Following early FY 2018 reporting by the five of the six largest pay TV operators (Comcast, DirecTV, Charter, FiOS, and U-verse), the US pay TV market is on track for the largest drop in penetration in its history. IHS Markit expects pay TV penetration of pay TV homes to decline nearly 4% in 2018, while the next largest loss was in 2017 with slightly more than a 3% drop. AT&T was the largest contributor to the decline in 2018 with its satellite unit losing more than 1.2 million subscribers in the year. Other notable declines in pay TV subscribers included Comcast (-371,000) and Charter (-296,000).
Revenue for the top five pay TV operators fared similarly, with an average of 5% declines in 2018 compared with the prior year. DirecTV lost the most revenue year-over-year, declining by more than 11%. The lone bright spot in the top five was Charter, which grew video revenue by 2% thanks to rate increases. On average, IHS Markit expects that the US pay TV market saw total video revenue decline by 5% in 2018, compared with the previous year.
Broadband revenues met expectations in 2018; both Comcast and Charter posted positive growth at $616m and $1.089bln respectively. AT&T was unable to make up for its $3.87bln loss in DirecTV DTH revenue as its broadband division (U-verse and DSL), grew by $282m in revenues in 2018. Broadband has become increasingly important as video subscribers cut the cord; and will continue to do so as consumer reliance on internet delivered video increases.
In Q4 2018, AT&T’s virtual pay TV service, DirecTV Now, lost 267,000 subscribers in the quarter, prior to which it only captured 49,000 net additions in Q3 2018. In November 2018, AT&T pulled back bundling the service with its cellular products, as well as removing promotional periods for new subscribers. IHS Markit expects that as a category growth for virtual pay TV providers isn’t as robust as it was one year earlier as consumer focus moves toward an on-demand experience.
Subscriber losses for Comcast, Charter, and Verizon were in line with expectations in 2018. AT&T’s video subscriber losses were eye opening, DirecTV DTH subscriber losses were slightly higher than expected. DirecTV Now was expected to maintain growth as cost-conscious pay TV subscribers looked for a less expensive alternative to the traditional TV bundle. It hasn’t happened, and the loss of 267,000 subscribers is a wakeup call to online pay TV providers.
IHS Markit expects that other online providers aren’t faring much better in terms of subscriptions. Linear television is becoming an anachronism, with subscriber tolerance for advertising and lack of choice taking its toll. According to IHS Markit’s Connected Devices & Media Consumption Intelligence surveys, Netflix and YouTube were numbers one and two respectively in terms of which services consumers go to first when looking for content to watch.
Netflix and YouTube were also ranked numbers one and two respectively in terms of value for money and ease of use. What it means for pay TV operators and cable networks is that there is a clear desire for on demand content. Advertising is another sticking point for consumers as nearly a third of every linear TV hour is spent on watching advertisements.
As consumption habits move away from linear television to online, it is going to be increasingly more important to replace lost linear revenue. Increasing broadband speeds and pricing is one way, however, low monthly prices of traditional pay TV’s replacement products is too low to make up the difference. Ad-supported online products are expected to emerge later in 2019 and 2020, but it remains to be seen if similar ad loads will be tolerable for younger consumers who don’t subscribe to linear pay TV.