US pay TV subscriptions rise in Q1 as cable achieves best quarter in years

Thursday, May 15th, 2014 
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EL SEGUNDO, Calif. — The number of U.S. household subscribing to pay TV services surged in the first quarter, as the increasingly resilient cable segment moderated its customer loses, according to IHS Technology (NYSE: IHS).

U.S. pay TV subscribers, encompassing cable, satellite and Internet protocol TV (IPTV), rose by 202,670 during the first three months of the year, as presented in the attached table. This represented the best performance for the market since one year ago in the first quarter of 2013, when subscribers declined by 214,580.

Although cable subscribers fell by 132,330 during the period from January through March, this actually was a victory for the pay TV segment, marking the lowest number of losses since the first quarter of 2011. The last two years have been brutal for the U.S. cable industry, with subscribers falling by an average of about 480,000 per quarter.

“The first quarter is generally the best time of the year for the U.S. cable market, and the start of 2014 was no exception,” said Erik Brannon, senior analyst for television media at IHS. “Cable achieved its best quarter in years. However, the negative outlook for cable remains the same, as it is expected to continue to contract as AT&T’s IPTV service is anticipated to keep gobbling up subscribers. Cable’s renewed strength could be foreboding for satellite players Dish and DIRECTV.”

Cable karma

Cable operators Comcast and Time Warner Cable played a major role in the overall performance of the pay TV business during the quarter.

Comcast added 24,000 video subscribers in the first quarter, the second straight quarter of positive video subscriber growth for the company and a rare feat for any cable operator in today’s highly competitive pay TV landscape. Comcast credits its Xfinity entertainment operating system and promotions for the strong upswing.

Time Warner Cable is coming off 2013 struggling more than most cable operators, but its first-quarter results were the strongest in several years. Time Warner Cable mitigated its video subscriber losses to just 34,000, a huge improvement over the 118,000 lost during the first quarter of 2013.

Comcast announced a methodology change in the way it counts multi-dwelling unit (MDU) subscribers. As a result, total pay TV households artificially increased by nearly 1million subscribers in the quarter to reach 101.56 million.

Even without the Comcast effect, however, the picture for cable remained positive as there was a moderate loss of 132,000 cable video subscribers, a major improvement compared to the loss of 265,000 in the first quarter of 2013.

Broadband eclipses video for some major cable operators

The term “pay TV operators” is increasingly becoming an oxymoron. Of the top five cable operators, only Comcast has fewer customers for its broadband service than for TV, due to its mammoth size. Among the next five largest companies, two have more broadband customers than for TV.

Broadband is compensating for the slower growth experienced on the video side of the business. But video still commands the most revenue and will continue to do so for the foreseeable future. In 2013, broadband generated around half of the revenue that video did. With the addition of broadband and voice, former cable TV operators who have become cable Internet service providers (ISPs) are more profitable than ever.

Satellite under increasing pressure, headwinds ahead

A strong quarter from Dish helped mask a soft quarter for satellite, as DIRECTV and Dish combined for a gain of 52,000 video subscribers in the quarter, slightly less than the 57,000 gained in the first quarter of 2013.

Pressure from Internet Protocol Television (IPTV) continues to buffet both DIRECTV and Dish, considered as direct-broadcast satellite (DBS) providers, as the two players are beginning to feel pressure shifting away from cable.

Dish finished strong in the first quarter, adding 40,000 subscribers, thanks to a marketing campaign that put its message everywhere, and a strong execution of its Hopper/Sling strategy.

DIRECTV grew by 12,000 subscribers in the quarter, a sign that the high end of the pay TV market may be shifting back to cable, or migrating to IPTV.

Slow gains at Verizon result in a weak quarter for IPTV

The two largest U.S. IPTV operators, AT&T and Verizon, combined for the weakest quarterly IPTV subscriber growth since 2007. AT&T and Verizon generated collective video subscriber additions of 258,000, compared to 401,000 in the first quarter of 2013.

Verizon’s deceleration has been dramatic, with the maturation at the company responsible for the weaker IPTV growth. With Verizon’s FiOS build-out approaching completion, along with no further signs of aggressive expansions and rejuvenated cable operators, Verizon expanded its video subscriber base by just 57,000, much less than the 169,000 it added in the first quarter of 2013.

In contrast, AT&T’s U-verse TV is in a completely different position, having ended the first quarter of 2014 on an upbeat note. The company continues to acquire customers at a blistering pace, picking up 201,000 U-verse video subscribers during the quarter. With a larger footprint than FiOS, an aggressive build-out, and a video penetration at only 21 percent, AT&T has plenty of room to grow and will continue to gain subscribers comfortably for the foreseeable future.

IHS predicts that the number of pay TV households will remain flat overall and that cable’s positive momentum of the past three quarters will likely continue, meaning that gains for U-verse and Verizon’s FiOS will have to come from somewhere. And up until today, Dish and DIRECTV had enjoyed an easy ride. However, it now may be satellite’s turn to share in cable’s pain. It seems very likely that both U.S. DBS providers will experience future quarters with negative subscriber growth.