4Q10 TV numbers from SNL Kagan: better than 3Q10, but not good

4Q10 TV subscriber numbers

The June 2010 and September 2010 quarters were tough to take for the cable, telco and satellite TV industry, which lost a total of 335,000 net subscribers over the six months.

A complex set of interacting factors produced this result:

  1. The stock market’s biggest worry is that some—mostly younger—viewers are unplugging from traditional cable/satellite and substituting a basket of (cooler, but also cheaper) streaming services like Netflix and Hulu instead. That certainly is happening, but the extent isn’t clear.
  2. Recession has caused some viewers to cancel service to save money.
  3. For some years, cable companies have steadily been losing market share to telco-offered TV services at cheaper, introductory rates. A portion of these switchers subsequently cancel service at the end of the first year, as the telco rates revert to higher prices.
  4. Some over-the-air viewers shifted to cable/telco/satellite as the US made the switch from analog to digital TV broadcasting in the June quarter of 2009. A percentage of these viewers have figured out that they can get the reception they want (actually often a better picture) using an over-the-air digital antenna. They are switching back to over-the-air viewing as their cable/satellite contracts run out.

The December quarter was a bit better. According to industry guru SNL Kagan, cable+satellite+telco added 65,000 net new subscribers over the three months. That compares with losses of 119,000 and 216,000 subs during the prior two quarters. Two reasons for the better numbers: the economy is improving; most people who adopted cable as a temporary measure while they figured out digital have already cancelled service, so this headwind is abating.

Not everything is rosy, though. Traditional cable subscribership continues shrink at a steady, and possibly accelerating, pace. The figure of 526,000 subscribers lost during the December quarter only looks good against the much greater defections seen during the middle of the year. For 2010 as a whole, cable lost 2.2+ million subs and has dipped under 60 million viewers.

Also, according to SNL Kagan, the number of occupied housing units rose at a faster rate during the period than the number signing up for cable/satellite. In other words, a decreasing proportion of people establishing new residences signed up for these video services.

Will cable lower prices to retain customers? I doubt it. For one thing, it’s a matter of conjecture whether, say, a 10% across the board price cut would persuade anyone to stay with cable. However, such a measure would definitely mean a 10% loss of revenue—and perhaps double that percentage as a loss of profit.

Fighting the net neutrality battle is a better way to go. Ironically, it’s the cable companies’ provision of high-speed internet service that allows people to unplug from cable video offerings. If cutting prices is too risky, the logical route for the cable firms to follow to combat unplugging is to attempt to impede their streaming rivals’ access to the bandwidth they need to deliver their services, or charge them a lot for it. Streaming services, in their turn, should argue that the cable firms are quasi-monopolies who have a social obligation to allow equally high-speed access to all for a nominal fee. This battle will ultimately be decided in Washington.

My thoughts

I believe we’re only in the early adopter phase of a switch from traditional cable to streaming services. I understand that special factors may have led to large net losses of video service subscribers in the middle of last year. But I don’t take any particular encouragement from the “rebound” of the December quarter.

On the other hand, I remember thinking during the ATT breakup of the early 1980s that the regional Bells would not be able to survive for long. If someone had told me then that they would only be reaching the end of the profit road for their basic fixed-line business thirty years later, I would have thought they very crazy. Yet, the fixed-line business has fought a successful war of attrition for that long. And the Baby Bells have been done in, not by lower-cost fixed-line rivals, but by wireless, a new technological development. Although I’m inclined to look longer and harder at the streaming services providers, my guess is that value investors will find the cable firms to be fertile fields for investing for decades to come.

The June 2010 and September 2010 quarters were tough to take for the cable, telco and satellite TV industry, which lost a total of 335,000 net subscribers over the six months.

A complex set of interacting factors produced this result:

  1. The stock market’s biggest worry is that some—mostly younger—viewers are unplugging from traditional cable/satellite and substituting a basket of (cooler, but also cheaper) streaming services like Netflix and Hulu instead. That certainly is happening, but the extent isn’t clear.
  2. Recession has caused some viewers to cancel service to save money.
  3. For some years, cable companies have steadily been losing market share to telco-offered TV services at cheaper, introductory rates. A portion of these switchers subsequently cancel service at the end of the first year, as the telco rates revert to higher prices.
  4. Some over-the-air viewers shifted to cable/telco/satellite as the US made the switch from analog to digital TV broadcasting in the June quarter of 2009. A percentage of these viewers have figured out that they can get the reception they want (actually often a better picture) using an over-the-air digital antenna. They are switching back to over-the-air viewing as their cable/satellite contracts run out.

The December quarter was a bit better. According to industry guru SNL Kagan, cable+satellite+telco added 65,000 net new subscribers over the three months. That compares with losses of 119,000 and 216,000 subs during the prior two quarters. Two reasons for the better numbers: the economy is improving; most people who adopted cable as a temporary measure while they figured out digital have already cancelled service, so this headwind is abating.

Not everything is rosy, though. Traditional cable subscribership continues shrink at a steady, and possibly accelerating, pace. The figure of 526,000 subscribers lost during the December quarter only looks good against the much greater defections seen during the middle of the year. For 2010 as a whole, cable lost 2.2+ million subs and has dipped under 60 million viewers.

Also, according to SNL Kagan, the number of occupied housing units rose at a faster rate during the period than the number signing up for cable/satellite. In other words, a decreasing proportion of people establishing new residences signed up for these video services.

Will cable lower prices to retain customers? I doubt it. For one thing, it’s a matter of conjecture whether, say, a 10% across the board price cut would persuade anyone to stay with cable. However, such a measure would definitely mean a 10% loss of revenue—and perhaps double that percentage as a loss of profit.

Fighting the net neutrality battle is a better way to go. Ironically, it’s the cable companies’ provision of high-speed internet service that allows people to unplug from cable video offerings. If cutting prices is too risky, the logical route for the cable firms to follow to combat unplugging is to attempt to impede their streaming rivals’ access to the bandwidth they need to deliver their services, or charge them a lot for it. Streaming services, in their turn, should argue that the cable firms are quasi-monopolies who have social obligation to allow equally high-speed access to all for a nominal fee. This battle will ultimately be decided in Washington.

My thoughts

I believe we’re only in the early adopter phase of a switch from traditional cable to streaming services. I understand that special factors may have led to large net losses of video service subscribers in the middle of last year. But I don’t take any particular encouragement from the “rebound” of the December quarter.

On the other hand, I remember thinking during the ATT breakup of the early 1980s that the regional Bells would not be able to survive for long. If someone had told me then that they would only be reaching the end of the profit road for their basic fixed-line business thirty years later, I would have thought they very crazy. Yet, the fixed-line business has fought a successful war of attrition for that long. And the Baby Bells have been done in, not by lower-cost fixed-line rivals, but by wireless, a new technological development. Although I’m inclined to look longer and harder at the streaming services providers, my guess is that value investors will find the cable firms to be fertile fields for investing for decades to come.

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