Waiting for the Video Losses to Wane

Perhaps a cable operator’s greatest weapon in carriage disputes with major programmers is a simple one: perseverance.

Phoenix-based Cable One is more than seven months into a carriage fight with Viacom, a battle the small-market operator appeared to be losing in the early stages.

It lost about 34,500 basic-video customers in the second quarter, more than double its losses of the previous year.

But the declines seem to have leveled off to about 14,000 video customers in the third quarter, slightly better than the previous year.

More heartening, according to one prominent cable analyst, is that broadband subscribers — the most profitable customers for most cable companies — actually grew in the period.

Cable One parent Graham Holdings said high-speed data customers totaled 486,142, an increase of 3,417 subscribers for the period. That’s the first broadband increase for the company since the dispute with Viacom began on April 1. (Cable One lost about 1,443 broadband customers in the second quarter.)

Cable One now has more broadband customers (486,142) than video customers (476,233). It has packaged a tight 50-channel video lineup with high-speed Internet to draw new subscribers. But now new customers are increasingly ignoring video altogether.

“Nearly 60% of our new connects are Internet- only, at 50 Megabits per second [and] less than 10% are video only,” Cable One spokeswoman Patricia Niemann said.

The cable firm is in the market with a broadband offer of 50 Mbps download speeds for $35 a month, significantly less than what other larger cable operators charge.

Niemann said Cable One high-speed data customers are increasingly looking to over-the-top video solutions such as Netflix, Amazon Prime and Hulu, and with additional OTT video offerings expected from Dish Network, Sony and Verizon Communications, Cable One is embracing possible replacements for its video product.

“We have always viewed OTT as a big longterm plus for our Internet product,” Niemann said. “Our third-quarter and year-to-date increases in cash flow and cash-flow margins over last year, despite a 15% drop in video subscribers, strongly indicate that lack of importance in video cash flow today. The 4% growth in HSD subscribers, despite a 15% drop in video subscribers, also indicates the lack of importance of video as a gateway product.”

Losing the video offering could force small cable operators into pricing competition with deeper pocketed competitors. But for the moment, even analysts are beginning to see some advantages of minimizing video.

“Perhaps the biggest takeaway from the Cable One experience is the confirmation that you can, in fact, lose video subscribers without hurting your broadband business,” Craig Moffett, MoffettNathanson partner and senior analyst, said. “That had been theorized before, but it’s heartening to see the empirical evidence.”

That evidence also is emboldening some smaller operators, who are beginning to weigh the benefits of dropping or severely curtailing their video offerings.

At Buford Media, a Tyler, Texas-based cable operator with about 6,000 customers in Arkansas, Texas, Alabama, Oklahoma, Louisiana and Mississippi, CEO Ben Hooks said doing without video is becoming increasingly attractive.

“I am losing interest in providing video content,” Hooks said, adding that rising rates for content are making it more difficult to compete with satellite-TV providers, his main competition.

Hooks estimated he pays more than $50 per month for an average of 50 channels, or roughly twice the 55 cents per channel the Federal Communications Commission has estimated the average consumer pays for cable programming.

“The only reason to continue to provide video content at this time is that it still helps pay the bills, but without other broadband services it can’t support the expenses anymore to cover all the plant and programming costs to operate the system,” Hooks said.

Whether dropping video becomes the norm for smaller operators or just a negotiating tool for future carriage agreements, Moffett said operators must increasingly make hard choices about which programmers they will carry.

“But in a way, the realization that video is less important to the business is liberating,” Moffett said. “It allows for more serious negotiation with programmers, backed with the realization that if video subscribers leave it’s not the end of the world. And it encourages experimentation with new video models and packages.

“Cable One has realized that they have less at stake in these negotiations than they used to believe, so they can focus exclusively on striking whatever balance they think is best for the largest number of customers,” Moffett said.