming bundles of channels like Dish Network’s Sling TV, Hulu, Sony’s PlayStation Vue and AT&T’s DirecTV Now.

“If you look at the rumors about Amazon or YouTube coming out with OTT bundles, there could be a whole bunch of them, maybe seven or eight by the end of 2017,” Steve Shannon, general manager of content and services at Roku, said.

Tony Goncalves, senior vice president of strategy and business development for AT&T Entertainment Group, described DirecTV Now “as a mobile-first-centric platform” that will deliver the kind of advanced digital features consumers expect from their mobile apps.

“DirecTV Now is pay TV as an app and it opens up a market that has not historically been addressed by pay TV,” he said.

Dish Network also sees great promise in the melding of pay TV packages, OTT delivery and app experiences, Niraj Desai, the company’s vice president of product management, said.

“TV is becoming an app,” he said. “We have been talking about that trend for a while, but 2016 was really the year TV as an app came into its own” with better TV everywhere offerings and the streaming OTT bundles such as Dish’s Sling TV and DirecTV Now.

COMPLEMENTARY PLAYS

Even better, these products open up new markets and are not designed to cannibalize traditional pay TV offerings, he added. “Sling is complementary to DBS,” he said, meaning Dish and DirecTV’s satellite-TV platforms. “Sling over-indexes with urban millennials and DBS resonates with suburban and more rural customers that are more traditional TV watchers.”

Similar views come from programmers that have aggressively targeted consumers without traditional multichannel TV subscriptions.

“We launched HBO Now with the theory that its subscribers were going to look very different from the traditional subscribers,” Bernadette Aulestia, executive vice president of worldwide distribution at HBO, said of the premium programmer’s standalone app.

HBO Now subscribers are 10 years younger than customers of HBO’s premium cable network and typically live in broadband-only households, she said.

“We look at it as an entry point to customers that are coming into the category,” Aulestia said.

The growing popularity of skinny bundles and streaming OTT offerings has also helped HBO’s premium pay TV business, she added.

“There was a time, as a premium service, that we were only sold at the top of the bundle,” Aulestia said. “The idea that HBO should be sold at every level of the bundle, and even as a standalone service, means there are fewer barriers to get HBO.”

The rise of OTT and skinny bundles has been more worrying for ad-supported networks.

“Getting more creative packaging of content to create more customized solutions for the consumer can be very challenging for content providers because you have increasingly fragmented audiences,” Joe Atkinson, technology, infocomm, entertainment and media advisory leader at consultancy PwC, said.

Atkinson and others said OTT distribution can also open up a number of new opportunities.

For instance, the growing SVOD market encouraged Turner’s recent launch of an OTT movie service called FilmStruck, Coleman Breland, president of Turner Content Distribution and president of TCM, said.

“As the bundle became tighter, we decided to go direct to consumer instead of trying to launch a linear network and push it through the ecosystem,” which would be difficult in the current pay TV environment, he said.

Turner has also been pushing to expand the content made available on all platforms both in terms of reach and quantity, with the addition of offerings like full seasons on-demand.

“We now have 450 affiliate partners for our TV everywhere products” and have seen usage jump by “triple digits” in the last year, Breland said.

TIME TO TARGET

Many of these newer products can be traced to a more fundamental change in the way operators think about their customers.

“Today, service providers have to figure out how to target different individuals in household,” PwC’s Atkinson said. “That is a tough challenge, but I think it is really the keys to the kingdom.”

One example of such a targeting effort is the development of packages targeted to consumers at different life stages. “College students have different needs than a single-family home with kids, and we are very focused on meeting all those different needs,” Comcast’s Strauss said. He said the Xfinity on Campus product has been a success in that regard.

Operators have also been greatly expanding the content sources via apps on Internet connected set-top devices such as Dish Network’s Hopper. “You can watch live TV with your Dish subscription, or recorded TV on your DVR or you can watch Netflix and YouTube all in one convenient place,” Dish’s Desai said.

