The Zero Sum Game

Q1 2010 Shows Little Room, Getting Smaller

 

Welcome to the Zero Sum game. 

For the first quarter of 2010, movement within the cable/satellite/telcoTV video universe was, well, more swaying than actual movement.

Overall, the top 10 cable operators in the U.S. lost a total of 333,800 basic video subscribers.

DBS gained a total of 337,000.

The telco TV giants (AT&T U-verse and Verizon FiOS) added 399,000. 

For those of you without calculators in your brains, that's around 402,200 net new customers.  Out of a pool of 93.7 million (counting only the top 10 MSOs), it's barely a droplet.  For a full year, as shown in the chart, net new customers in this pool came in slightly over 1.5 million ... for a barely perceptible 1.6% gain.

So what does it mean?  Easy:  Now is the moment for multiplatform providers to stay on top of their business models.  Or risk the zero sum game morphing into a losing game.

Cable's Basic Losses

 

For the cable guys, the losses amounted to an average loss of -0.6% of basic subscribers for the three month period.  On a year over year basis, they lost -2.8%. 

Given this steady downward trend, you might imagine a tough road ahead for MSOs.

Not so.

In reality, the MSOs continue to fare quite nicely.  

Those triple-play bundles of video, voice and data have proven remarkably lucrative for most operators.  That, combined with dropping capital expenditures, is producing some eye-popping cash piles.  At Comcast, for example, cable segment revenue (which includes the regional sports nets) for the first quarter was $8.7 billion, a 3.7% jump over the year earlier.  Meanwhile, the company's cap ex dropped by 19.2% to $913 million.

To be sure, Comcast is the biggest of the big.  But most other top cable operators saw strong cash flows for the quarter, even as their basic video business continued to decline.  

Still, video remains No. 1 in cable revenues.  In our Comcast model, for example, it accounted for 55.8% of revenues in the first quarter.  That's down from 58.8% a year earlier.  But taking up the slack is both high speed internet (which accounted for 23.9% of Comcast's revenue in the first quarter, up from 22.8% a year earlier) and telephony (which accounted for 10.1% of revenues, up from 9.3% a year earlier.)

The New Bread & Butter

 

High speed data is clearly the big winner for the cable ops.  It is, as some analysts have commented, the MSOs "new bread and butter."  

Just how much bread and butter?  Our top 10 cable ops added nearly 2.5 million HSI customers in the 12 month period ending March 31, 2010.  On average, the operators achieved a near 7% year over year increase.

The two big telco TV players, however, easily eclipsed that growth.  Verizon FiOS ended the period with more than 3.6 million HSD subscribers, a bump of 30% over Q1 2009 while AT&T U-verse closed the quarter with more than 2.1 million HSD subs for a growth of 87%. 

Impressive numbers to be sure.  And they are reflected on the video side of the telco equation.  But given aggressive marketing and expansion from the telco players, the numbers are not that surprising.  As the days of rapid footprint expansion come to a close – most particularly for Verizon – the torrential subscriber growth is certain to ebb.

Wireline's Mixed Blessing

 

Also boosting cable numbers for the first quarter were continued gains in wireline voice products.  Overall the top 10 MSOs gained a total of nearly 2.4 million new VoIP customers across the 12 month period.  However, as virtually all the nation's telcos can attest, wireline voice is a dying product.  And that fact is reflected in increasingly smaller gains. 



Cable operators, of course, are well aware of this declining product and are moving fast into wireless services for both voice and broadband products.  A case in point is Cablevision which recently added tens of thousands of Optimum WiFi hot spots across its New York territory, along with an aggressive ad campaign touting the higher speeds offered by its product.   Likewise, the Clearwire service, whose strategic investors include Intel Capital, Comcast, Sprint, Google, Time Warner Cable and Bright House Networks has been rapidly expanding its territory ... particularly its 4G territory offering its most robust service. 

Future Plays

 

Looking to the future for all our multiplatform players – in cable, DBS and telco TV – the most troubling questions revolve around the specter of "cord cutting."  That is, customers who give up their "traditional" video service in favor of video – thus far mostly free video – over the internet.

