Subscriber churn crushed the pay-TV industry in the third quarter of 2018, delivering the worst quarter on record.
Rather than fighting to keep video subscribers, Wall Street analyst Craig Moffett predicts that cable operators will withdraw from the video business to focus on broadband.
There are already a number of smaller cable operators who say they don’t make money at this anymore and it’s no longer a compelling proposition for me, Moffett said on an episode of Cable Talk, a podcast hosted by American Cable Association president and CEO Matt Polka.
Moffett thinks the process will be gradual. Cable operators will first continue providing an aggregation function for users, offering video that runs as an app on someone else’s set top box, like a Roku, Apple TV, or Amazon Fire TV Stick. Later, they will drop even that and will allow customers to negotiate their own contracts with content providers.
This shift won’t hurt cable operators’ bottom line because broadband is a better business than video, Moffett said.
Cable companies rely on their high margin broadband business to blunt the impact of video losses. In fact, when users drop their video service, cable providers are able to shed the programming costs it takes to provide subscribers with content, like ESPN. So while cable companies lose the revenue accompanied with video service, they also cut the cost it takes to provide it to their customers.
It’s a point that cable companies have started to publicly express.
“Cable success as an industry, despite the challenges of standalone video product margin pressure, is because at our core, we provide connectivity,” Charter CEO Tom Rutledge said on the company’s second-quarter 2018 earnings call.
Video losses are only going to get worse in 2019
Moffett’s prediction comes as video-subscriber loses are expected to get even worse in 2019.
Traditional video losses for the full year 2018 are expected to come in around 4.2 million, according to analysts at UBS. That’s a 4.5% decline from the previous year, and a significant acceleration from past quarters. In 2019, the trend will, ratchet to 5.4% (adding vMVPD figures softens the decline to a total 2.5%), accordin to UBS.
Cable is better insulated from large subscriber losses because of its higher broadband margin product, according to UBS analysts, who said that just 15% of cable EBITDA is from video. DISH has by far the most exposure with nearly all of its profitability from video, the UBS analysts said.
In the third quarter of 2018, Dish had its worst subscriber loss of all time with 367,000 satellite-TV customers dropping the service. Sling TV, the largest service that provides live TV over the internet, added 26,000 subscribers.
Dish realizes the benefit of a broadband offering and the company has started to form partnerships with regional broadband operators to bundle their video services to stymie customer churn.