Adding more choices has also been a top priority for Cox Communications, Steve Necessary, executive vice president of product development and management at the Atlanta-based cable operator, said. “We have more than doubled our VOD offerings from 50,000 to over 120,000,” he said.

Cox also has revamped its TV app to expand the content available on digital devices and speeded up the rollout of Contour — Cox’s version of the Comcast X1 Internet-connected set-top platform — from 3,000 customers to more than 600,000 in 2016.

Very importantly, such efforts are also beginning to pay off. Both Comcast and Cox are seeing some of their best video-subscriber efforts in a decade.

Programmers are also reporting strong gains from their digital platforms.

“There is a blending of content types and expansion of the platforms,” translating into some record-setting numbers, ESPN vice president of digital media research and analytics Dave Coletti said.

In year when some live sports audiences have declined, Coletti noted that Watch ESPN’s live stream of the Nov. 26 college-football game between third-ranked Michigan and second-ranked Ohio State — which went into double overtime before OSU prevailed, 30-27 — tallied 1,273,000 unique viewers, making it ESPN’s most streamed regular college football game. (The game telecast also aired on ABC.)

“Eight of our top 10 most-streamed regular season college football games have occurred this year,” he noted.

The 2016 presidential election helped CNN set a number of network records, Wellen said, including a record audience level on Nov. 9 with 77 million unique users, 83 million video starts, 483 million page views and 29 million live streams.

Equally notable was social media. CNN racked up 169.7 million video views on Facebook and 47.6 million Facebook Live views, he said.

“Those results show that it has become very important to be both a destination for content and a distributed brand,” he said. “We have apps and websites where people can access our content but, we’ve also seen that we can be very successful on Facebook Live” and other outside platforms.

Additional encouraging news can be found in TV use, Nielsen’s Enoch said. “The decreases that we saw in TV usage that really started to accelerate in the mid-2014 have lessened,” he said. “TV consumption remains at near record level.”

“We are also seeing a shift back to the more traditional way of hooking up a TV” to a pay TV service or an antenna, he added. “The universe of homes that can watch TV or can stream video to the big screen has actually grown,” reversing a trend that began with the digital transition and the 2008 recession.

That said, Enoch said the “fastest growing area of overall usage — not just video — is the smartphone.”

In the second quarter of 2016, Nielsen reports that consumers ages 18-34 spent almost as much time each week with their smartphones (14 hours and 36 minutes) and tablets (three hours and 27 minutes) as they did with traditional TV (18 hours and 27 minutes).

Less discussed but equally important are connected TVs. “TVs connected to the Internet by any device have grown from about one-quarter of all households in 2010 to about two-thirds of all households,” Leichtman said. “There are now more connected TV devices in American than there are pay TV set-top boxes.”

Said CBS Interactive president and chief operating officer Marc DeBevoise, “We are seeing explosive usage in those connected TV experiences.” He added that “time spent on connected TVs with our products has grown by more than 300%.”

As an illustration, consumers in October of 2016 spent about 347 minutes per month consuming CBS news content via desktop computers, compared with 360 minutes via Apple TV and 496 minutes via Roku, per unique viewer, DeBevoise noted.

“That is a lot of usage, and we are spending a lot of time making certain we can capitalize on that by getting those experiences right,” he added.

LINES ARE BLURRING

Connected TVs also offer much more advanced capabilities for search and discovery. For example, the Roku platform allows users to search for TV shows and movies across more than 100 apps, Roku general manager of content and services Steve Shannon said.

Advanced features are helping to blur the line between connected devices, pay TV operators and the new bundles of streaming channels.

Companies such as Hulu and Sling are increasingly bundling their subscription packages of channels with a free Roku, Shannon said. Also, Charter, Comcast and a number of other operators have either launched or plan to launch TV everywhere apps on the Roku platform so that subscribers can access a large bouquet of channels on the pay TV apps, he said.