Operators and programmers generally say that cord-cutting is not impacting their television services.  ESPN boss George Bodenheimer, for example, recently told the Nielsen Consumer 360 conference that viewing via mobile devices, PCs and like is not cannibalizing the sports giant's regular video channels – and this from a company which has aggressively tailored new products for new technologies.

On the other side of the divide, CBS boss Les Moonves told an investment group that in his greatest fear involves half of all "CSI" audiences migrating to unpaid online viewing.

For the most part, recent research leans more toward Moonves nightmare than Bodenheimer's 'more the merrier' view.  According to an April 2010 report from the Convergence Consulting Group, as of the end of 2009 almost 800,000 U.S. households had cut their TV subscriptions.  Likewise, a recent report from eMarketer suggests that online viewing, particularly the streaming of long-form video, is expected to continue its steady increase.  Noted eMarketer senior analyst Paul Verna, "If the first iteration of online video was about silly pet tricks on YouTube, the next wave will be about professionally produced full-length content such as TV shows, movies, and live sports.  This shift will be propelled by a combination of technology integration, demographics, and a growing comfort level with the idea of watching video hosted on Web sites."

To combat the specter of the disappearing customer, multichannel video programming distributors are adopting a number of strategies.  On the high end of the services, companies like Cablevision, Verizon FiOS and DIRECTV are focusing on bringing their customers the "ultimate" video experiences with offerings such as whole-home HD DVRs, interactive TV replete with special services and 3D channels.  In DIRECTV's case, of course, exclusive programming also plays a key role as witness the enduring power of the DBS provider's "NFL Sunday Ticket" plus its "101 Network". 

Others are focusing on offering the most economical services as in DISH Network's Free HD For Life campaign.  At Comcast, the spotlight is on a complete rebranding of its service under the Xfinity label while Cox is going with a strong emphasis on customer service.  High definition services continue to hold a key position in the battle for customers, as 3D is expected to in the future.  And then, of course, there is the increasing emphasis on video on demand and personalized TV ...  services which come about as close to over-the-top internet as possible while still exacting a price.•

The Cable Center Bibliography

 

 If you are interested in reading more about this topic the following is a selection of additional periodicals provided by The Cable Center’s Barco Library.  Dedicated to chronicling cable’s varied and colorful history, The Barco Library houses the largest collection of cable telecommunications equipment, photographs, and marketing and informational materials in the industry. 

Visit www.cablecenter.org for more information.

Comcast and Viacom Looking Up. Sramana Mitra (May 6, 2010)

Atkinson, Claire. “Time Warner Has Most Profitable Quarter Ever:  Networks unit sees profit leap 22%; ad revenue up 9%”  Broadcasting & Cable (May 5, 2010)

Farrell, Mike “Cable Channels Drive Q1 Gains at MSG:  Cash Flow Triples on Higher Affiliate Fees, Ad Sales”  Multichannel News, (May 7, 2010)

Umstead, Thomas. “Can Anyone Beat this Cable Network?  Secrets Behind USA’s Record Ratings Rally."  Multichannel News, (April 5, 2010)

Spangler, Todd. “BigBand Cuts 6% Of Work Force, Lowers 2010 Outlook – Company Cites Slower Sales of IP Video Solutions” Multichannel News, (May 6, 2010)

Hampp, Andrew. “A Quiet Strategy for the Rebound of a Lifetime…” Advertising Age  (April 12, 2010)  

Mediacom Communications Reports Results for First Quarter 2010 BusinessWire (May 7, 2010)

Szalai, Georg. “CBS' first-quarter loss narrows: Ad revenue rises further; Moonves eyes best upfront in years” Hollywood Reporter (May 5, 2010)  

Szalai, Georg. “Cablevision, Charter up in Q1-Cable operators boost financials, advanced subs”  Hollywood Reporter (May 6, 2010)  

Brian Stelter.  "Viacom's Profit Up 37% as Ads Return." New York Times, (April 30, 2010, Late Edition - East Coast)

Brian Stelter.  "Comcast's Revenue Rises 3.8% As Local Ads Start to Return." New York Times, (April 29, 2010, Late Edition - East Coast)

Mike Farrell.  "Cable Leads With Speed: Fast Lines Fuel First Quarter, Stock Highs." Multichannel News, 9 May 3, 2010)