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Summary:

The pay TV industry shed at least 193,000 subscribers last quarter, based on public earnings results. While most were low-end subscribers that didn’t pay for HD, DVR or other value-added services, the industry faces a tipping point if it keeps focusing on ARPU above all else.

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With Cablevision reporting a loss of 23,000 subscribers and Dish Network shedding 135,000 in the second quarter, the U.S. pay TV industry has lost nearly 200,000 subscribers in the second-quarter — and those are just the ones we know about. But if there was a lack of concern about cord cutters on second-quarter earnings calls, it’s not because operators were unaware of the losses; it’s because in most cases, they didn’t want those subscribers anyway.

As seen in the chart below, public pay-TV providers collectively shed 193,000 subscribers in the most recent quarter. While losses by cable providers are nothing new, they are usually offset by stronger growth in satellite and IPTV providers picking up the slack. That didn’t happen this quarter, as somewhat weak growth by IPTV providers and a big loss at Dish highlighted what seems to be an exodus of pay TV subscribers amidst a weak economy.

Company 2Q Video Net Adds/Losses
Comcast -238,000
Time Warner Cable -130,000
Charter -79,000
Cablevision -23,000
Dish Network -135,000
DirecTV 26,000
AT&T 202,000
Verizon 184,000
Total -193,000

When the numbers actually shake out, things are likely to be even worse than this. Keep in mind that these are just the top eight public pay TV providers, and most of those above operate in metropolitan markets. There’s a number of Tier 2 and Tier 3 providers not in this list, and many of those are in rural or underserved areas where the down economy has hit even harder.

Is competition really the cause?

On most of the earnings calls we sat in on over the past several weeks, there seemed to be a common refrain: Cable and satellite providers were losing subscribers in part due to increased competition and deals from the telco providers — Verizon and AT&T — who are aggressively buying share with steep upfront discounts.

But a look at the actual numbers doesn’t seem to bear that out. AT&T added 202,000 video subscribers in the second quarter, while Verizon added 184,000 in the same period. The addition of about 386,000 video subscribers combined is not out of line with previous quarters, and in fact is actually a little low compared to the 410,000 the telcos signed up in the first quarter or the 440,000 they added in the fourth quarter.

Will the real cord cutters please stand up?

If those pay TV subscribers aren’t actually going to competitors, where are they going? Most likely they’ve actually become cord cutters — two words that we didn’t hear much of on those earnings calls. In part, that’s because the rhetoric around cord cutters as anti-establishment, online video-watching rebels has largely been dispelled.

Studies have found those going without cable aren’t doing so because of over-the-top streaming offerings. Instead, those who are choosing to go without cable are doing so because they either don’t see much value in pay TV packages, can’t afford to keep paying for TV, or some combination of the two.

Operators acknowledge that the few video subscribers who have left the pay TV ecosystem so far have most commonly been on the bottom end of the cable value chain — that is, generally low-income users that just paid for TV and didn’t subscribe to broadband, HD or other higher-value services. And for most operators, that’s ok because they weren’t very high-margin customers anyway.

The myth of the higher-value customer

Cable providers are increasingly seeking ways to get more money out of their existing subscriber base. As a result, we’ve seen steady increases in average revenue per user (ARPU) as users sign up for more HD, more premium channels, more DVR set-top boxes throughout the home. That’s the reason Comcast’s ARPU stands at about $140, when basic cable service starts at about $39 based on some introductory offers.

On the other side, operators are increasingly shying away from customers who might not want to pay for the premium cable package, multiple DVRs and other bells and whistles. DirecTV and Dish Network both run credit scores of potential subscribers to weed out those who might turn out to be flakes and cancel after an introductory deal is over. The goal — to get customers signed up for as many value-added services as possible — is not just about driving up revenues, but about making those services sticky and increasing customer lock-in.

The problem is that in a world where all the cable operators are trying to sell ever-more expensive packages of services, there’s a sad truth of business they’re running up against, and it’s that not everyone is a luxury car buyer. That is, not everyone is in the market for the biggest and best. But in the cable world, there’s very little choice if all you want is a Kia.

Will cable reach a tipping point?

It’s not enough to blame the weak economy when things get rough and folks stop paying for cable; there’s also a structural problem with the way the industry views its subscribers. In the quest for higher margins and customer retention, those companies are generally willing to sacrifice subscribers at the low end if it means they can get more out of their so-called higher-value customers.

The question is how long the industry can keep pushing ARPU up before it starts to shed some of its better customers — those that aren’t necessarily poor, but don’t have $150 or more a month to spend on entertainment. There’s the old belief that TV is recession-proof, as consumers hunker down and spend more time at home rather than going out when their disposable income gets low. But at some point, the value proposition has to break down — especially when there are other ways to get low-cost video entertainment from services like Netflix or Hulu.

No TV image courtesy of Flickr user Mykl Roventine.

