Comcast added 160,000 video subscribers over the course of 2016, the first time a major public cable operator has done so in nearly ten years. The company has been stemming its subscriber losses in recent years, and analysts had expected growth this year. But in fact, fueled by a stronger than expected fourth quarter, Comcast Corp. (Nasdaq: CMCSA, CMCSK) handily exceeded expectations. It also beat analyst estimates for EPS and revenue. (See Comcast Kicks A$$, Earns $80B in 2016.)
Given that some estimates have 2016 down as the worst year for cord-cutting to date, this would seem an accomplishment. It also explains why Comcast CEO Brian Roberts is less than enthused about offering OTT services. (See Why Cord-Cutting Continues and Is Comcast Right to Reject OTT?)
Verizon Communications Inc. (NYSE: VZ) and AT&T Inc. (NYSE: T) also reported video subscriber gains, but these came with rather large, ungainly asterisks. In the case of AT&T, it was substantial losses for its U-verse IPTV business exceeding gains at its DirecTV satellite TV service as it attempts to switch subscribers from one service to another.
AT&T ended 2015 with 25.4 million video subscribers, including 19.8 million DirecTV subscribers and 5.6 million U-verse subscribers. At the end of 2016, it had lost 1.3 million U-verse subscribers, but gained 1.2 million DirecTV subscribers, essentially losing 100,000-odd subscribers over the course of the year.
But at the end of November 2016, AT&T launched its streaming service, DirecTV Now. The operator's skinny OTT service gained 200,000 subscribers in December alone, and took AT&T to a combined 25.5 million subscribers -- a gain of approximately 100,000 subscribers over last year.
The problem for AT&T is that DirecTV Now may be a loss-making exercise for the company. According to Craig Moffett, principal analyst at MoffettNathanson LLC , AT&T loses $355 in "customer lifetime value" for every DirecTV Now "Go Big" package subscriber. Furthermore, the "value erosion just from the positive net addition of DirecTV Now subscribers likely exceeds $70 million."
AT&T didn't directly respond to Moffet's mathematics, but did point out that the skinny service has lowered mobile churn and brought in new customers from a younger demographic AT&T has struggled to attract in the past. It's also worth pointing out that the original $35-per-month price for the "Go Big" package was a promotional offer. As of the second week of January, the service costs $60 per month, at least making it financially viable.
DirecTV Now has also struggled with service issues and complaints, which have appeared in various media outlets and social networks, but it does appear that the operator is addressing these and the user experience is beginning to improve.
Verizon also grew its video subscriber base over the course of 2016, adding 59,000 video subscribers for a total of 4.7 million. However, for Verizon as well, the key driver was its lower-margin skinny bundle, Custom TV, which is driving growth for its video services.
Still, it is evidence of the demand for linear pay-TV packages, slim or full-fat. While cord-cutting is a market reality, somewhere between three-quarters and four-fifths of US households still subscribe to pay-TV. And while skinny bundles and more customized services are growing rapidly, the vast majority of pay-TV subscribers are still subscribing to full-fat pay-TV bundles.
A new market entrant, Layer3 TV , is an interesting example. Rather than concentrate on skinny bundles, it's going after the higher-spend pay-TV subscriber with a $79 per month promotional package (which will rise to $120 eventually) offering UHD channels, social media integration and a personalized program guide among other features. The company has raised more than $100 million in funding and launched in Chicago and Washington DC in 2016. (See Layer3 TV Comes to Town, Hints at Future.)
And Verizon is optimistic about the potential for pay-TV as well, if recent reports that it is exploring a purchase of Charter Communications Inc. are to be believed. Charter's stock is up as a result, with many looking at AT&T's bid for Time Warner and Comcast's prior acquisition of NBCUniversal as examples of the need for Verizon to bulk up. Both the content and the distribution sides of the video business benefit substantially from scale, so bigger players definitely have advantages. Comcast's success in 2016 is probably due to the company performing a number of tasks well, but it's no coincidence that it is the largest integrated video provider in the US.
So what has 2016 taught us about the future of pay-TV? It is obvious that cord-cutting will continue, though I think increasing fragmentation in the OTT universe might also result in some cord-cutters returning to pay-TV. Still, most pay-TV providers will struggle to grow or even maintain their customer base, and skinny bundles with lower margins may be the only way to keep some of them.
But not everyone is cutting the cord, or necessarily wants to. And while it's important to look at future trends and younger demographics, there are still a lot of people who want regular pay-TV. Operators should not forget about them -- they still represent the majority of the market.
— Aditya Kishore, Practice Leader, Video Transformation, Telco Transformation