US IPTV operators Verizon and AT&T gained 140,000 video subscribers in the first three months of the year - their lowest Q1 gain since they began their aggressive rollout. Similar to Q4 2014, the sharp decrease in U-verse video gains is dragging down IPTV's overall results..
U-verse added 50,000 video subscribers in Q1, a sharp drop-off from 201,000 in Q1 2014. Just two quarters ago, the AT&T service was consistently posting quarterly subscriber gains in the 200,000 range. AT&T was not able to follow up to a weak Q4 2014 (an organic growth of 73,000) with stronger results in Q1, as video content costs and increasing ARPU is becoming a challenge to deal with. U-verse ended the quarter with a video penetration rate of about 22%.
Verizon-owed FiOS had its second straight quarter of improved year-on-year quarterly net gains, adding 90,000 video subs in Q1 2015, compared to 57,000 added in Q1 2014. And as another sign of FiOS's maturity, FiOS ended the quarter with a video penetration rate of 36%, which is now higher than Charter and Time Warner Cable. Verizon is looking to keep its positive momentum going with the launch if its new custom TV package, FiOS TV Custom HD. However ESPN, NBC, and Fox have expressed their discontent with it, stating that it does not comply with their terms in their existing contracts.
The fact of the matter is that growth for both top US IPTV operators just isn't what it once was. For Verizon's FiOS, a slowing in video subscriber gains are the result of significant penetration. For AT&T's U-verse the story is starkly different. U-verse has begun to suffer from a very cable-like syndrome early on, high cost leading to subscriber acquisition slowdown or loss. U-verse's penetration is relatively low - about 22% as of Q1 2015 - but the company like all other pay TV operators is suffering under the weight of steadily increasing programming fees. It is these programming fees which IHS believes may be at the heart of future mass disconnections.
As IHS has said on multiple occasions, if programming costs are not reined in, the business of pay TV video is likely to suffer. Our prediction that increases in programming costs will have to be passed down to pay TV video subscribers is coming true, with both AT&T and Verizon hiking prices in the last 12 months. One key factor in the problem is that a large portion of video subscribers have likely become resentful that the most expensive sports channels are being forced upon them whether or not they watch them.
For its part, Verizon is making a bold move, offering a skinny sport-less bundle with theme packs add-ons. By doing so the company is responding to consumer demand for sports-lite packaging. However, the problem is that its existing programming partners don't agree that their existing contracts allow for carriage of certain channels outside of basic tiers, the perfect example being Disney's ESPN. In the past few days since the company made the announcement both Fox and NBCU have joined in the objections.
If the objectors feel familiar, it is with good reason. All three vigourously opposed Aereo in its short life, citing that the service undermined their existing business models. IHS feels that a significant portion of pay TV video subscribers aren't 'hardcore sports fans' and would likely be happy to pay less for a basic tier without any sports content. However happy this would make some pay TV video customers, it isn't in the best interest of cable owning media conglomerates to allow skinny bundles to become the status quo.
Like the Aereo case, Verizon's unbundling of popular channels from basic packages may have profound consequences for the business. It is not out of the questions that this issue may even be settled via court action, much like the Aereo case was. It's too early to tell who will be the winner or loser in such a case, but one thing is clear: consumers are pushing for new ways to consume pay TV video content.