US pay TV saw its worst quarterly subscriber loss in history, amidst a seasonally weak Q2 coupled with the intensifying effects of cord-cutting. There was a loss of 701,480 pay TV subscribers (not including Dish’s Sling TV), slightly more than the 646,450 lost in the prior-year quarter. The results pushed Pay TV video penetration of TV households downward, continuing its relentless decline. Pay TV penetration in Q2 2016 dropped to 82.6%, down from 84.7% in the same quarter of 2015. Cable once again showed its resilience with continued improvement, while satellite growth was flat and IPTV continued its streak of accelerated losses.
Cable once again improved dramatically, losing 231,600 pay TV subscribers in Q2 2016, an improvement over the 334,500 lost in Q2 2015. Comcast had a net loss of just 4,000 video subscribers, its best Q2 in over 10 years. Comcast has managed to compete favorably thanks to its strong broadband services and its X1 cloud services that it continues to deploy at an aggressive rate. Nearly 40% of its video customers now have X1 and is expected to have 50% penetration by end of 2016.
Charter closed on its Time Warner Cable (TWC) and Bright House networks acquisition, forming the third largest domestic pay TV operator. The company passes nearly 49 million homes and business, and has 25.6 million total customers, including 17.2 million video subscribers. The newly formed Charter reported a combined net loss of 143,000 video subscribers in Q2 2016. At TWC, with the effects of the pause in the TWC Maxx build-out, there was a net loss of 73,000 video subscribers in Q2 2016, compared to a loss of 45,000 in Q2 2015.
Cablevision nearly had a net gain in video subscribes this quarter, only losing 2,000 pay TV subscribers, as it benefited from the work stoppage at Verizon. Cable is expected to continue its quarterly improvement in video subscribers loses as it leverages its strong broadband services to entice customers into bundled video services.
Total satellite grew by 12,1200 video subscribers in Q2 2016, thanks to DirecTV’s net gain of 342,000 video subscribers, which was nearly nullified by the estimated loss of 329,880 satellite subscribers at Dish. With AT&T’s full backing in marketing and resources, DirecTV had its quarterly subscriber growth since Q1 2009. The massive satellite losses at Dish continue, and in Q2 2016, it was further hampered by the ongoing effects of its programming disputes. DirecTV looks ahead to the impending launch of its online video services in late 2016, while Dish hopes to reinvigorate its satellite services with the launch of its skinny bundle, Flex Pack.
IPTV suffered its fourth straight quarterly of video subscriber declines, its largest quarterly subscriber loss yet. There was a loss of 482,000 IPTV video subscribers, compared to a gain of 24,000 in Q2 2015. AT&T’s U-verse is the reason for IPTV’s ongoing losses, with the company losing 391,000 video subscribers in Q2 2016 as AT&T shifts focus to DirecTV, thanks to its lower content costs. Since Q2 2015, U-verse has lost 1.13 million video subscribers, nearly 19% of its video subscriber base. During the same period DirecTV grew by 910,000 video subscribers.
Verizon saw its first ever organic loss at FiOS, due to the work stoppage in the quarter. FiOS lost 41,000 video subscribers in the quarter, compared to the gain of 26,000 in Q2 2015. Maturity at Verizon, with its 34.6% video penetration, and ongoing competitive pressure at cable and now DirecTV, will keep its net gains to a minimum and is even likely to undergo further quarterly video losses. The quarter also saw the reshuffle of nearly 1.2 million IPTV subscribers, as Frontier Communications became the eighth largest pay TV provider after acquiring 1.2 million FiOS video subscribers in California, Texas, and Florida.
Recent quarterly losses have become the norm as pay TV operators struggle to find the key to retaining video subscribers. The losses in Q2 2016 served to highlight the precarious position of pay TV operators. For companies like Dish Network and Comcast, the choice between paying carriage fee increases and resisting often means the difference between positive quarterly results and negative.
In years gone by, when fast broadband speeds wasn’t a must have product for households, pay TV was the go to source of entertainment, and video subscriptions grew correspondingly. However, the ubiquity of broadband and plethora of low cost online video options has changed the business. For their part, cable and IPTV operators have done a decent job of signing up customers for double and triple play bundles (TV, broadband, voice). Unfortunately, without a return path, DirecTV and Dish Network were left at a diasadvantage..
It is also important to remember that this is the era of consolidation. A number of large deals have been struck in recent years:
Regardless of the consolidations, and the benefit that they will have for affected customers, the trend of industry-wide subscriber losses will continue. Arguably the most at risk providers are AT&T U-verse, and Dish Network. The merger between AT&T and DirecTV has mitigated the most significant risk of video subscriber losses, and in Q2 2016, DirecTV’s stellar performance highlighted the success that AT&T has found by marketing the DirecTV brand. The company is giving marketing priority to its lower margin satellite service, and converting U-verse subscribers (IPTV) to DirecTV.
On the other side of the spectrum Dish Network attempted to head off the problem with its launch of Sling TV in January 2015. There was one significant problem, the company doesn’t own the connection path for its Sling TV customers. In many cases, customers who would have been Sling TV subscribers were gobbled up by cable or IPTV double plays. Q2 2016 saw the departure of 329,880 estimated satellite subscribers; future quarters are likely to be comparatively bleak if the company can’t solve its programming cost problems.
Faster broadband speeds will mean more opportunities for Cable operators and Verizon (who offers competitive speeds with fibre technology). These operators are going to divide the existing pool of subscribers, with each company’s penetration changing minimally. What’s important to note is that the cord-cutting witnessed in recent quarters and especially Q2 2016 will continue.
Responding to the threat of cord-cutting, and the phenomenon of cord-nevers is going to be the long term key to sustaining the business of pay TV video. Several pay TV operators have attempted to meet the challenge by offering skinny bundles of channels. However, none has found the formula for enticing newly forming households into subscribing for video services, a phenomenon which is likely to be true into the coming future.