Cord Cutting Accelerates in 1Q 2020

The largest traditional cable providers collectively lost over 1.7 million customers in the first quarter of 2020 – an overall loss of 2.2% in customers. This is the biggest overall drop in customers ever in a quarter. To put this loss into perspective, the big cable providers lost 18,800 customers every day.

The numbers below come from Leichtman Research Group which compiles these numbers from reports made to investors, except for Cox which is estimated. The numbers reported are for the largest cable providers, and Leichtman estimates that these companies represent 95% of all cable customers in the country.

Following is a comparison of the first quarter subscriber numbers compared to the end of 2019:

1Q 2020 4Q 2019 Change % Change
Comcast 20,845,000 21,254,000 (409,000) -1.9%
Charter 16,074,000 16,144,000 (70,000) -0.4%
DirecTV 15,136,000 16,033,000 (897,000) -5.6%
Dish Networks 9,012,000 9,144,000 (132,000) -1.4%
Verizon 4,145,000 4,229,000 (84,000) -2.0%
Cox 3,820,000 3,865,000 (45,000) -1.2%
AT&T U-verse 3,440,000 3,440,000 0 0.0%
Altice 3,137,500 3,179,200 (41,700) -1.3%
Mediacom 693,000 710,000 (17,000) -2.4%
Frontier 621,000 660,000 (39,000) -5.9%
Atlantic Broadband 306,252 308,638 (2,386) -0.8%
Cable One 303,000 314,000 (11,000) -3.5%
Total 77,532,752 79,280,838 (1,748,086) -2.2%
Total Cable 45,178,752 45,774,838 (596,086) -1.3%
Total Satellite 24,148,000 25,427,000 (1,029,000 -4.1%
Total Telco 8,206,000 8,639,000 (123,000) -1.5%

Some observations of the numbers:

  • Note that AT&T no longer reports customers by division, so Leichtman has reflected all of their losses as DirecTV and shown no losses for AT&T U-verse.
  • The big loser is AT&T, which lost nearly 897,000 traditional video customers between DirecTV and AT&T U-verse.
  • The big percentage loser is Frontier that lost almost 6% of its cable customers in the quarter.
  • The big cable companies fared the best, but still lost 1.3% of their customer base in the quarter.
  • Satellite TV continues to dive and lost more than 4% of customers in the quarter.

Leitchman speculated that the magnitude of the losses could be due to the impact of COVID-19. However, the story seems to be a bit more complex than that. Several of the big companies reported about the same level of disconnects as in recent quarters but saw a big drop-off in new customers buying service. It’s worth noting that the above losses were experienced even while these same companies saw an increase of over 1 million new broadband customers in the same quarter- the best growth in broadband since 2015.

The full impact of COVID-19 will likely be seen in the next quarter. There has to be an impact from over 23 million newly unemployed people this year, as of mid-May. Cutting cable is one of the most obvious ways for a household to save money.

There may be evidence that COVID-19 had an impact by the end of March. Leichtman also tracks the subscribers of the online TV services that are owned by the above companies. Collectively, there was a loss of 319,000 customers by Hulu Live, Sling TV, and DirecTV Now. Additionally, Paystation Vue exited the market in the first quarter. However, YouTube TV is reported to be growing and had over 2 million customers by the end of February.

Losses of this magnitude have to be rolling downhill in the industry. These losses mean a lot lower revenues for cable TV networks. It means a lot less franchise revenues for local governments. It means lower advertising revenues from loss of eyeballs.

It’s Hard to Like AT&T

Over the last year, I’ve said some nice things about AT&T. It was nice to see AT&T wholeheartedly embrace their commitment to build fiber past 12 million homes as they had promised as part of the conditions of buying DirecTV. In the past, they might have shrugged that obligation off and faked it, but they’ve brought fiber to pockets of residential neighborhoods all over the country. It seemed that they were unenthusiastic about this requirement at first, but eventually embraced when somebody at the company realized that new fiber could be profitable.

I also thought that AT&T was by far the most responsible wireless carrier in terms of not ridiculously exaggerating the supposed coming of 5G, although they finally gave in to their marketing arm and started labeling the latest version of 4G LTE as if it is 5G.

But overall, AT&T is hard to like as a company. AT&T puts stock prices and Wall Street above everything else and is probably as good of an example as any of large corporations gone amuck. AT&T clearly values the bottom line over employees, customers, and the public good.

