Do you still have a home landline? Some of you might, on the theory that it’s useful in a power outage. But newer landlines don’t always work then, either. Residential phone lines simply don’t make sense for most, not even AT&T (T). Ma Bell’s residential phone business is sliding to zero. The company lost 14% of its landlines over the past year, 25% over the past two years, and 33% over the past three years. I have three adult children. Not one of them has a landline, and they never will.
And you know what else they’ll never have? Cable TV. Cable—and its satellite TV sibling—was awesome technology 20 or 30 years ago when the competition was over-the-air broadcasting; it was a revelation to have dozens and then hundreds of channel options. But in the era of Netflix (NFLX), Hulu, HBO, ESPN+, Fox Nation, Pluto, Tubi and other streaming services, cable is fading. Death isn’t imminent, but it’s coming, all the same. (All of this is good news for growing digital platforms like Roku (ROKU), where, in full disclosure, I previously worked—between my stints at Barron’s.)
This past week, AT&T reported a second-quarter loss of 778,000 Premium TV subscribers, across its DirecTV and U-Verse offerings. It was a record quarterly decline for the company, which now counts 21.6 million TV subscribers. Comcast (CMCSA) lost 209,000 video customers in the second quarter, the cable giant’s worst quarter ever for video subscriber losses, cutting its video subscriber total to 20.6 million. Over the past two years, AT&T and Comcast shed a combined 5.4 million, a decline of more than 10%. Add in Dish Network (DISH), Verizon Communication (VZ), Charter Communications (CHTR), and Altice USA (ATUS), and you have about eight million subscriber losses in just two years.
But here’s a weird twist—investors don’t mind. Comcast stock is near all-time highs. Same for Charter. Losing video subscribers actually boosts the profitability of the cablecos and telcos, since video carries lower profit margins than broadband, which continues to thrive. In fact, for cable stocks, “video subscriber losses are now part of the bull case,” MoffettNathanson analyst Craig Moffett asserted in a recent report.
It all amounts to more average revenue per user, or ARPU. “As more and more customers drop video, the unwinding of bundled discounts means faster broadband ARPU growth, pushing margins higher still. Video’s indirect cost intensity—video demands significantly more customer service and repair and maintenance than does broadband—effectively pushes margins yet higher.”
In theory, the trend should be a boon to virtual cable services—those live-streaming internet TV options like AT&T’s DirecTV Now and Google’s YouTube TV. But the virtual TV bundles are no magic cure for what ails pay TV. A wave of price increases has made the services less appealing. DirecTV Now packages run $50 to $85 a month, and all of the other players—YouTube TV, Dish’s Sling TV, Hulu With Live TV, Sony PlayStation Vue, Philo, and Fubo TV—have raised prices at least once and, in some cases, twice since the beginning of 2018. Once you add in the cost of internet access, these internet TV bundles don’t look all that different from traditional cable in structure or price.
UBS analyst John Hodulik estimates that virtual cable services have 8.6 million subscribers combined, or about 9% of total U.S. video subscribers, and he thinks that streaming TV will more than double its share of the overall pay-TV market by the end of 2022. But Hodulik notes that the growth won’t make up for cable sub losses—the pay-TV market has passed its peak.
Moffett earlier this year wrote a report laying out two scenarios for the future of pay TV. In one, cable losses slow as internet TV bundles increase in price to reflect higher programming costs. In the other, “the slide in traditional subscribers becomes a tsunami.” Moffett contends that for some small cable operators, that dynamic is already playing out. “It’s not because they can’t keep their customers,” Moffett explained in a research note. “It’s because they don’t want to.” These smaller cable companies, he says, are cutting programming, raising prices, withdrawing promotions, and even encouraging customers to shift to the live streaming packages. If the likes of Comcast and AT&T adopt the same approach, he reasons, subscribers would drop precipitously. “The industry as we know it today, could, or would, simply unravel.”
As noted, that might actually be bullish for pure-play cable companies, and Moffett has Buy ratings on both Charter and Altice. It’s more complicated for Comcast and AT&T, which have big content businesses—NBCUniversal and WarnerMedia, respectively. Both companies offer a slew of basic cable channels—NBC owns E!, Bravo, USA Network, Oxygen, and Syfy, among others, while Warner owns TNT, TBS, CNN, Cartoon Network, and more.
“There’s simply no good way to spin the story for programmers,” Moffett wrote in another recent note. Moffett thinks that over time, viewers focused on entertainment content are going to shift their TV budgets to subscription-based services like Netflix, Hulu, and Amazon Prime Video, and coming services from Apple (AAPL), AT&T, and Disney (DIS), supplemented by ad-supported services like Tubi TV and Viacom’s Pluto. News and sports watchers “will be forced to stick with the status quo,” he writes—although even in those categories, new subscription-based options are emerging.
Michael Greeson, president and co-founder of The Diffusion Group, a media research consulting firm, thinks we’re headed for pay TV 3.0, when current cable bundles disappear, including virtual services like DirecTV Now, replaced by bundles of streaming services. The most likely new bundlers, he thinks, are streaming platforms like Amazon (AMZN), Apple, and Roku, and TV manufacturers like Sony (SNE) and Samsung (SSNLF). There is still value in bundling; it’s just likely to be a different set of services—and a different set of bundlers.
|For more news you can use to help guide your financial life, visit our Insights page.|