“You have the normalization of OTT, where you are seeing massive amounts of traditional broadcast style content viewing on OTT platforms,” Shannon said.

The amount of commercials in TV network programming rose to 10.9 minutes per hour in November from 10.7 minutes last year, according to Nielsen data analyzed by Brian Wieser of Pivotal Research Group.

Several networks have been talking about reducing commercial loads to make their programming more attractive to viewers, who are being lured away by commercial-free alternatives like Netflix and over-the-top video sources, which often have fewer, shorter breaks.

Commercial loads were down at networks run by Time Warner, Scripps Networks Interactive and 21st Century Fox, according to Wieser.

Viacom, which has talked about lowering the amount of commercials in some new programming on some of its networks, was up for the month.

Read more at broadcastingcable.com.

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.

Pivotal Research Group said it is reducing its year-end 2016 target price on Liberty Global from $50 to $41 in part to account for the UK vote to exit the European Union.

The reduction also accounts for the distribution of 117.5 million Liberty Global Latin America and Caribbean (LiLAC) tracking stock shares, Jeffrey Wlodarczak, Pivotal’s principal and senior analyst – media & communications, said in a research note issued Friday.

Liberty Global owns Virgin Media, the largest U.K.-based MSO, as well as cable operations in several other parts of Europe via Ziggo, Unitymedia, Telenet and UPC.

“The broader risk is that Brexit will drive the U.K. (and possibly the EU) into a recession, but we remind investors that LGI provides mostly utility like products at relatively attractive prices and we suspect the EU and the U.K. will be forced to expand stimulus programs around this event,” Wlodarczak noted.

He said he does not expect any change to Liberty Global’s Project Lightning network and service investment/expansion in the U.K. as a result of the Brexit vote.

“Broadly speaking even the most supposedly defensive euro telco stocks have traded poorly in recent weeks around the prospects for Brexit, which we believe is related to concern that there is no realistic place to hide in Europe if the exit of the U.K. leads to further EU destabilization (and potential additional country exits from the EU medium to longer term),” the analyst added, noting that the Brexit vote is considered “advisory,” because the UK will remain in the EU for at least 2 years and could still reach an ultimate deal to stay in.

“However, until the market gains greater certainty about the ultimate effects from a potential Brexit trading in Euro cable/telco names may potentially continue to be choppy and it is likely to continue to be easier to own BUY rated CHTR [Charter Communications] and CMCSA [Comcast].”

Liberty Global was among a large group of distributors and vendors with a focus on Europe to take a hit on the stock market.

-Shares in Arris, a major supplier that became incorporated in the U.K. following its acquisition of Pace in January and is now pushing to spur international growth, were down $1.05 (4.60%) to $21.77 each at last check. Arris's worldwide headquarters remain in Suwanee, Ga.

-Shares in Altice, which just wrapped its acquisition of Cablevision Systems, was down 94 cents (6.29%), to $14.01 each.

-Discovery Communications, which has significant international operations and focus, was down $1.75 (6.64%), to $24.62 per share. 

Update: Discovery released this statement regarding the Brexit vote: 

"Discovery Communications respects the decision of the U.K. people in this historic vote to leave the European Union. Discovery Channel launched in the U.K. in 1989 and since then it has become one of our biggest markets and a critical creative and business hub. As a global company with a significant presence in 220 markets, we are accustomed to operating in an industry and a world where change is constant. We will work closely with U.K. and E.U. leaders to successfully navigate this change and find new opportunities to shape our future. In the short-term and medium-term, our currency hedging program will significantly minimize the foreign exchange impact of the Brexit vote on our financial performance."

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.”

A decade after the split that was supposed to unlock the hidden value inside Viacom, some pundits are calling for the home of MTV Networks to put the old band back together by recombining with broadcaster CBS in an aggressive move to restore value and clout to the once-powerful cable networks.

