The writing is on the wall for both cable and Pay TV everywhere. Ignore the amount of profit, profit margins, average revenue per user or subscriber and instead focus on the number of customers from this the latest batch of pay TV results in the US.
US Pay TV results
US Subs this quarter US Subs last quarter Net Additions ARPU Broadband adds
Cable Comcast 22,937,000 23,212,000 -275,000 $129.75 248,000
TWC 12,551,000 12,706,000 -155,000 $71.62 95,000
Charter 4,652,700 4,716,500 -63,800 $69.10 50,800
Cablevsn 3,043,000 3,067,500 -24,500 $149.04 10,000
Cable Total 43,183,700 43,702,000 -518,300 403,800
DTH DirecTV 18,934,000 18,760,000 174,000 $88.98
Dish 14,289,000 14,318,000 -29,000 $74.36
DTH Total 33,223,000 33,078,000 145,000
IPTV AT&T 2,741,000 2,505,000 236,000 148,000
Hybrid Verizon 3,300,000 3,096,000 204,000 61,000
IPTV Total 6,041,000 5,601,000 440,000 209,000
This picture is key to everything in pay TV. The US is virtually the ONLY saturated pay TV market in the world, everywhere else pay TV is going up, and this provides a picture of what might happen when other countries reach this saturation.
Secondly it is the best case scenario for cable of anywhere in the world, a vibrant, cash rich community which can continue to invest in the best of breed technology on a grand scale. And the truth is that largely the formula is not working. In one single quarter, 1.2% of the cable community has cancelled its subscription to cable TV. It has added the lower ARPU service of 403,800 broadband lines to its mix, but already the telcos are finding rich broadband pickings in their new offerings. Verizon FiOS Internet is growing faster than its internet as a whole with 226,000 new additions more than reversing the losses at its traditional DSL internet. Once Verizon has converted most territories to FiOS it will clearly have just as good broadband adds as the cablecos and that will be an across the board disaster, because those customers got to come from somewhere and the best candidate is cable.
We haven’t covered the telephone lines in this diagram, but across the board the cablecos acquisition of them is slowing and the losses at AT&T and Verizon are slowing. They could easily reach parity there soon, which would make the TV services the main area of contention.
We have only taken the big top four US cable companies and the two major telcos and DTH players, but we expect this time of transition to be going on across the board, but slightly worse, because as we go down to take in smaller cablecos (and smaller telcos) we will find that they are both less able to invest heavily in capex, and their differentiation will be slower to emerge in the first place.
Ask yourself ‘ How can the Telcos be holding their own in broadband, when the main rivals can offer 150 Mbps, and the best they can do is 50 Mbps. The answer is in price, attitude and support. The prices are high ‘ even though they are low in terms of $ per Mbps, the attitude is take it or leave it and the support is documented as poor.
But if this is the position today, and the cable world continues to insist that no-one is going to dump pay TV to take Over The Top video, what happens when that effect begins to cut in or accelerates?
The cablecos continually fool themselves by talking about Revenue Generating Units or customer relationships and counting cable lines and digital cable increases, along with VoD relationships and digital voice. Sure revenue is going up, but quite clearly customers are going down ‘ these four have lost 114,500 RGUs across Video and Broadband ‘ and these are the ones that matter, the higher value services.
If the US cable players cannot pay off the debts incurred by Capex spending to take services digital and to annex triple play markets, then how can their counterparts around the world raise the money in the first place to invest in DOCSIS 3.0 and SDV and going digital in the first place.
Does this mean that the huge investments made by private equity firms across the board in Pay TV generally, but mostly in European cable operators, may find themselves on the block and up for sale, on the back of this market turn.
But it’s the same for all Pay TV. Sure it looks like AT&T and Verizon will be able to make money on these new services, but their investments were way above $20 billion each and they don’t give their ARPUs clearly for these services, so we cannot be sure.
The reasons that the Telco don’t give their ARPU’s out (except for wireless) is because this is a landgrab as far as they are concerned, and the ARPUs are almost certainly low numbers because all they want is to cause Cablecos a serious headache..
You can see why US cable operators feel the need to get into cellular services through Clearwire, Sprint or owning their own spectrum, or even through extensive WiFi networks. They want to cause the same type of problem for telcos. Both of the major US Telcos are making ground in wireline for the first time in a long time, but they have been making hay in cellular for years, something cablecos have been deprived of so far.
But if you are a European cable operator, suffering from underinvestment and slowly going through the gears in digitalization, the leap to cellular is a long way off, and probably an investment too far, except perhaps for a handful such as Virgin Media, the Netherlands cable operators or through MVNOs, working with the very companies they wish to compete with.
Although this gives the impression that Pay TV has not shrunk this quarter, this is because we are only counting the four largest cable companies. At last count they had about 64% of the 68 million cable homes in the US. If there is a similar loss at all the other cable operators in the US, then the drop in cable homes with video is closer to 810,000, while the Telcos and DTH players together have only put back 585,000. That would lead to a loss of some 225,000 pay TV customers across the US. If this is recession led, then okay, it could recover. But who would want to bet on that when already pay TV accounts for around 85% of US homes between them all, and major initiatives in pay TV and free TV over the internet are underway from some of the biggest names in technology.
Of course to be really accurate all the 1,000 or so incumbent telcos would also have to be added up, but we suspect that number would include quite a few growing in pay TV numbers against nearby cablecos.
Back in the second quarter this happened in an even worse way, when for the first time ever, IPTV and satellite subscriber increases didn’t make up for cable losses which netted out at losses of 216,000 homes. It is a seasonal low point for cable in the third quarter and this debate will probably recover in the last quarter as subs pick up in the run-up to the holiday season. But once ALL these figures are in, then we may well have a number very adjacent to the last quarter and find ourselves sitting on a 1 million a year cord cutting phenomena. And then the finger pointing will start, aimed initially at Bittorrent, the nasty Telcos and the recession. But when the finger pointing is over there will be a need for a dramatic rethink of Pay TV, not just in the US, but globally.