Market Insight

Early reports show positive signs for the pay TV business

April 24, 2014

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

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The two largest US IPTV operators, AT&T and Verizon, combined for the weakest Q1 IPTV subscriber growth ever in a quarter that otherwise showed some positive signs for the US pay TV industry.Thanks strong results from Comcast and Time Warner Cable, pay TV is off to a stronger first quarter than last year.

AT&T and Verizon combined for video subscriber additions of 258,000, compared to 401,000 in Q1 2013. Maturation at Verizon is responsible for the weaker IPTV growth. With Verizon's FiOS build out approaching completion, no further signs of aggressive expansions, and being faced with rejuvenated cable operators, Verizon grew its video subscriber base by just 57,000, much less than the 169,000 it added in Q1 2013. Verizon maintained its video penetration at 35.0%, unchanged from Q4 2013, another sign that Verizon has matured. The company recently announced more aggressive promotions and bundling to counteract slowing growth.

By contrast, AT&T continues to acquire customers at a blistering pace, picking up 201,000 U-verse video subscribers during the quarter. With a larger footprint than FiOS, an aggressive build out, and a video penetration at only 21%, AT&T will continue to gain subscribers vigorously for the foreseeable future.

Comcast played a major role in overall pay TV performance to uplift total pay TV subscribers in the quarter by adding 24,000 video subscribers. The first quarter 2014 was the second straight quarter of positive video subscriber growth for Comcast, a rare feat for any cable operator in today's competitive pay TV landscape. Comcast changed its video subscriber methodology for reporting Multi Dwelling Units. Using the old methodology, Comcast added 4,000 video subscriber, still a positive performance.  Comcast credits its X1 platform and promotions for the strong Q1 upswing.

Time Warner Cable is coming off 2013 struggling more so than most cable operators, but its Q1 results have been its strongest in several years. Time Warner Cable mitigated its video subscriber losses to just 34,000, a huge improvement over the 118,000 lost in Q1 2013. TWC  also posted strong broadband and telephony subscriber growth of 269,000 and 107,000, respectively.

Our take

The US pay TV business is in flux, with nobody knowing the exact direction it will now head. The quarter's victories for Comcast, Time Warner Cable, and AT&T point to the success of a balance between price and features. The deceleration for Verizon has been dramatic, Growth of 57,000 subscribers is a shadow of what it was in the same period from 2012. This is good news for TWC, Verizon is overbuilt across a significant portion of its footprint, nearly 13% at the end of Q4 2013, according to TWC.

Given that penetration for Verizon was at 35.0% at the end of Q1 2014, it isn't difficult to understand why the company is not growing like it did two years previously. In fact, the relatively minimal growth during the quarter was worse than IHS had previously projected. Market forces being what they are, Verizon has reached a point of maturity and will now begin the real battle with cable operators as it fights to hold on to its subscribers. In the next few years it can reasonably be expected that the company will begin a pattern of subscriber gains and losses as its marketing campaigns are successful or not.

TWC isn't taking the matter laying down, in key markets the company has been fighting  back against Verizon. The loss of 34,000 video subscribers during Q1 2014 is a sign that the maturation at Verizon coupled with an improvement in operations and cost are leading to future quarters of positive subscriber gains. The combination with Comcast will create a media titan, the likes of which have never been seen before.

For its part, Comcast's Q1 2014 gain of 24,000 video subscribers was less of a surprise given the company's renewed commitment to technology.  During the quarter it accelerated deployments of its X1 cloud-based set-top box, and boosted internet speeds for significant amounts of its customers. As we predicted, the transition from all negative quarters to some positive was inevitable. And by the same logic, a return to yearly organic growth in subscribers is not out of the question.

Unlike the other major pay TV operators, we believe that AT&T is ready to continue growing video subscribers at a significant rate for years to come. The company is actively expanding its footprint, its fiber-to-the-node installations snaking across many major urban markets. Like cable, AT&T has found success with the bundling of broadband and video products. Reacting to market demand will be key to keeping AT&T's momentum, IHS estimates that the company will likely top out slightly north of 9m subscribers at near 30% penetration of a potential 33 million U-verse TV homes passed.

All of the top cable and IPTV operators outperformed their estimates, even if it was somewhat worse than expected. Cable's successes, and especially TWC's, are indications that once IPTV players reach maturity the market will act upon them with very cable-like patterns of growth and loss. No matter which side of the aisle you sit on, the industry is in flux, with the consumer being the primary beneficiary, and investors secondarily.

 

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