Recent moves by Sumner Redstone, Viacom’s ailing top shareholder, to possibly oust CEO Philippe Dauman and the board of directors have brought the conversation to the fore.

But many say stitching Viacom and CBS back together would be a long, costly process that might make both weaker rather than stronger.

SpringOwl Asset Management hedge fund manager Eric Jackson has been one of the loudest proponents of reconstituting the old Viacom, combining the broadcast and cable assets and placing CBS chairman and CEO Les Moonves and his team firmly in charge.

Jackson pins most of Viacom’s woes on executive chairman and CEO Philippe Dauman and thinks a CBS-Viacom recombination would offer cost savings and greater efficiencies, as well as the obvious changes in management.

TARGET: NEW MANAGEMENT

Viacom might indeed rise out of the ashes of its current predicament — but possibly too late for Dauman. “Investors will value other management taking over,” Pivotal Research Group senior research analyst, advertising Brian Wieser said in an interview. “You could literally put anyone in the CEO spot.”

Wall Street’s top candidate would be Moonves, who has overseen a huge resurgence at CBS in the past 10 years, while Dauman has seen Viacom’s value diminish. The biggest question, Wieser said, is if Moonves wants to take on the daunting task of reviving Viacom or would rather continue on his current path of growing’s CBS assets.

Under Moonves, CBS stock has more than doubled in price, to $55.17 from $26.64 per share, over the last 10 years.

CBS expects retransmission-consent revenue to reach $1 billion by year-end (up from “tens of millions” after the 2006 Viacom split) and to more than double to $2.5 billion by 2020.

Moonves has been quick to the attack on the over-the-top front, launching CBS All Access, which last year attracted an estimated 100,000 monthly subscribers. CBS has projected it could have 4 million customers by the end of 2020.

Moonves has deflected merger talk, saying on a 2015 earnings call, “We’re feeling pretty strong about ourselves and don’t need any partners.”

One roadblock could be finding an acceptable premium for Viacom, which currently has an enterprise value of about $29 billion, about the same as CBS’s EV of about $32 billion.

Wieser said a Viacom-CBS combination makes sense on some fronts and there could be tons of synergies across the board, but Moonves and CBS would have to articulate their vision for the company for any recombination to work.

Viacom still has value in that its Nickelodeon networks reach more kids than any other programmer, Wieser said. In the music arena, MTV Networks could recapture some of the lost mojo in that sector with new programming introduced at the most recent upfronts. “It really comes down to whether there is a fundamental belief in the durability of the assets,” he said. “I believe there is value in the assets, but it’s understandable why some don’t have that view.”

Others, like Telsey Advisory Group media analyst Tom Eagan, think the risks would outweigh the rewards, adding that Viacom’s problems could also be solved with time and the move toward Total Audience Measurement.

Total Audience, which is beginning to emerge from ratings companies Nielsen and comScore, potentially will track all viewership all of the time, even those elusive viewers who watch content on every device but their TVs.

CROSS-PLATFORM ELEVATION

One of Viacom’s biggest problems has been declining ratings at its youth-oriented networks, which have driven ad sales down and made the company vulnerable in affiliate-fee negotiations.

“The inclusion of more cross-platform measurement is going to help Viacom,” Eagan said. “You could arguably say it will help them more than any other cable-network group, because so much of their viewership is off-linear. But they need to be able to monetize it.”

Wieser wasn’t so sure that Total Audience would be Viacom’s magic bullet. He believes the company’s problems are much deeper, even more than its failure to develop shows its core audience wants to see and the loss of talent like Comedy Central’s Stephen Colbert and Jon Stewart.

“The fundamental problem Viacom has is, it has a controlling shareholder,” Wieser said. “Investors never seem to care [about that] until things go badly.”

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.”

