Analysts Predict Q4 Growth in Pay TV Users

After two consecutive quarters of declines and a resulting cord-cutting debate, TV distributors may be in for a sigh of relief at the end of Q4 earnings season.

NEW YORK -- Many analysts are optimistic that the pay TV industry has returned to video user growth in the fourth quarter after two straight quarters of subscriber declines.

The back-to-back decreases in the second and third quarters of 2010, driven by cable subscriber losses, caused investor fears that cord cutting, which sees consumers give up their pay TV service -- particularly thanks to cheaper Web options -- could become a trend. Wednesday's earnings report from Netflix, which included strong subscriber growth that made the firm the second-largest subscription-based U.S. media business with more than 20 million subscribers, likely contributed to such concerns.

A gain of pay TV subscribers in the final quarter of 2010 could help alleviate such concerns, even though most observers say that they will keep a close eye on subscriber trends throughout 2011.

On Tuesday, Verizon reported better-than-expected subscriber growth for its FiOS TV service, and Time Warner Cable follows Thursday along with AT&T, which will provide an update on its U-verse service. Additional fourth-quarter reports are expected thereafter. At the end of earnings season next month, research firm SNL Kagan is expected to share its latest subscriber wrap-up.

Many on Wall Street expect sector executives during their earnings calls to cite improved trends and reiterate management comments that subscriber losses have been driven by competition and were exacerbated last year by customers ending subscriptions after cheap promotions during the digital TV transition a year earlier. 

Citadel Securities analyst Vijay Jayant predicts that the eight publicly traded TV distribution companies will collectively record a gain of 340,000 subscribers for the fourth quarter. Cable operators will lose 375,000; satellite TV will report a gain of 300,000; and telecom firms will post 415,000 additions, he predicted.

The past two quarters also saw cable decline while the competition recorded growth.

"After losing subscribers for two consecutive quarters, we think the pay TV industry may add video subscribers this quarter because of improving retail trends, cycling through the digital transition-related churn and more aggressive promotions from DirecTV, Comcast, Charter and Cablevision," Jayant said.

But the eight public distributors only tell part of the story as privately held firms contributed to the declines of the past two quarters.

Evercore Partners analyst Bryan Kraft estimates a collective gain of 243,000 video customers for the pay TV industry, up from the third-quarter loss of 130,000 and the 246,000 loss in the second quarter.

He cited "less pressure from customers that took cable or [satellite TV] because of the digital broadcast transition going back to over-the-air" and a "likely improvement in household formation as indicated by improving home sales since the bottom in July and a general improvement (albeit a small one) in the economy."

While less bullish, Credit Suisse analyst Stefan Anninger still expects the pay TV industry to eke out growth by adding about 87,000 subscribers following the end of the third quarter. A video subscriber gain of 445,000 for telecom firms will partly make up for a cable loss of 576,000, with the satellite TV operators, particularly DirecTV, putting the pay TV industry into positive territory.

Goldman Sachs analyst Jason Armstrong begs to differ. "We expect a third consecutive quarter of video losses in the fourth quarter," he told investors.

But his forecast of a decline of 14,000 is "a substantial improvement from third-quarter results and nearing an inflection," he emphasized. "Better quarter-over-quarter results from Comcast and DirecTV are the largest drivers of the improving trend."

And Sanford C. Bernstein analyst Craig Moffett also highlighted the good and the bad. "I suspect we'll see modest positive subscriber growth for the pay TV sector in the fourth quarter, if only because seasonality is working in their favor," he told The Hollywood Reporter. However, he also added a word of caution: "Longer term, though, it's hard to argue that we'll see much growth until new household formation starts to pick up again."

Once the final 2010 figures are in, industry watchers will turn their attention to the new year.

BTIG analyst Richard Greenfield, for one, is optimistic for 2011. "We expect growth to occur and substantially reduce the 'noise' related to cord-cutting that has persisted over the past six month," he said in a recent forecast.