Despite relentless regulatory threats (see Rules), at least a few bulls believe 2015 will be the year that cable operators — particularly Comcast and Charter Communications — will cross the chasm into positive video growth, capitalizing on satellite’s continued decline and its strong broadband offerings.
In a note to clients previewing his 2015 outlook on the sector, MoffettNathanson principal and senior analyst Craig Moffett said that after several quarters of flirting with positive video growth, both Comcast and Charter should cross into positive territory in 2015, with Comcast adding 70,000 video customers and Charter adding 67,000.
Moffett made a point to separate Comcast and Time Warner Cable, which are expected to complete their $67 billion merger early this year. TWC, which has faced some subscriber challenges over the past several years, will lose about 463,000 video customers in 2014, reducing that to a loss of 186,000 customers in 2015 (which would offset Comcast’s 70,000 gain), Moffett estimated. TWC will add 18,000 video customers in 2016, according to the analyst.
That growth won’t necessarily come from new household formation or the realization by millennials that Internet video is just a fad, but mainly from subscriber losses by satellite- TV providers DirecTV and Dish Network. After years of net new subscriber additions in the hundreds of thousands, Moffett predicted, DirecTV will dwindle to 14,000 additions in 2015, culminating in a loss of 151,000 customers by 2018. Dish, which added about 1,000 customers in 2013, is expected to lose about 92,000 customers in 2015 and 134,000 by 2018, according to Moffett’s estimates.
He’s not alone. Other analysts, such as Pivotal Research Group principal and senior media and telecommunications analyst Jeff Wlodarczak, also said satellite’s growth days could be over.
The notion that cable operators could cross the positive subscriber threshold first surfaced in 2013, when Comcast reported its first quarterly video customer-growth in about six years, adding 43,000 video customers in the fourth quarter. That turned out to be just a fleeting glimpse — Comcast ended up losing about 267,000 video customers that year, but it was fewer than in years past and a sign of things to come.
Comcast again reported positive video customers in the first quarter of 2014 (24,000). Although Comcast reported video customer losses in the second quarter (144,000) and the third quarter (81,000), Moffett said he expects a fourth-quarter gain that will reduce full-year subscriber declines to just 9,000.
Charter entered positive video-customer territory in 2012, adding 22,000 customers in the first quarter — which it credited to more-effective packaging and more HD channels — and again in the first quarter of 2014 (18,000 video customers).
Video-subscriber growth has been the cable industry’s Holy Grail for about a decade. The industry last showed a video-customer gain in 2001 when, according to the National Cable & Telecommunications Association, there were 66.9 million U.S. cable customers. As of last March, that number had fallen to 54 million, according to the NCTA.
Video-subscriber growth also comes at a time of high pressure on the video side of the business. Overall cable-video rates are rising between 3% and 5% per year to help partially offset double-digit increases for programming, retransmission consent and sports rights.
Over-the-top video competition also is heating up as Sling TV, Sony, Verizon Communications, HBO and CBS all have plans to offer lower-cost online video packages before the year is out.
OTT THREAT OVERBLOWN?
Moffett believes that Sling TV, Dish Network’s OTT offering, will have some initial interest, but it costs too much for the non-sports enthusiast and lacks the programming true sports nuts crave — regional sports networks and broadcast TV stations. Though the Sony offering is a little hard to forecast, Moffett wrote that maybe investors and industry pundits that fear OTT services that merely aggregate existing cable programming are looking in the wrong place.
“Disruption isn’t likely to come from within the existing ecosystem, in our view,” Moffett wrote. “It is likely to come from outside. Millennials aren’t waiting for a lower-priced package of the same content; they are abandoning the ecosystem altogether in favor of content produced on and for social media at a fraction of the production cost of traditional pay TV.”
That said, Moffett estimated DirecTV and Dish Network would lose a collective 285,000 subscribers by 2018, more than enough to fuel cable increases.
Wlodarczak said he believes that cable has finally caught up with the satellite business after years of fierce competition, adding that even AT&T’s proposed $48.5 billion acquisition of DirecTV won’t be enough to stop the bleeding.
“The presence of AT&T at DirecTV (which we believe will end up driving slower growth in and of itself) is likely to offset improvements in the economy and [satellite] is unlikely to show annual video-subscriber growth ever again,” Wlodarczak wrote in a recent note to clients.
IT’S THE ECONOMY
Wlodarczak said he believes that although there has been a lot of noise on the OTT front, the data shows that the economy has been the biggest factor in pay TV losses, forcing more and more consumers to revert to free, over-the-air broadcast programming. According to Nielsen, broadcastonly households have increased by 1.2 million over that past four years, while new pay TV customers increased by 475,000 homes. With about a 2.65 million additional occupied households in the same period, Wlodarczak wrote that implies that about 1 million households elected to go without TV or to a digital alternative in the past four years.
“As for the argument that millennials are less interested in pay TV, pay TV penetration among 18-24 [year-olds] is actually higher today (90.5%) than it was 4 years ago (88.2%) [although pay TV viewership hours declined over the same period] according to Nielsen,” Wlodarczak wrote. “In our view, if household incomes continue to rise, household formation accelerates off historically low levels, and millennials keep moving out of the basement of their parents’ homes, pay TV results could improve materially.”
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