The weak economy, significant "seasonality" brought on each year by students and retirees who turn off services for their summer moves, and some cord-cutting all hit the U.S. pay-TV sector particularly hard in the quarter.
Estimates on how many subs U.S. pay TV shed in the quarter vary, but they're all pretty ugly. An Associated Press tally pegged the losses at about 195,700. It was so bad that the U.S. satellite TV industry ended the quarter with a subscriber deficit (believed to be a first) as Dish Network LLC (Nasdaq: DISH) lost a bunch of subs and DirecTV Group Inc. (NYSE: DTV) barely kept its head above water in terms of U.S. sub additions.
Video sub numbers at AT&T Inc. (NYSE: T) and Verizon Communications Inc. (NYSE: VZ) were relatively flat, and they probably should have done much better.
"I thought there was nothing especially good or bad about their quarter, considering how large the losses were on the cable side," Infonetics Research Inc. Directing Analyst, Video, Teresa Mastrangelo says.
The picture was dim indeed for U.S. cable operators, which lost a combined 702,000 video subs in the quarter, according to Infonetics. It wasn't the worst ever (the third quarter of 2010 was more dismal), but it wasn't something to be proud of.
Here's how some of the nation's top pay-TV service providers stacked up in the second quarter:
Table 1: US pay TV industry subscriber trends
|Service provider||Q2 2011||Q2 2010||Q2 2009|
|Time Warner Cable||-128,000||-111,000||-57,000|
|Verizon (FiOS TV)||+184,000||+172,000||+295,000|
|AT&T (U-verse TV)||+202,000||+209,000||+248,000|
|Source: Sanford Bernstein and company reports.|
Analysts pinned the blame on a range of factors, but agreed that the bad economy was the underlying reason for the MSOs' tough quarter.
Mastrangelo says the results do demonstrate that there is clear competition for video services, and much less for broadband, where cable continues to enjoy sub increases each quarter.
While some losses were due to consumer belt-tightening, the overall losses in the pay-TV category will certainly fan the cord-cutting flames, since it's likely that a number of them opted to switch off their cable subscriptions and instead fulfill their video needs with broadband in conjunction with Roku Inc. boxes and other specialized video streaming devices.
"It's going to kick up the discussion" on cord-cutting, says Ian Olgeirson, senior analyst at SNL Kagan . The firm's most recent data shows that 4 percent of occupied homes -- about 4.5 million -- will fit into the "over-the-top substitution" category by year-end. While some of those are bona fide cord-cutters, the estimate also includes households that may not have been subscribing to a pay-TV service in the first place.
"But you can't discount the effects of the economy, unemployment… and sluggish housing formation," Olgierson adds.
"Economic justification is driving disconnects more than over-the-top," Mastrangelo agrees, but notes that OTT options are becoming increasingly appealing as they gain access to more and fresher content.
"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," Sanford C. Bernstein & Co. Inc. analyst Craig Moffett wrote in a recent note to investors.
Moffett believes satellite TV is the most vulnerable in a weak video market because players in that segment have less to fall back on. Cable, he adds, now generates roughly half of its subscription direct gross profit dollars from voice and data services.
— Jeff Baumgartner, Site Editor, Light Reading Cable