U.S. pay TV decline not really cord-cutting but a symptom of the economy, analysts say

Significant customer losses reported by U.S. cable and satellite distributors in the second quarter of 2011 are more a reflection of the state of the economy than “disruptive” cord-cutting, analysts say. News sources reported last week that the six largest publicly traded satellite and cable TV providers in the U.S.—including Comcast Corp., Time Warner Cable Inc., Charter Communications Inc., Cablevision and Dish Network Corp.—lost a collective 580,000 customers in the second quarter of 2011. Bloomberg called the collective loss the “the biggest such decline in history.” Subscriber losses were attributed in part to increased competition from telcos AT&T Inc. and Verizon Communications Inc. as well as streaming services like Hulu LLC and Netflix Inc. During the second quarter, Verizon reported net video subscriber additions of 184,000 and AT&T reported 202,000. Time Warner CEO Glenn Britt told The Wall Street Journal in a story published Tuesday that broadband Internet, as opposed to broadcasting, is developing into the company's “anchor service.” “Clearly the relative importance of the video business has declined over time,” Britt said. “I think broadband clearly is becoming the anchor service.” Duncan Stewart, director of research for technology, media and telecom at Deloitte Canada, said in an interview that unemployment and a struggling U.S. economy are more to blame for the decline than the phenomenon of cord-cutting. Stewart said two quarters ago the data showed that, although people were cutting their pay TV subscriptions, the reasons appeared to be primarily economic. “We have two things going on. OTT services like Netflix are doing better and better, which makes me wonder if it may be that factor,” Stewart said. “But the other contributing factor is that the U.S. economy has also been doing worse.” Stewart said that, unlike the U.S., in Canada there is very little data showing people are disconnecting cable and getting Netflix or other over-the-top solutions on their own. “The decline in the number of TV distributor numbers? We have not seen that data in Canada,” he said. “It’s interesting because the Canadian economy is doing so much better than the American economy. That sort of supports the idea that this is economically driven rather than disruptive over-the-top TV.” Stewart added that services like Netflix are not usually a primary source of programming for consumers. Over-the-top services tend to be limited in their offerings and are not a complete substitution for traditional TV distribution, he said, noting that TV distributors provide a wider range of services such as live TV, reality TV, news, weather and sports. Still, he acknowledged that some consumers are cutting the cord to traditional TV distribution packages and opting for a combination of free-to-air digital TV and inexpensive over-the-top services. Jeffrey S. Silva, senior policy director of telecommunications, media and technology at Medley Global Advisors LLC in Washington D.C., said in an interview that the state of the U.S. economy is a contributing factor to the recent customer decline. “ou have this happening at a time of economic turbulence, where people’s disposable income may be less,” Silva said. “You have economic conditions that are troubling. It may be one of the expenses that they can do without, particularly if they can find a near substitute.” The Medley analyst said Internet service can suffice for many consumers. “ can act as a substitute for people in tough economic times,” Silva said. “I would call it an imperfect substitute, but for the cable or satellite service that they have—they will find in their economic circumstances that they can do without .” The economy is a “very powerful factor” in the cord-cutting numbers, Silva said, but it is only part of the reason for the declines. Competition from U.S. telecom companies may have also caused a disruption because telcos can offer bundled packages that some TV distributors, such as satellite, may not. “You have video providers who double as broadband and telephone providers,” he said. Silva said that the country’s younger demographic, who are more dependent on their mobile devices, are also less likely to be buyers of cable or satellite TV subscriptions. “A younger crowd is more attuned to getting all their information, whether it’s texting, video, or anything, on their mobile device or computer. They’re less likely to be buyers of traditional subscription services.” Silva said some the cord-cutting phenomenon may have contributed to the number of lost customers, but it is only one factor among many. “It’s the first time that it happened, but I don’t think that there’s necessarily dramatic cord-cutting going on yet,” he said. “There’s some of that, but I think there’s a mix of factors that have come into play.” Paul Gallant, a telecom and media analyst at MF Global Inc. in Washington D.C., agreed in an interview that a younger, Internet-savvy generation is a contributing factor to the decline. “Internet TV is becoming a little more attractive and broadband speeds are getting faster,” he said. “Younger people are not signing up for Pay TV at the rate earlier generations did.” Gallant said U.S. telcos are also drawing customers with prices and packages that aim to undercut cable. “The phone companies, especially Verizon, have made significant investments to offer pay TV service,” he said. “They’re incentivized to discount and market aggressively to steal share from cable.” The Global analyst said cord cutting is not yet a big factor because content companies do not see as much revenue potential in over-the-top services. “It’s not a big phenomenon because content companies don’t want it to be,” Gallant said. “Disney, Viacom Productions and Time Warner make much more money through the pay TV system than through the Internet. The Internet won’t replace pay TV unless the content companies want it to—and they don’t.” On a monthly cable bill of $100, content companies collect approximately $30 to $40 from the customer, Gallant said. “If you quit cable tomorrow, you won’t be paying that $100 a month,” he said. “The content companies won’t be collecting that $30 to $40 from you because you’re signed up for Hulu and Netflix. That’s the economics.” Right now, he said, “there is no model on the Internet that earns that much.” Stewart said the second-quarter subscriber loss is a repeat of what the industry has seen before. In 2008 and 2009, many traditional media companies saw their ad revenues in Europe and North America decline at a rate of about 18 to 25 per cent year-over-year, which sent panic through the industry, he said. “People were saying that even when the economy does come back, these industries are doomed because they’re dinosaurs,” Stewart said. “But when the economy did come back, they went up 25 per cent year-over-year. So it’s easy to predict that an industry that’s been around for 10 years, 50 years, or 100 years that’s gone forever—isn’t really.” Stewart estimated that the number of stories about the death of traditional industries outnumbers the amount of actual “deaths” by about 10-to-one or even 100-to-one. dgrenier@thewirereport.ca

U.S. pay TV decline not really cord-cutting but a symptom of the economy, analysts say

Broadcast | August 16, 2011

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