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5 May 2022

Netflix ads debate dominates as US operators report difficult Q1

Operators in the US have not had a good collective Q1. Altice, Charter, and Comcast are all down in video subs, but this is hardly surprising. For Comcast, a 4 million bump in paid Peacock subs has again highlighted the importance of OTT, and while Warner Bros. Discovery reported its first numbers since the merger, it is not including the WarnerMedia results yet.

The US is the best market to highlight the diminishing role that pay TV operators have in the premium video market. They are being relegated to ISP status at the fastest rate we can track, and while AT&T and Verizon have made disastrous attempts at breaking into OTT, Comcast has had much better success.

Comcast lost 484,000 residential video subs in Q1, and 27,000 business ones too. However, cable video revenue was relatively stable, only declining from $5.62 billion to $5.54 billion – a loss of 1.5%. In the past year, total residential video customers have declined from 18.6 million to 17 million, while residential broadband has grown from 28.8 million to 29.8 million.

This is why Comcast is so keen to place the focus on Peacock, in its Q1 discussions. Cable video continues to die off, and yet Comcast’s pure residential broadband revenue has jumped from $5.6 billion in Q1 2021 to $6.1 billion in Q1 2022.

With Peacock, Comcast should eventually be able to offer a compelling video service as a bundled perk for its broadband promotions. If managed well, Peacock would be able to stand on its own two feet, although it is still far from profitable. Peacock reported $456 million in negative EBITDA in Q1 2022, on revenues of $472 million.

Comcast’s Peacock added 4 million paid subscribers in the US, bringing its total to 13 million – with some 28 million active accounts, accessing the ad-based version of the service. Figures from Rethink TV, the forecasting arm of Faultline, expects the subscriber count to reach 24.8 million by the end of the year, as the expansion into the Sky territories via Now, and Corus in Canada, begins to take hold.

Worth noting is Rethink TV’s expectation that Paramount and Comcast will eventually agree to dissolve their SkyShowtime joint venture – leading to a split between Paramount+ and Peacock, and opening up Peacock’s global expansion – especially as the Sky deal with HBO comes to an end. This is a move that will likely expose Comcast to regulatory scrutiny in the US, but it should be relatively safe internationally. Due to this position, the Comcast numbers look inflated at the beginning of the period, due to this expectation.

Paramount+ added 6.8 million global subscribers in Q1, bringing the total to some 39.6 million. Rethink TV expects Paramount+ to finish 2022 on 60.4 million subs – having consolidated CBS All Access’ subscribers inside Paramount+. Based on that forecast, Q1 is ahead of expectations, but whether it can sustain that level of additions remains to be seen.

The newly combined Warner Bros. Discovery (WarnerDisco) reported a Q1 tally that does not yet include the WarnerMedia figures. Last week, AT&T reported that WarnerMedia operating income had fallen 32.7% year-on-year, which prompted WarnerDisco CFO Gunnar Wiedenfels to admit that it “was really below my expectations.”

Discovery’s revenue hit $3.2 billion, up 13%, with net income listed as $456 million. International revenue was listed as $1.3 billion – up 25% year-on-year. Discovery reported 24 million direct-to-consumer subscribers, up two million in three months, but linear subscribers fell 4% year-on-year. The Q2 figures should show a full picture of the combined WarnerDisco, and leadership still expects a $3 billion annual cost saving synergy.

Returning to Peacock’s revenues, they stand at around $16.86 per active account currently. Given the negative EBITDA, this would suggest that Peacock would need to double its active user count to roughly break even, which points to its need to look outside the US swiftly. Of course, increasing the paid subscribers helps solve that problem, but Peacock is already at a 46% conversion rate – meaning that nearly half of its active users are already paid up.

To increase that penetration rate significantly is a major uphill battle, especially given that on the AVoD side of things, Paramount’s Pluto TV added 4 million in the quarter, bringing its total global monthly active user count to 68 million. Fox’s Tubi now stands at 51 million, having added 18 million in 2021, at a clip of 4.5 million per quarter.

There is not exactly a shortage of free content these days, and here is where the discussion pivots to Netflix. For Peacock, unless it begins paywalling content (like Crunchyroll is exploring), it can only really upsell on the benefit of removing adverts.

Consequently, the 46% rate suggests that some 54% of users are happy to watch these adverts – either because the ads are not annoying enough, or that they do not believe they watch enough content to get their money’s worth out of paying for the ads’ removal from the service.

For Netflix, ads are a way to migrate password sharers towards full accounts. Heavy users will generate ad-revenue until they tire of the ads and stump up to get the old user experience back. Light users will continue to tolerate ads, until they feel they use the service enough to justify paying to remove the ads.

Like Peacock, paywalling content is an option, but the risk here is that you will simply incite an arms race, or mutually assured destruction. While there are freely available ad-based tiers, the rival services can count on users moving between them.

As soon as a paywall is in place across the board, the services are forcing users to make a purchasing decision, and if they are heavy users of the free tiers due to a shortage of disposable income or a perceived lack of value, this market would effectively be shooting itself in the foot – confining a user to one ecosystem alone.

There are lessons to be learned from the ratio of paid subscribers to ad-only users in these OTT services. Many in the industry speak as if the first ad on Netflix would create an immediate exodus. The pervasiveness of advertising in our societies also suggest otherwise.

Elsewhere in US pay TV, Charter managed to lose 112,000 video subscribers in the most recent quarter, which is down a little from the 138,000 it lost in Q1 2021.

With 28.3 million residential broadband subs, its video total is now approaching 50% penetration – with the total residential video subs sitting at 15.1 million. Revenue for the quarter was reported as $13.2 billion, up 5.4% year-on-year, with net income listed as $1.2 billion.

Across the board, the major operators are still collectively adding broadband subscribers, but Altice USA somehow managed a third successive quarterly loss of broadband subscribers – some 13,000 fewer homes, on top of 74,000 lost video customers.

Residential broadband subs stand at 4.61 million currently, down from 4.64 million in Q1 2021. Altice USA notably does not break out total video subscribers separately, but the latest blip is an acceleration from the 54,000 video cancellations seen in Q1 2021.

Revenues fell 2.3%, to $2.4 billion for Altice USA, with the residential wing down 3.6% to $1.9 billion. The reported net income stood at $196.6 million – down from Q1 2021’s $274.1 million.

Altice USA expects to return to growth in the second half of 2022, when its fiber expansion ramps up, on the back of heavy promotional discounts. To this end, it passed some 146,000 new locations with fiber in Q1, which puts its total footprint at 1.3 million fiber premises – with a target of 6.5 million in 2025.

Total fiber subscribers now stand at 81,000, having added 11,000 in Q1. Altice will be banking that the promise of fiber speeds can tempt some of its lost subscribers back to the fold, as its pricing has been some of the most competitive in its local markets.