U.S. Pay-TV Net Adds Plunge in Q2 as Economy and Netflix Take Their Toll

Friday, August 10th, 2012
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Net U.S. subscriber additions for pay-TV operators fell by nearly 350,000 in the second quarter–the largest subscriber drop in history–as weakening economic conditions and strengthening competition from over-the-top (OTT) players like Netflix continue to work against cable operators and even against the satellite segment.

U.S. basic video subscribers to pay-TV services amounted to 100.9 million in the second quarter of 2012, down 348,000 from 101.2 million in the first quarter, according to the IHS Screen Digest service at information and analytics provider IHS (NYSE: IHS).

The second-quarter results were slightly worse than the 340,000 decline during the same period in 2011. The figure below presents the IHS estimate of sequential quarterly changes in net subscriber adds for all types of pay-TV services in the United States.

Cable, Satellite, Telco TV

“Poor economic conditions played a role in declining subscriber additions for pay-TV operators in the second quarter,” said Erik Brannon, analyst for US television at IHS. “Another challenge was in the competitive threat posed by OTT services, such as Netflix. Consumers are spending an increasing amount of time using Netflix at the expense of traditional services like cable and satellite, which may lessen the incentive to retain a pay-TV subscription.”

Satellite Suffers, Cable Continues to Bleed

U.S. satellite also fell during the first quarter, down by 62,000. While far less than cable, it was more significant, marking the first contraction since the second quarter of 2011. The decrease in satellite subs was mostly due to the loss at DirecTV of 52,000 subscribers, its first-ever decline.

Cable during the second quarter shed about 600,000 video subscribers, the biggest decline among all U.S. pay-TV segments. This continues a trend for cable, which has seen its subscribers decrease in number during each of the last consecutive 21 quarters.

Telcos Soften the Blow

In contrast to cable and satellite, U.S. telco TV players in the second quarter increased their net subscriber adds, although at a slower pace than in the past. Net adds for telco TV increased by 312,000, offsetting the declines for cable and satellite. Nonetheless, the increase was significantly less than the 394,000 expansion one year earlier in the second quarter of 2011.

Fighting back against OTT

“Pay-TV players are betting that by adding extra value for their subscribers–with new offerings like TV Everywhere, faster Internet speeds and deep discounting promotions–they can stem the tide of subscribers defecting to OTT, and entice new ones to join,” Brannon said. “Still, while OTT presents a challenge to pay-TV, the magnitude of the threat is largely overblown. Pay-TV losses in the second quarter of 2012 were only slightly worse than the second quarter of 2011, largely due to seasonality, and also the economy.”

Adding voice and data continues to bolster the bottom lines for cable, although that has come at the expense of legacy telco DSL customers.

“Our view that the business will remain sound has not changed,” Brannon remarked. “However, it is important to note the widening gulf in the number of TV households vs. pay-TV households.”

Netflix on the Rise

Continuing to grow its business and provide quality content are key for Netflix, and its usage has grown steadily. In comparison, portals like abc.com have not seen the same growth as Netflix.

Reacting to this new threat, pay-TV operators–and cable especially–have been on the acquisition front as they attempt to shore up their subscriber rolls. Last year, in fact, saw the largest number of cable deals occur in recent history, at 23.

With 2012 more than halfway finished, however, this year isn’t shaping up to be a breakout period for cable mergers and acquisitions. The most notable deal so far this year was Cogeco’s purchase of Atlantic Broadband; not since the early 2000s has a Canadian pay-TV operator obtained a stake in a Stateside concern.

Ultimately IHS believes that the number of pay-TV video subscribers generally will remain flat to slightly negative through the remainder of 2012, lasting through 2016 and beyond. Even so, the industry, is betting on the success of TV Everywhere products, promotional pricing, and creative bundles to draw customers back and to prevent their defection in the first place.