I am old enough to remember when Yahoo! stood for something (Yet Another Hierarchically Organized Oracle) and not just the final word of Major Kong in the last scene in Dr. Strangelove (or was that “Wahoo?”). Nevertheless, the latest moves of Yahoo! the Internet company – holding off on the planned spin-off of its stake in Chinese e-commerce giant Alibaba and essentially spinning off the rest of its business – doesn’t invoke the sense of enthusiasm that once permeated the online pioneer.

There was a day when Yahoo! [the exclamation point was needed because it was the only way they could trademark the name; Yahoo was already taken] was at the top of the Internet heap, heading a long line of Web portals with names that have been forgotten for the most part – Lycos, Excite, Web Crawler, Ask Jeeves, etc. Yahoo! was different, a little cocky, but that attitude was backed up by strong technology and the sense that the potential for the Internet was limitless.

But over the last few years, the purpose of that exclamation point has faded as the missteps have far outweighed the hits. In the TV space, where Yahoo! came late to the original content party but with an open wallet, the disappointments have been particularly strong.

In October it scrapped its most high-profile scripted series – former NBC cult comedy Community – and canceled basketball comedy Sin City Saints and sci-fi spoof Other Space, taking a $42 million write-down in the third quarter to boot.

On its third-quarter conference call, Yahoo! chief financial officer Kenneth Goldman said Yahoo! came to the conclusion that it couldn’t make money on original content. He left the door open for future shows, but wasn’t that encouraging.

“We're not saying we're not going to do these at all in the future, but what we are saying is, in three cases at least, it didn't work the way we had hoped it to work and we decided to move on,” Goldman said on the call.

Other ventures, like its exclusive streaming venture with the National Football League, seemed promising at first, but less so after closer scrutiny. Yahoo! said it attracted 15.2 million unique viewers for an Oct. 25 game between the Buffalo Bills and Jacksonville Jaguars in London. But later there was some doubt as to how long those viewers watched, which affected whether the online giant made any money back from its reported $15-to-$20 million investment.

More recently, Yahoo! had planned to avoid a potential $10 billion tax hit to its $32 billion stake in Alibaba by spinning off the interest in a separate company called Aabaco. Those plans were scrapped after the IRS declined to sign-off on its tax-free status. That forced Yahoo! into a corner and resulted in the latest scenario.

Yahoo CEO Marissa Mayer has pledged to tighten Yahoo!’s focus and “prioritize investments to drive profitability and long-term growth,” what some have said could be code for more layoffs. But truthfully, there already has been a massive talent exodus at the company over the past few years.

The spin, which some say could take a year to complete, gives Mayer more time to pretty up the assets for sale. It won’t be easy. Companies like AT&T, Verizon Communications, Google, Microsoft and News Corp. have been singled out as potential suitors, but none of them will likely pay a high price for the assets. With a market capitalization of about $34 billion, separating out the Alibaba stake and its Yahoo! Japan unit (a joint venture with Japanese wireless company Softbank valued at about $5 billion) leaves a negative valuation for the rest of the company. By some estimates, Yahoo!’s core business has a private value between $2 billion and $8 billion, but is still a far cry from the company’s heyday during the Internet bubble, when it was valued north of $100 billion, or even in 2008, when the company had a $56 billion valuation.

The sad part is that Yahoo!’s core business has some strong components – Yahoo! Finance, Yahoo! Sports and Yahoo! Mail – and has about 1 billion global users. Its mail service has about 81 million users in the U.S. alone. Surely that is worth more than a couple of billion dollars.

In a research note before the spin became official, Pivotal Research Group analyst Brian Wieser wrote that Yahoo! has a big enough customer base and a strong sales force that could give a new owner time to develop new products while the core business continues to pump out revenue.

“The big question is whether anyone would actually show up with a meaningful bid,” Wieser wrote. “We can understand why a buyer looking to attach their existing assets to a large media property might look at Yahoo! only reluctantly vs. alternative strategies.”

Therein lies the rub. If some deep-pocketed company or investor sees the value in that kind of reach, maybe there will be a reason for some enthusiasm at Yahoo! after all.

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.”