Market Watch

US Subscription TV Posts Another Quarterly Subscriber Loss


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US subscription TV posted a net subscriber loss in Q3 2010, with the long-term decline in cable continuing. According to our estimates, the whole industry lost 70,000 subscriptions between July 1 and September 30, compared to over 252,000 drops in the previous three-month period. The slowing of the decline can be largely attributed to a modest uptick in net subscriber additions in the IPTV sector from 427,000 in Q2 to 485,000 in Q3, and a 75 per cent increase in net additions by satcaster DirecTV from 100,000 to 174,000. Cable operators in contrast have continued to churn record numbers of basic subs having lost 700,000 subscribers in Q3 and 760,780 in Q2.

Analysis
Cable companies have been losing half a million subscribers per quarter on average for the past two years. This attrition, however, did not seem like a serious problem as long as the glass remained half-full. During the same period, cable operators kept moving their existing analog customers to high-ARPU digital packages at healthy rates (590,000 per quarter on average) while the IPTV and satellite sectors compensated for churned cable subscribers (and more) by netting over 770,000 new subscribers per quarter. Overall, the total number of TV subscriptions grew by almost two million subscribers since Q3 2008, and the growth in digital cable subscriptions increased the sector's video ARPU by a healthy 7 per cent.

If we look beyond averages, however, we begin to see a tear in the silver-lining. Not only did subscription TV households shrink since 1 April, 2010, but it now seems that the churn contagion has reached the digital side of the cable video business as well. Indeed, three of the top 10 cable operators have seen their digital video subscriber numbers shrink during Q3 2010. Time Warner Cable, Cablevision and CableOne reported losing 46,000 (-0.5 per cent), 5,000 (-0.1 per cent) and 3,000 (-1.4 per cent) digital subs, respectively. While these losses are miniscule, their significance lies in their future implications since digital growth seems to be slowing down for most other cable operators as well. They collectively added 380,000 digital subs in Q3 2010, down from 636,000 in Q2 and 860,000 in Q1. Given this trend, more MSOs may be poised to experience significantly reduced digital subscriber growth rates in the near future or even net losses.

So far, the shrinkage (in basic or digital subscriptions alike) has been blamed on macroeconomic weakness. Providers insist that they have not seen evidence of 'cord-cutting' - the substitution of subscription TV with cheaper online video offerings through Netflix, Hulu and similar platforms. 'Lite' TV packages, like the one being launched by TWC, are meant to counter the adverse impact of the economy by making subscription TV affordable for low income households. While this proposition is a promising, it may take a few quarters to assess its full impact on subscriber trends.

Interestingly, we are beginning to hear a new explanation of the latest subscriber declines from the industry. Many operators confirmed that these losses have been caused, not by higher than usual gross churn rates, but by historically low demand for new connections. If this argument turns out to be the case indeed, then it may be indicative of 'cord-abstinence' whereby younger, more tech-savvy households forgo subscription TV from the moment they are formed. There is certainly anecdotal evidence that supports this hypothesis. Whether these young people end up taking TV subscriptions, as the economic situation improves or they grow older and have children, will determine future growth prospects for the subscription TV industry.

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