Are mounting video losses a positive trend for US cable operators? According to a top industry analyst, the pendulum to that answer is swinging toward "yes."
Pay-TV subscriber losses, once considered US cable's bear case, are now part of the sector's bull case, MoffettNathanson analyst Craig Moffett surmised in a new report.
The general reason for that view is that broadband services carry a higher gross margin than video, so ARPU growth and margins reflexively rise as the subscriber mix shifts from video to broadband, Moffett explained. And as customers cut the video cord, they also unwind bundles that, in turn, cause the cost of the now-unbundled broadband service to rise.
"In 2019, we've entered a new phase," he wrote. "Video subscriber losses are now part of the bull case. In conversation after conversation, investors talk of faster subscriber losses as a clear positive."
Video, Moffett points out, has higher indirect cost intensity -- including more customer service, repair and maintenance -- than broadband, which effectively pushes margins higher.
This has led to rising margins among the publicly traded cable operators that Moffett covers. Among the recent examples -- Altice USA's margins are now in the low 40s, and Cable One, which has largely de-emphasized pay-TV in favor of broadband, saw its margins reach 47.8% in Q1 2019.
"50% margins are imminently attainable as video continues to shrink," Moffett added.
Still, video will remain part of the cable story. While some smaller cable ops have given up on pay-TV, others still see reason to upgrade to multiscreen options that can compete with new OTT-TV options and attempt to defend the video base.
"To be clear, none of the major cable operators are planning to abandon video," Moffett said, noting that Comcast (with X1) "is committed as ever to ensuring that they have the very best video offering."
However, fears that video sub declines will prompt investor discomfort are fading away. "Video subscriber losses became something that investors were willing to ignore," the analyst said.
But, he added, pay-TV losses aren't as good for programmers such as Comcast-owned NBCU and AT&T-owned Time Warner, because virtual MVPDs are recapturing only a fraction of traditional pay-TV sub losses.
Among US MSOs covered by Moffett, he prefers Altice USA and Charter as the best ways to participate in this "re-rating" of the sector, maintaining "Buy" ratings for both. He rates both Comcast and Cable One as "Neutral."
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— Jeff Baumgartner, Senior Editor, Light Reading
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