Market Insight

Early reports indicate pain and opportunity for US pay TV

August 03, 2015  | Subscribers Only

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In the U.S., IPTV stumbles in Q2 2015 as cable sustains and improves on its momentum in early reporting from the top pay TV providers. The top cable companies, Comcast and Time Warner Cable, collectively lost 114,000 in the quarter, significantly improving over the nearly 296,00 lost in Q2 of 2014. At the same time, IPTV saw its fortunes turn around for the worse, as the two largest IPTV players, Verizon and AT&T, who’s combined growth accounted for a mere 4,000 video subscribers, a fraction of the 290,000 subscribers gained in Q2 2014. However, Cable’s continued improvement is still not enough to offset meager gains in IPTV, as collectively, pay TV as a whole is off to a much slower start this quarter than it was in Q2 2014.

Both Comcast and Time Warner Cable (TWC) continue to be catalysts for the overall improvement of cable as the pay TV market slows down and in the midst of upcoming changes. Time Warner Cable lost 45,000 video subscribers, its best second quarter since 2008 and a 70% improvement over the 152,000 video subscribers lost in Q2 2014. TWC is seeing significant benefits from rolling out its TWC Maxx internet upgrades (which is helping reduce churn), and improving its customers experience through deploying new set-top boxes, digital adapters, and advanced modems. TWC continues to focus on the triple play, posting its best ever second quarter net gains in triple play additions in history.

For Comcast, X1 continues to drive the company to new heights, which helped Comcast to its best second quarter results in nine years in terms of video subscribers. Comcast reported a net loss of 69,000 video subscribers in Q2 2015, improving drastically over the 144,000 lost in Q2 2014. X1 is aggressively being rolled out, nearly 30,000 boxes were deployed every day in Q2 2015, nearly 50% of new connects signed up for X1. Comcast sees X1 as a game changer with the results helping to speak to its success. X1’s benefits include that it improves DVR adoption, increases additional video connections in the home, increases VOD usage, and reduces churn, compared to a non X1 customer. X1 is seeing some licensing opportunities, both Cox and Shaw Communications in Canada have expressed interest, with other companies joining in. While Time Warner Cable is focusing on triple play, Comcast is putting its focus on double-play as growth in voice subscribers slowed in Q2 2015.

For IPTV, video subscriber uptake has come to a complete halt after years of impressive gains. At Verizon, the momentum from coming off two straight quarters of improving video subscriber gains came to an abrupt end. Verizon FiOS had a video subscriber growth of 26,000 which was down significantly from 100,000 gained in Q2 of 2014. During the quarter, FiOS changed its triple play offer, also suffered through a advertising blackout of its skinny bundle offer, Custom HD. The dispute with programmers over Custom HD lead to its advertising being blacked out in several markets, including New York and Philadelphia.  However, the introduction of its Custom HD offering has seen some initial success with over a third of new gross additions picking up Custom HD (see In weak quarter, one third of Verizon new customers sign up for skinny bundle)

The largest IPTV provider in the U.S., AT&T U-verse, had its first ever organic video subscriber loss in its history. U-verse saw a net loss of 22,000 video subscribers, compared to a gain of 190,000 in Q2 2015. The decline in net video additions results from AT&T taking a more disciplined approach to acquiring customers, opting to improve profitability and targeting higher value customers with fewer promotions.

Our analysis

Nobody doubts that there are pressures which threaten to change the business of pay TV, however, the poor returns made by IPTV players may indicate that cord-cutting is entering a new phase in the USA. Even without growth in cord-cutting the significant number of Verizon FiOS Custom TV HD additions in Q2 2015 is a clear signal that Americans are looking for ways to save money.

Startling is the reversal of fortune that U-verse TV saw in Q2 2015. The company suffered significantly in the quarter, its losses not entirely attributable to a shift in strategy for higher value customers. The mechanisms by which cable operators like Comcast and Time Warner Cable are finding success are playing against AT&T.  In general cable operators have continued to increase speed, improve customer service, and improve channel/content access. Unlike U-verse, FiOS has a distinct advantage in the markets where it competes, high-speed data offerings match or beat those of its competitors.

For Verizon’s FiOS, it isn’t clear sailing thanks to the high-profile dispute with programmers like Disney over carriage on its Custom TV HD package. However, growth of 26,000 in Q2 2015 video subscribers can be counted as a victory, given the fact that advertising for the service was boycotted by major programmers in the quarter. In fact, the boycott should be good news for Cablevision, as it almost certainly was for Time Warner Cable’s New York City operation.

While not publically mentioned in their Q2 2015 earning call, Time Warner Cable must have benefitted from the Verizon advertising blackout. TWC had its best Q2 in years, the combination of many factors: the rollout of TWC MAXX service, increased competiveness with U-verse, and high expanded basic uptake. The company is so bullish on its future that it made the bold claim that it thinks it can be net video subscriber positive for the full year 2015.

While not making the same claim, Comcast has stepped up to the plate and been successful at reducing losses. The company continues to show quarterly improvements, mainly thanks to its X1 DVR. At the same time it continues to boost broadband speeds in its markets, and has adopted the policy of promoting double plays. Promoting products which customers want is important; Comcast recognizes that fewer customers are interested in land line telephones. It is important to note that triple play customers change their contracts at the end of term with a greater frequency than double play customers.

Q2 2015 was a windfall for some, and a disappointment for others. Increases in cord-cutting are becoming obvious as both major IPTV players continue to struggle against market factors. IHS expects that a ruling on the Verizon/Disney litigation will have an impact on the market, consumers will either be given more choices, or more incentives to flee pay TV.

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