For the first time since analysts began paying attention, the usually seasonally strong first quarter wasn’t quite strong or seasonal enough to beat back overall video subscriber losses in the pay TV sector, with the industry shedding a collective 31,000 video customers in the first three months of the year.
While a loss of 31,000 customers in a universe with more than 100 million pay TV households doesn’t spell doom, it adds fuel to the growing debate that cord cutting isn’t just a passing fad.
The first quarter is usually a strong one for pay TV — students are still tapping away on their computers in their dorm rooms and residential subscribers haven’t yet packed up for their summer homes.
Coupled with a strong increase in occupied housing over the past 12 months, the stage was set for big gains by pay TV.
HOUSING WAS STRONG
According to the U.S. Census Bureau, occupied housing rose by about 1.7 million homes in 2014. Even with a decline of 407,000 occupied homes in the first quarter of 2015 (up slightly from the same period a year ago in a typically sluggish quarter for the housing market), overall housing growth was still strong at about 1.2 million.
While there may be other explanations for the declines, it is becoming harder to dispute a rise in homes cutting the pay TV cord or never getting wired to begin with.
MoffettNathanson principal and senior analyst Craig Moffett said in a note to clients that given the numbers, the question of whether or not selling content to over-the-top services such as Netflix, Hulu and Amazon Prime would harm overall pay TV distribution seems “painfully quaint.” Until recently, he noted, executives were able to maintain that any impact from cord cutting would be benign at best.
“The genie is out of the bottle now,” Moffett wrote. “Now, ratings are bad and pay TV subscriber trends are bad as well.”
And the Q1 results don’t include the impact of Dish Network’s Sling TV (unveiled in February), HBO Now (launched in April) and Sony’s PlayStation Vue (March). Verizon is also expected to launch a mobile OTT video service before the end of the year.
“It is only going to get worse. And, of course, we haven’t heard from Apple in all of this yet,” Moffett said.
Apple, which launched HBO Now in April in time for Game of Thrones’ season five premiere, has hinted at its own OTT service in the past. Pivotal Research Group CEO and media and communications senior analyst Jeff Wlodarczak believes the sector is headed for a “slow bleed” of video subscribers the rest of the year.
Wlodarczak estimated that pay TV declines were flat in the quarter (down by about 9,000), missing widely his prediction of a gain of 170,000 customers in the quarter. He said the high price of pay TV service — particularly hard for low-income households — and the decline in new housing formation in the first quarter will lead to “materially higher” video losses in the second and third quarters.
Leichtman Research Group president and principal analyst Bruce Leichtman estimates pay TV was flat in the quarter (gaining about 7,700 customers).
BROADBAND STILL RISING
Wlodarczak was encouraged by broadband gains for cable and telcos. Overall, net new data subscribers rose about 2% to 1.1 million, with cable’s share of the gain at 85%, compared to 81% in the same period in 2014.
Wlodarczak said cable companies added 1 million broadband subscribers in the period, similar to the prior year and ahead of his estimate of a gain of about 840,000. Telcos added about 170,000 broadband customers, according to Wlodarczak, down 25% year-over-year.
Data penetration of U.S. occupied homes was up nearly 1% to 79.8% and Wlodarczak expects those levels to rise to at least pay TV levels(86%).
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