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  1. Dropped cable, getting free over-the-air digital programming

    1. this is exactly why i dropped my cable too, I live in the Toronto area, where I get local HD channels as well as those from Buffalo and Rochester, for a $35 directional antenna.

    2. I did the same. Here in San Diego I get all the major networks including Fox. The main trade-off is live sports. I’ve found some work arounds online but they can be a moving target.
      http://cordcutterguide.com/

  2. Dennis Crowley Tuesday, August 9, 2011

    >> Operators acknowledge that the few video subscribers who have left the pay TV ecosystem so far have most commonly been on the bottom end of the cable value chain — that is, generally low-income users that just paid for TV and didn’t subscribe to broadband, HD or other higher-value services.

    Seeing exactly the opposite in certain circles in NYC. High value customers (paying $140+) month trading in their cable box for a MacMini with Boxee/Hulu/EyeTV/etc.

    The most interesting group tho is college students… kids who leave their parents house and never get a TV / never order cable for their dorm rooms, go a few years without cable and then become Cord Cutters after they graduate. I’d love to see a chart of cable subscribers by age (18-25) over the past 36 months.

    1. That’s exactly what I did during undergrad, continued during grad school and then said what the heck after leaving. All I need is my 4G connection, Hulu & some other streaming sites and I’m good

      1. Ditto. Dropped cable tv back in 2009, kept cable internet, bought a MacMini with an eyeTV USB HD tuner and a $35 antenna. Went to install that in the attic and discovered I already had an antenna up there from years gone by (previous owner). Macs have optical outputs in their headphone jacks so I ran that to the surround-sound AV receiver and get all the 5.1 goodness in my DVDs and some broadcasts. And I can websurf, play games, Hulu, youtube etc. Really has worked out well.

    2. Dennis – Thanks for the comment. It’s true, I think the real problem isn’t with the cyclical nature of the economic downturn and people leaving cable just because it’s getting too expensive to justify… There’s a whole class of users — the so-called “cord nevers” — who up until now haven’t paid for cable and seem unlikely to do so in the future. I haven’t really seen a good substantial study of this group (18-25 year olds) and how they consume TV/pay TV yet, however.

    3. I concur, and I’d love to see that chart!

  3. George Creedle Tuesday, August 9, 2011

    Exactly what I did. Nice income, but hated the DVR, channel interface and customer non-service from TWC; slowly moved to OTA digital recordings on EyeTV, Podcasts from both networks and independent producers, Hulu and Netflix. I have more programming that I could ever hope to watch. Goodbye cable cabal.

  4. Am I alone or has anyone else noticed the following: 1 – high percentage of Cable-TV networks transmitting programs with aspect ratio smaller than the size of subscriber’s digital TV screen (non-High Definition); 2- provider(s) playing a passive role by not reformatting any of such programming to fit subscriber’s TV screen nor requiring the networks to reformat such programs to fit the TV screen; 3- providers discriminating by furnishing HD-TV subscribers with settings option that enables them to change at will the aspect ratio of any given program to better fit their TV screen but not making such feature available to any other subscribers who do not have HD-TV equipment; 4- providers not coming clean with subscribers as to what has actually been transpiring to diminish TV experience of non-HD-TV subscribers; and finally 5-oddly enough the vast majority of networks transmitting programming with the wrong aspect ratios at the same time are transmitting advertising with aspect ratios that perfectly fit the entire TV screen of non-HD subscribers. It appears to me that these complaints/observations are consistent with the astute premise of your well-written article that networks and providers are targeting higher-end subscribers as for example those with HD-TV. I have complained to my provider and now have on the books a confirmed scheduled appointment for a technician to follow-up at my apartment in less than two days from now, but truth be told I have already spoken with 3 cable-TV provider’s field technicians on the street during the past 24 hours and their comments and explanations have more or less convinced me the entire matter will not get resolved to my satisfaction. These same providers are those also offering Internet connections and as such have been engaged in other practices of a less than honest nature that merit being formally investigated. I will be pleased to provide your organization with full details and under oath will swear to same as being the full truth. Fred Diener, New York City

  5. Edward O’Meara Wednesday, August 10, 2011

    You should also consider the new value people see in free OTA HD. Every TV you buy comes with a tuner and an Internet connection these days. we actually get a better picture on core channels than with Comcast. Cutting the cord is less about money than you may think.

  6. Cable is absolutely the most expensive entertainment you can buy. You are forced to receive 200 channels, even if you only watch 10 channels. You pay $50-125 a month for mostly junk you don’t watch. But now the cable monopolies are starting to see a shift away from the cable TV garbage and they are ratcheting up the price of broadband where it’s now more expensive than a cable package. That’s the case with Time Warner. Cable TV and broadband are being priced out for many families and the absurdly high expense of broadband will impact America’s ability to compete with the rest of the world which have much less expensive and quicker broadband.

