Third-Quarter Pay TV Sub Trends Could Revive Cord Cutting, Merger Talk

Television being thrown out - H 2012
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Television being thrown out - H 2012

At least one analyst predicts that sluggish momentum could lead satellite TV giants DirecTV and Dish to revisit a potential merger over the next 18 months.

Weaker third-quarter subscriber results from pay TV companies are likely to bring the cord cutting debate back to into the spotlight as analysts have started discussing the implications of what one estimates was a 127,000 drop in subscribers in the latest period.

And at least one Wall Street observer said the weak momentum could lead satellite TV giants DirecTV and Dish Network to take another look at a merger, which as often been suggested, but has never materialized.

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"We are increasingly of the view that DirecTV and Dish Network will propose a merger over the next 12-18 months," Sanford C. Bernstein analyst Craig Moffett said. "Making the case to regulators that their long-term viability is only ensured if they merger to form one stronger entity would be a bit easier against a backdrop of subscriber weakness."

DirecTV CEO Mike White said earlier this fall that a possible combination with Dish, if it was ever to be discussed again in the future, could be seen as being "pro-consumer" amid a continuing increase in programming costs.

ISI Media analyst Vijay Jayant tallied the third-quarter subscriber data from all publicly traded pay TV firms his conclusion: "The third quarter of the year is generally the rebound quarter for the [sector] after a seasonally weak second quarter. While third-quarter video subscribers did rebound, overall video net adds were tepid at 30,000 subs. We estimate that if unlisted cable companies are included, pay TV industry lost subs."

Asked if the weak trends were due to cord cutting because of  attractive online video alternatives or a weak economy and housing market, Jayant said both. "I think the economy is the bigger factor," he told THR.

Bernstein's Moffett in a report entitled "Pay TV Subscribership Continues to Bump Along the Bottom" estimated that the industry including privately-held pay TV operators lost 127,000 subscribers in the quarter.

"For two years now, the pay TV industry has grown subscribers at a rate essentially indistinguishable from zero," he said. In 201, a first-quarter pay TV subscriber gain of 454,000 was followed by a 440,000 decline in the second quarter, a 25,000 drop in the third and a gain of 243,000 in the fourth, he said. This year, a first-quarter gain of 429,000 was followed by a 410,000 drop in the second quarter and a 127,000 in the third, his data shows.

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"Household formation, while still anemic, is showing signs of recovery," Moffett wrote. "Pay TV industry subscriber metrics are not. Pay TV penetration of America's households is therefore falling, even while the number of pay TV subscribers is still inching higher."

So what does that mean about cord cutting? "Declining industry penetration rates suggest that cord cutting is a reality, but perhaps not in the way that most pundits think," Moffett wrote. "Certainly, there is no evidence that customers are dropping subscriptions in droves in favor of Internet-based content. Rising costs of cable service, however, are undoubtedly becoming more burdensome for lower income households, increasing the likelihood that some households are reverting to rabbit ears - cable losses, at least, continue to be concentrated among low-end "broadcast basic" subscribers."

But Moffett sees reason to expect "modestly improved growth" going forward. "Normalization of household formation rates should yield a larger pool of potential customers for the industry, and even if the take rate is lower than average, it will yield net additions," he said.

The analysts highlighted that cable operators once again lost subscribers in the third quarter, with declines at all publicly traded cable firms. Gains at DirecTV offset Dish Network losses to yield net growth of 48,000 subscribers in the satellite TV sector. And telecom giants signed up about 320,000 new TV subscribers in the latest quarter, but that was a slowdown from the year-ago period.

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"For the cable operators, the approach of market share equilibrium with their satellite and telco peers, a long time theme of our research, should continue to reduce net subscriber losses, and with some help from housing could eventually take them back to positive territory," Moffett predicted.


Twitter: @georgszalai