What DirecTV's Big Sub Loss Means

With its unexpectedly big loss of 133,000 video subscribers in the second quarter, DirecTV is setting off fresh alarms in the US pay-TV world that cord-cutting is accelerating. But the real story may be a bit more complicated than that.

In a regulatory filing late Friday, AT&T Inc. (NYSE: T) quietly disclosed that its newly acquired DirecTV Group Inc. (NYSE: DTV) division shed more than twice as many video customers as Wall Street expected and about four times as many as it did in the year-ago period. The large loss in the traditionally weak spring quarter also came after DirecTV gained 60,000 subscribers in the first quarter.

With the latest record-setting loss by the US satellite TV market leader, DirecTV widened the US pay-TV industry's overall loss of video subscribers in the quarter to more than 500,000, according to some estimates. In a note to clients late Friday, for instance, Craig Moffett, principal and senior analyst at MoffettNathanson LLC , calculated that the sector lost a whopping 566,000 video customers in the spring, by far its highest quarterly loss yet and 70% worse than a year ago. That also amounts to about a 0.7% shrinkage in the pay-TV customer base over just the past 12 months, a startling amount for a market with at least 90 million households.

"That may not seem like a mass exodus, but it is a big change in a short period of time," wrote Moffett, noting that the industry was shrinking at just a 0.1% annual rate a year ago. "And the rate of decline is still accelerating."

The DirecTV news and Moffett's sobering analysis may well set off a new wave of sell-offs by cable and media stock investors this week. Cable and media stocks took a sharp tumble last week after Walt Disney Co. (NYSE: DIS) executives confirmed that one of their prime networks, ESPN, has lost subscribers over the past year, mainly because of cord-cutting. The stocks of programing companies were particularly hard-hit.

"Yes, folks, it really was as bad as feared," Moffett wrote. "Cord-cutting did indeed accelerate markedly in the second quarter, just as we were afraid it would. And no, this is not about seasonality."

Yet simple cord-cutting by existing pay-TV subscribers may not be the only thing going on here. Other factors, such as the increasing inability of pay-TV providers to attract younger consumers, and the imposition of stricter credit policies, may be playing big roles as well.

In the regulatory filing by AT&T, for instance, the company reported that DirecTV's total subscriber disconnects, as opposed to net subscriber disconnects, rose by a mere 9,000 to 951,000 in the second quarter. But its gross subscriber additions fell by 90,000 to 818,000 on a year-to-year basis. So DirecTV's net loss of 133,000 subscribers was due to the fact that it signed up many fewer new customers in the spring, not that it lost that many more existing subs. (See AT&T Closes Acquisition of DirecTV.)

Further, like a number of other major pay-TV providers, DirecTV is no longer hotly pursuing every possible TV household out there no matter what the financial status may be. In the filing, AT&T said DirecTV signed up fewer subscribes in the quarter "primarily as a result of stricter credit policies." So, the net loss of subscribers may be at least partly self-induced as pay-TV providers seek to boost their video profits, not revenues.

In any case, it seems clear that the US economy can no longer be the scapegoat for the pay-TV industry's woes. As Moffett points out in his note, the rate of new household formation has accelerated over the past nine months, after being stagnant for the last few years. So, the number of TV households is growing again, even while the number of pay-TV homes continues to drop.

Finally, in an interesting side note, cable operators are no longer the only ones dragging the pay-TV industry down. In fact, if Moffett's latest calculations are correct, then the two satellite TV providers -- DirecTV and Dish Network LLC (Nasdaq: DISH) -- combined to shed a whopping 284,000 video subscribers in the spring, or just over half of the pay-TV industry's total loss. In comparison, the major cable providers lost a combined 280,000 subs in the quarter, cutting their losses almost in half from the year-ago period. (See Dish's Losses Are Sling TV's Gains.)

— Alan Breznick, Cable/Video Practice Leader, Light Reading

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