2020 continues to be a year of challenge for the business of pay TV in the US. Traditional pay TV providers lost 1.5 million subscribers in Q2 2020, a marked improvement over the loss of 2.0 million in Q1 2020. Satellite continued to lead the pack in terms of TV subscriber losses, with Dish and DirecTV combining for a loss of 769,000 subscribers. Cable segment has seen a slowdown in the loss of subscribers in Q2 2020, primarily due to Charter gaining 102,000 TV subscribers in the quarter, which offset the decline in subscribers among other cable operators. IPTV providers did slightly worse than satellite, losing 3.14% of total TV subscribers compared to 3.12%, in Q2 2020.
The woes for pay TV are numerous and will continue into the medium-term future. The COVID-19 pandemic has had the expected effect in most cases, driving customers to disconnect from TV services in favor of online channels. At the end of 2020 Omdia expects that 9% of all pay TV subscribers (7.5 million) will have cut the cord. There isn’t any relief in sight, traditional pay TV subscribers are expected to decline from 75.8 million in 2020 to 62.4 million in 2024. Conversely, double, triple, and quad play bundles have been instrumental in maintaining revenue growth and cushioning pay TV subscriber decline for cable operators.
Comcast has continued to see declines in pay TV video, while adding broadband subscribers. Q2 2020 marked the worst quarterly loss to date for Comcast, who has been struggling to manage costs and retain subscribers. Omdia believes that the companies relatively high penetration of broadband homes passed didn’t give it much room for growth, unlike Charter.
Charter’s quarterly success can be attributed to several factors, all of which focused on growing customer relationships. First, the company offered 60 days of internet free to households with school-aged children. Second, the company honored the request of nearly 700,000 customers for protection from disconnection for non-payment in the quarter.
AT&T continued to struggle with DirecTV in Q2 2020, DirecTV’s TV ARPU is expected to be $114.59 in Q4 2020. Without the protection that a double-play of broadband + TV offers, the company saw the loss of 774,300 TV subscribers, not its worst quarterly loss ever, but still troubling. DirecTV is on track to lose 3.225 million subscribers in 2020. Like Charter, Dish Network bucked the trend in Q2 2020, with lower than industry losses attributable to lower churn due to the pandemic.
IPTV subscriber decline continued in Q2 2020, with losses of 3.05% of all TV subscribers (265,220) in the quarter. Both AT&T and Verizon saw significant TV subscriber losses: 111,620 and 81,000 respectively. AT&T’s losses are attributable to the company’s new focus on IP delivery; the company is no longer advertising its U-verse IPTV pay TV service. Verizon’s loss was especially painful as a truck-roll is required to do a FiOS internet installation, which hinders its ability to rely on multiplay to prop up its pay TV business. The company added a mere 10,000 FiOS broadband connections in the quarter.
Frontier Communications, the nation’s third largest IPTV operator filed for bankruptcy protection in the quarter. The company has been struggling to stem the tide of TV subscriber losses since it acquired the tranche of 1.2 million TV subscribers, 2.2 million broadband connections, and 3.7 million voice connections from Verizon in Q2 2016 in a deal worth $10.5 billion. The company has been plagued with execution errors, as well as the rising cost of cable network carriage that must be passed through to the consumer.
It is worth noting that subscriber losses weren’t the only driver in revenue decline in the quarter for pay TV providers: both Comcast and Charter reported significantly reduced local advertising revenue in the quarter. Comcast and Charter reported local advertising revenues of $428 million and $249 million respectively, declines of 23.2% and 31.8% compared to Q1 2020 respectively.
In addition to profitability pressures from both subscription and advertising revenue declines, pay TV operators are also subject to growing carriage fee costs. US carriage fees are expected to grow in the mid-single digits in 2020. Growth in carriage fees continues to drive the “traditional threat” of price increases for pay TV providers. Omdia expects that the negative feedback loop of increasing carriage fee costs being passed through to consumers (which drives cord-cutting, and further price increases) will continue into the foreseeable future.
There are additional reasons for cord-cutting along with cost savings. The consumer perceptions that the overall cost of broadband + online channel subscriptions will be cheaper than broadband + pay TV are generally true. However, when households subscribe to multiple online channels, the savings are significantly reduced and the overall cost becomes in comparable to promotional rates for pay TV + broadband packages. Omdia therefore believes that advertising aversion is a key, though not often spoken about, factor driving cord cutting. The average TV show sees between 18 and 20 minutes of ad breaks per hour. Take away another 2 to 3 minutes for intros and credits and the customer is left with about 38 minutes of actual content per hour. This stands in sharp contrast with commercial free (or significantly ad reduced) content offered by online channel subscriptions.