Sinking subs leave cablers all wet

DirecTV among few to buck '07 trend amid more competition

Satellite TV giant DirecTV Group again beat out its TV distribution peers in terms of subscriber gains last year, with Verizon's FiOS TV service coming in second in its first full year of marketing.

The two were the only clear winners in a sector that has seen increased competition due to the entry of telecom firms into the market and the rollout of high-definition TV offerings.

Among the established distributors, DirecTV, of which News Corp. recently handed control to John Malone's Liberty Media, was the only one to record stronger subscriber growth in 2007 than in 2006.

Its satellite peer, Dish Network, has seen a hit to its lower-end clientele amid the recent housing crisis and economic malaise, which contributed to lower user growth than in 2006 and compared with Verizon.

Based on the full-year 2007 results recently reported by sector players, Cablevision Systems was the only one of the four big publicly traded cable operators to avoid a major decline in basic cable customers last year despite the industry's much-touted triple play of video, broadband and telephony services. Cablevision's loss of about 4,000 basic users still marked a clear weakening in momentum compared with a big customer gain in 2006.

Overall, the top 10 U.S. cable firms lost 472,500 basic subscribers in 2007 after adding 205,000 in 2006, according to Leichtman Research Group.

Time Warner Cable and in a more pronounced way Comcast swung from 2006 basic customer gains to particularly clear declines in 2007 as the economy, along with satellite and FiOS competition, affected them. Paul Allen's Charter Communications also lost more basic users in 2007 than 2006.

Wall Street expects these trends to largely continue this year.

"DirecTV's fundamental performance will continue to lead the multichannel industry for the next several quarters as it benefits disproportionately from high-definition adoption and experiences less impact from the economy due to its higher-quality customer base," Credit Suisse analyst Bryan Kraft said in a recent report. "DirecTV is also benefiting from superior execution on the part of management."

Bear Stearns analyst Spencer Wang said he also was "impressed" by DirecTV's 2007 results but warned "that the company's leadership position in HD may become harder to translate into outsized results past the 2008 time frame." He pointed to a rollout of high-definition offerings by all major competitors.

Bernstein analyst Craig Moffett recently lauded Cablevision for bringing in a fourth-quarter increase in basic subscribers, "a remarkable feat given the extensive overlap with Verizon's FiOS," he said. All satellite and cable TV firms have admitted pressure from FiOS, but most have said they feel comfortable about their ability to compete.

New data from the Massachusetts Department of Telecommunications and Cable shows how FiOS has affected established players. Miller Tabak + Co. analyst David Joyce said that in Massachusetts markets where FiOS competes with Charter, Verizon last year added 2,260 subscribers, a fact that explains 53% of Charter's 4,264 user losses.

AT&T's U-Verse video service fully launched a little after FiOS, which early this year reached its 1 million user milestone, but so far has failed to gain the same traction. Observers say that 2008 will be the key year to gauge U-Verse's progress.

Meanwhile, cable firms seem poised to continue to feel the brunt of the hit from economic and competitive pressures.

Joyce predicted that Comcast will lose more of its low-end subscribers this year than last. He recently boosted his basic user loss projection from 149,000 to 198,000. Citi Investment Research's Jason Bazinet even sees basic losses of 300,000, compared with about 180,000 in 2007.

Bazinet also expects Cablevision to see its momentum turn to a clear basic customer loss of 93,000. "Before we conclude that Cablevision is largely immune to FiOS, we need to see a few more quarters of robust results," he said.