    1. Well said. The reason I am about to ditch a TV subscription (Dish) service is that is is not value at all. For $60 a month, I get a bunch of channels, of which only 2-3 are worth watching for me. I wouldn’t mind paying as much as $5-10 for each of those if I could get them individually.

      The fact is most people are waking up and seeing alternatives to the “fake choices” thrown up by bundled channels, and will continue to drop cable and satellite, in favor of pay as you go services.

      This article is from the industry perspective, but fails to ask the basic questions about what customers are looking for. At least people like me want content at a reasonable price, before we even think about all the “value added services” like DVR etc.

    2. @Mike – I’m sure someone will come along from the cable industry and make the case that it’s still “an incredible value” based on the number of programming hours available. Bundles are great when they make sense from a value/price perspective. I guess the question is, is cable still valuable enough to justify the price increases?

  7. Black Belt Auntie Wednesday, August 10, 2011

    It is their own fault. I recently cancelled cable TV – they constantly raise their prices without any advance notice, and they try to sneak extra charges in every month. If you are not vigilant, they will charge you for movies you never watched, services you don’t actually have, and surcharges they have invented that do not correspond to any actual product or value. They are rude to their customers, as though we are an annoyance to them. On top of which, the number of commercials per hour is purely ridiculous. I am not going to pay to watch commercials. If companies want me to see their products, they can pay me for my time. That entire model of advertising is out of control – and I refuse to participate in it any longer.

    When I want to watch a movie, I rent it. There is almost nothing on TV that is worth wasting the limited minutes of my life to see, and I can get the news free on the Internet. There are great browser plug-ins to block the ads so I don’t have to be bothered with advertisers who don’t understand that my time is too valuable to waste on their commercials.

    The cable companies are following the same path that their entertainment peers chose – they didn’t learn a single thing from watching the complete overturn of the music and video rental industries. Now it’s cable’s turn. Bye-bye cable companies, you blew it.

    1. Bravo!
      Cable companies “double dip”. They charge us, the consumer and they charge the advertisers as well. While I hated to pay to watch commercials, useless stations and micro-manage my bill; that is not what prompted me cut drop my service.
      It was the way companies treated me!
      Every one I had ever used eventually got me so angry I would cancel my service. Comcast, Direct TV and now Dish Network all tried to add false charges to my bill and then treat me like “I: was the crook when I called them on it.
      I there defense, they [almost] always removed the charges, but it is dishonest and just another waste of my time.
      Been cable free for 4 months now and loving it. Will save enough for a brand new laptop in no time.
      Bye Bye cable and good riddens!

  8. Maybe because there are a lot of free online Tv in which you could watch TV for free such as tvhod.

  9. Ryan, you said “But at some point, the value proposition has to break down.”

    But the big question, on Wall Street analyst minds, is WHEN will it happen? Back when the pay-TV ARPU went above $100/month, I thought that would surely be the tipping point — but it wasn’t. Will $150 be the breaking point, I doubt it.

    Why? There’s still a huge segment of the American consumer population that is somewhat discontented with pay-TV’s value for money, but most are too lazy to look for alternatives. They apparently keep paying whatever the increased rate is on their monthly bill. Perhaps affluent and apathetic consumers constitute pay-TV’s core base of customers. Who knows?

    My point: something relatively dramatic will have to happen to drive these people to take action — otherwise, the ongoing decline of traditional pay-TV could take several years to fully run its course. A torturous end to a video entertainment legacy — death by a thousand (cord) cuts.

    1. The issue I have is that TV is supposed to be relaxing entertainment. Cable is one-click, and the alternatives are not. I don’t want to have to buy a PC just for watching TV in the living room. I don’t want to have to mount an antenna on my house or have it sitting visible in the living room for OTA. I don’t want to have to subscribe to multiple services to find the shows I want. I don’t want to have to use multiple program guides. I don’t want to have to waste my personal time managing that stuff. Outside of work, the computers and electronics in my life are tools, and only tools. And those tools had better be as efficient as possible. The cable box is simple and efficient. The suggested alternatives are not.

      1. @AnthonyP – True, over-the-top alternatives haven’t done a good job with discovery or ease of use. That’s changing, however, and I think sometime over the next 6-12 months you’ll see some interesting technologies that enable continuous feeds of streaming content delivered to your TV.

    2. @David – I’m with you. Sometimes I feel like I live in the future, wondering why change doesn’t happen sooner. The tipping point question is a good one. Everyone knows that you can’t infinitely raise rates above inflation and keep your customer base intact forever. But where is that inflection point where you start to lose more revenues through customer losses than you gain through an increase in ARPU? I don’t know, but I’m sure someone’s done a model of it.

      Not to throw another analogy out there, but my gut feeling is that it’ll be like the Titanic hitting an iceberg — the industry won’t know it until it’s too late.

  10. Look at the economy, look at the unemployment numbers, and the question becomes “Why ARE so many people continuing to waste money on cable?”

    I have never had cable and I have never missed it. I have a cheap DSL Internet connection, an antenna on my roof, and a public library.

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