US pay TV shows shifting tides to OTT cannibalization in Q2

Four of the top five US operators came out with their second quarter results last week, and while we wait for Dish Network to make that a full house, due out just after Faultline Online Reporter goes to press, we have analyzed how their sliding traditional pay TV subscriber numbers contrast with users of their TV Everywhere offerings.

AT&T, Comcast, Charter and Verizon lost a combined total of 261,000 pay TV subscribers between the first and second quarters of this year, ending the period with just over 69 million between them. In comparison, their combined TV Everywhere services saw uptake of over 4 million users across the board. While these aren’t broken out by all companies, our research arm, Rethink TV, has tracked them closely and projected these numbers up until 2021.

Below we have included a simple bar chart comparing the number of pay TV subscribers compared to TV Everywhere users for AT&T, Comcast, Charter and Verizon, in the first and second quarters of this year.

While the figures don’t represent the more disruptive standalone OTT services, and therefore the reality of cord cutting, what the chart does show is a huge swing in consumer viewing behavior in just a small time frame. Of course, in order to access a TV Everywhere service you must have a pay TV subscription, so these are not separate subscriber wins, but rather conversions to a new way of viewing. In other markets this has led to more paid SVoD acceptance.

That said, many of these subscribers will be relatively new to internet delivered TV, and their TV Everywhere offerings will act as stepping stones towards eventually cutting or shaving the cord. For some, a TV Everywhere service acts as an incentive to keep hold of pay TV subscription or even sign up for one if out of home viewing is a priority, while for others, TV Everywhere will act as a cannibalization tool.

If the OTT TV Everywhere numbers were reversed out, then subscriber losses are well over 1 million a quarter – making things far worse than anyone in the industry would like us to believe.

AT&T fared worst in the last quarter, losing 123,000 subscribers, leaving it with 25.17 million, followed by Charter with losses of 90,000 to total 16.65 million. Comcast lost 33,000 while Verizon was down 15,000, totaling 22.5 million and 4.7 million respectively.

At Dish Network’s current run rate, it looks set to add a significant number of skeletons to the 261,000 pay TV subscribers which cut the cord last quarter. Looking back at Dish’s performance in the first quarter of this year, its ability to attract new customers fell yet again with 547,000 gross subscriber activations, down from 657,000 a year ago. In all, pay TV subscribers declined by 143,000 in Q1, compared to a decline of approximately 23,000 in the first quarter of 2016. It lost a huge estimated 690,000 existing subscribers, offset by the 547,000 it acquired.

However, Dish is one of those companies, like Comcast, which continues to count SVoD customers in among its traditional pay TV numbers, so we can expect much of the same tactics when it publishes those numbers this week.

Today Dish has 13.53 million pay TV subscribers, compared to 13.87 million at the end of Q1 2016. At this rate, it could churn its entire customer base in about 5 years from expensive DTH customers to cheaper OTT customers.

Charter is also shuffling the way it reports its numbers because many subscribers to Bright House Networks, which it swallowed last year along with Time Warner Cable, are based in Florida and are therefore seasonal customers. It has aligned Bright House’s seasonal customer program with Legacy Charter and Time Warner Cable to show customers reported throughout the year, to reduce the negative net additions which it had previously experienced from subscribers activating a seasonal plan at Bright House, when returning to Florida in the winter.

Charter has also shrugged off suggestions of a merger with Sprint this week, instead pointing to focusing on its wireless services launch with Verizon, expected to be available to cable customers next year.

Charter’s stock price shot up by 9.4% to $399.90 over the weekend, while Sprint’s jumped by 11% to $8.90 earlier this week. However, Charter is almost three times the size of Sprint, with a market cap of $99.9 billion compared to Sprint’s $35.6 billion. Sprint’s Japanese parent company SoftBank is valued at around $90 billion.

On the topic of takeovers, Charter’s CEO Tom Rutledge seemingly mocked Discovery Communications’ acquisition of Scripps Networks Interactive on the company’s analyst call last week by saying, “There are smaller companies out there that have questionable pricing power and you can see them wanting to align themselves to get it.”

On a final note, it’s worth mentioning an analyst comment last week stating that linear pay TV companies will lose 31 million customers over the next 10 years, according to Kannan Venkateshwar of Barclays, saying that media companies aren’t doing nearly enough to adapt to changing distribution models. He highlighted YouTube TV as a model with much greater potential than a cable set top environment.

“Media companies are looking at all forms of distribution from the same narrow lens of affiliate fees. However, there are significant differences in emerging OTT business models and incentives for new entrants vs legacy distribution. These differences are driven by the following factors (1) medium shapes the message and its consumption (2) quality is becoming less important than context (3) Shifts in consumer inertia becoming frictionless (4) TV is not about the Television screen anymore,” said Venkateshwar.

Stop Press: Dish reported earlier than we expected and came in with revenues down by $220 million to $3.64 billion for Q2 and lost some 196,000 pay TV customers in the second quarter, compared to a decline of 281,000 in Q2 last year. Given that Sling TV was reported as having reached 1.3 million last quarter, its run rate is around 100,000 a quarter and Faultline would suggest that 1.4 million of its 13.3 million subscribers are Sling TV, leaving it with only 11.9 million DTH subscribers.

Dish net income was $40 million for Q2 compared $424 million from the year-ago quarter, but it says that $280 million of that difference was down to litigation expenses, so its operating margins haven’t quite fallen off a cliff.