Market Insight

US pay TV subscriptions decline

August 17, 2011

Erik Brannon Erik Brannon Associate Director – Research and Analysis, Service Providers & Platforms

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IHS Screen Digest estimates there was a decline of approximately 364,000 pay TV households in the US over the second quarter of 2011, based on recently reported operating results from public pay TV operators and consultations with private operators. The significant decline was largely due to escalating losses for cable operators and anaemic subscriber growth on the part of satellite operators. IPTV operators posted strong subscriber growth of 386,000, but this was not enough to offset the declines in other platforms.

IHS Screen Digest forecasts quarterly declines will continue in the next few years. However, we do also expect to see intermittent quarters of pay TV subscriber growth, for an estimate of flat subscriber growth/loss in the pay TV business in the near term.

Our estimates peg the number of pay TV homes at 102.2m as of Q2 2011. As chicken little once said, 'the sky is falling', and to many pay TV executives this is indeed true thanks to cord-cutting. To address the burning question of cord-cutting, we need to take a hard look at the facts of the situation: the economic situation for a vast population of Americans has worsened in the past four years, and customers are discontinuing video service in favor of lower priced internet video solutions.

IHS Screen Digest finds the trend of discontinuing video service in favour of the internet to be particularly noteworthy in the current economic context. In better times, subscribers were happy to take both services, but when forced to choose, many seem to see more entertainment value in the internet. This is not necessarily a negative for pay TV operators.

Cable: While the significant declines in video subscriptions are taking a toll on revenue, they are more than being made up for with high speed data and voice services. IHS Screen Digest estimates put cable video only ARPU at $75.96 at year-end 2011 with HSD and voice at $41.10 and $35.80 respectively. We believe that cable operators are in a unique position to adapt and grow their businesses even in the face of significant declines in video subscriptions. Similarly, they are in a strong position to get back video subscriber losses to IPTV and Satellite by converting DSL customers to cable's HSI.

Satellite: The two satellite operators in the USA continue to duke it out over defecting cable subscribers, even though their piece of the defection pie has shrunk dramatically thanks to U-verse and FiOS. DirecTV has been successful at capturing the high-end of the market with its sports packages, while Dish Network has built its business on the backs of cost-conscious consumers. Both face pressure from the declining demand for video packages. Without the ability to provide two-way communication, we believe that declines in subscribers is inevitable, the question is when. By 2015 we expect that the two companies will have continued to grow subscribers at a moderate pace, 0.8 per cent yearly from 2011.

IPTV: In the strongest position of all, being under penetrated and two-way will allow FiOS and U-verse to continue to grow their subscriber bases at steady 7.2 per cent CAGR through 2015. Unlike cable, IPTV players are overbuilt into traditional cable markets and will continue to whittle away at their competitors. And like cable they are able to provide two-way communications, enabling them to continue to deliver internet to their consumers. Like cable's video services, eroding DSL customer bases at AT&T are cause for concern, but revenues at the company's level 1 internet backbone will more than make up for lost DSL revenue. FiOS on the other hand will continue to eat at cable on both fronts with the ability to deliver fibre to the home.

Ultimately IHS Screen Digest believes that content owners are in the most precarious position as they attempt to continue the nearly 10 per cent annual growth in cable affiliate fees enjoyed between the years of 2000 to 2010. As video ARPU passes $86 in 2015, can we expect consumers to bear the increases?

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