Pay TV Sub Slump in Second Quarter Likely to Reignite Cord Cutting Debate

U.S. satellite TV operators posted their first-ever sub decline, and the broader industry may post its biggest drop ever after two quarters of slight gains.

NEW YORK - Big pay TV operators had a rough second-quarter earnings season, citing the weak economy along with heated competition as key reasons for weaker-than-projected video subscriber momentum that could make for the biggest quarterly sub declines ever.
After second-quarter earnings reports from Cablevision Systems and Dish Network on Tuesday, all indications are that pay TV subscribers declined in the period after two straight quarters of slight gains. And some on Wall Street say this may reignite the cord cutting debate.
The debate had started after the first-ever pay TV sub decline in the second quarter of last year, which the TV distribution industry lost 246,000 subs, followed by a 130,000 decline in the third quarter, according to SNL Kagan data. That led to investor concerns that consumers were cutting their pay TV cord to watch TV content via online sources, such as Netflix.
Since then, concerns have taken a back seat, although analysts have predicted choppy subscriber results in the future.
However, the past 10 days of earnings reports highlighted weak customer trends. And Dish’s sub decline in the April-June period, which it reported on Tuesday, confirmed expectations that U.S. satellite TV operators lost subscribers in the second quarter for the first time ever.
Subscriber momentum also declined for many publicly traded pay TV operators that have reported their quarterly results. Overall, pay TV subs for them as of June 30 are down nearly 200,000 compared with the first quarter.
“Baby, it’s cold out there” was the title of a Tuesday report by Sanford C. Bernstein analyst Craig Moffett. “With all the major publicly traded pay TV providers having reported their results, the second quarter looks to have been the weakest in the industry's history.” And while cable and telecom players had sub trends comparable to the year-ago period, satellite TV provided the biggest shortfall compared to Wall Street estimates, he said.

“To be sure, the second quarter is seasonally the weakest for the industry, so there are legitimate reasons not to simply extrapolate these results going forward,” Moffett continued. “Still, a resurrection of the cord cutting thesis seems almost inevitable here, notwithstanding all the evidence that it is the tremendous stress on consumers, particularly at the low end of the market, that is the root cause for the weakness.”

Among satellite TV providers, DirecTV added 26,000 subscribers in the latest quarter, down from 100,000 in the year-ago period, and Dish posted a 135,000 loss, compared to a 19,000 loss a year earlier.

Cable giant Comcast lost only 238,000 video subscribers this quarter after a 265,000 decline a year earlier. But Time Warner Cable's drop went from 111,000 to 128,000, Cablevision Systems swung from a year-ago gain of 2,900 to a drop of 23,000, and Charter Communications lost 79,900 overall video subs instead of last year's 71,700.

Only telecom players added subscribers, and a few more than last year. Verizon's 184,000 adds in the second quarter, up from 174,000 in last year's period, combined with AT&T's 202,000 sub gain, which was down slightly from 209,000 a year earlier.
Adding in some smaller operators and private companies, Miller Tabak analyst David Joyce said “it looks like perhaps 307,000 customers left the pay TV market.” Moffett cited a decline of 380,000.
While operators cited a weak economy and housing market and increased competition, Joyce said some consumers seem to have replaced their pay TV service with broadband video services.
“AT&T and Verizon added subs in the same range they typically do, but cable and satellite lost more than what AT&T Verizon gained,” the analyst said. “This could be a degree of the [broadband video service] factor doing it – high-speed data net adds are still up solidly.”
Similarly, Moffett said: “In any case, as we've argued so often in the past, the distinction between cord cutting for technology's sake (the favored argument in the technology press) and cord cutting for economic reasons is a semantic one. Rising prices for pay TV, coupled with growing availability of lower cost alternatives, add to a toxic mix at a time when disposable income isn't growing.”
On another day featuring news of weak subscriber momentum in the second quarter, Wells Fargo analyst Marci Ryvicker found one positive. “Luckily earnings are almost over,” she said in a report.

Twitter: @georgszalai