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Controlling Q2 Churn

Recent media and analyst reports have been quick to point out that Verizon Communications Inc. (NYSE: VZ)'s FiOS TV growth was down for the second quarter of 2008. The company gained 176,000 net new subscribers, compared with 263,000 in the previous quarter.

To my mind, it's a bit premature to describe that as a slowdown, given that the second quarter is notoriously unpredictable. The pay TV business does have significant seasonality, and most providers lose more subscribers in Q2 – largely as a result of college students disconnecting their cable subscriptions for the summer holidays, and of families moving to their summer homes doing the same at their primary residences.

In fact, it's been typical for cable operators to lose subscribers over the second quarter even when they were increasing their annual subscriber base a few years ago. Over the same quarter (Q208), Comcast Corp. (Nasdaq: CMCSA, CMCSK) lost 138,000 subscribers – almost as many as Verizon gained – and Time Warner Cable Inc. (NYSE: TWC) lost 57,000. In fact, Comcast's results suggest that second-quarter losses have become more significant over the years. In last year's second quarter, Comcast lost 101,000 net basic video subscribers; in 2Q06, it lost just 91,000.

This could be partly a function of population growth. The number of U.S. households grows by about 1 percent every year. That's one of the reasons why all providers (cable, satellite, telco) gain new subscribers in some quarters: There's simply a new set of households entering the market. But when these households churn, there's a greater number lost as well.

However, it is also clear that competition, especially triple-play bundling, is increasingly a factor. In the past, most subscribers that churned in Q2 returned in Q3, making September a great acquisition period for the pay TV providers. Now, it's foolhardy to assume that the homes that left you in May will simply come back in September. Some cable operators have already created various schemes for this time period, allowing subscribers to maintain their subscriptions but not pay for the months they are away in some markets. They are also helping households that move to find local cable operators in their new neighborhoods, and sign up with them rather than a telco or satellite operator.

Telcos need to look into similar strategies. As this market becomes more competitive, telcos will have to transition from typical mass-market customer acquisition strategies to more targeted ones. Marketing partnerships and channels will become more important: For example, partnering with retailers running back-to-school programs could become a critical strategy in the future to regain subscribers lost in Q2. Second-quarter cable churn can also be an opportunity for telcos, since customers lost by cable are "in play" and could be stolen away three months later.

— Aditya Kishore, Senior Analyst, Heavy Reading

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