If you look back a few years, you can find numerous times where AT&T lobbied against net neutrality and broadband regulation. The company repeatedly said that unfair regulation was stopping them from making capital investments and promised that if the government would lift regulations that they would invest more. The FCC handed them even more than they had publicly asked for when the agency eliminated Title II regulation along with net neutrality.

AT&T didn’t react to the end of regulation by increasing capital investment as promised. They instead laid off a lot of employees and in the year after net neutrality was eliminated spent about the same for capital – only due to big spending on their sole-source First Net contract. Then in 2019, capital spending dropped by $1.9 billion and they are planning to cut an additional $3 billion this year. The drop in capital spending is hard to reconcile with the supposed 5G race that we are supposedly waging against China.

AT&T also joined with other large corporations and publicly pledged that if the government would lower the corporate tax rate that they’d hire thousands of new high-paying tech jobs and again promised to increase capital spending.  The unions that work for AT&T claim that since the enactment of the 2017 tax act that AT&T has laid off nearly 38,000 employees and are down to under 248,000 employees. Rather than investing in new capital and people, AT&T has been spending billions to buy back their stock to help keep stock prices high. The company used excess cash to buy back almost $2 billion of its stock in the fourth quarter of 2019 and had announced $4 billion of additional buybacks this year that was just recently put on hold due to the COVID-19 pandemic.

Meanwhile the company significantly raised consumer prices. There were moderate rate increases for broadband and cellular customers, and larger ones for video customers. But the biggest increases came when AT&T ended promotional pricing on video and expected customers to pay full price at the end of contracts. This move raised video rates significantly and led 4.1 million customers to drop DirecTV, U-verse TV, and the online AT&T TV in 2019. The company has said they were glad to be rid of low-margin customers.

In the summer of 2019, AT&T was sued in a class-action suit alleging that the company was selling real-time customer location data for cellular customers, even though the company had repeatedly told customers that they were not doing so. A series of reports by Motherboard showed that AT&T, Sprint, and T-Mobile had continued selling customer data even after promising to stop the practice.

AT&T recently made headlines by dropping data caps during the COVID-19 crisis. What’s worth noting is that the company has perhaps the most restrictive data caps in the country, particularly on DSL and fixed-wireless. The data caps at AT&T are clearly in place to make money over and above any rates promised to subscribers. Hopefully, there will be a huge public outcry when the company quiets puts the data caps back in place.

During all of the above, the company has significantly increased compensation for its CEO Randall Stephenson. His salary in 2019 was more than $32 million, up from $29 million the year before. However, much of that number is based upon stock bonuses, and shares of AT&T closed under $29 last week, down from over $39 at the start of this year. The company announced a new CEO last week and we’ll have to wait to see how he is compensated.

It’s honestly hard to say much nice about AT&T these days. I think back to when I worked at the company pre-divestiture, when the company made a steady, but unspectacular monopoly profit. The company and employees in those days were proud of the US communications network which was second to none in the world. It’s been clear for a long time that none of that old Ma Bell thinking is left in the company that now is driven to maximize stock price over everything else.

Ho, Ho, Holy Rate Increase!

It’s that time of year when customers get an unwanted Christmas present from cable companies in the form of a rate increase. The largest providers – Comcast, Charter, and AT&T have all announced rate increases. A few others like Cox and Mediacom generally announce price hikes in January. Altice typically raises rates in June.

The cycle of raising rates routinely has gone on for so many years that it feels routine. To give some credit to the cable companies, programmers continue to increase the cost of buying content every year. In fact, most programming contracts last 3 – 5 years and annual rate hikes are usually baked into the contracts.

What’s becoming mystifying is why the programmers and cable companies can’t sit down and find a way to control costs. The rate of cord cutting is climbing at a dizzying rate and with each rate increase, the industry is losing millions of customers.

Comcast

Comcast is raising rates on Basic cable, their smallest packages from $30 to $35, a 17% rate increase. The company is also raising the broadcast TV fee from $10 to $14.95 per month, a 50% increase.

Comcast is also raising the rate of Internet access by $3. I’ve been warning for a few years that annual broadband rate increases will become routine, even though there is no underlying cost of offering broadband that can be pointed to in the same manner. The big cable companies are raising broadband rates to increase earnings to satisfy Wall Street. A $3 rate increase may not seem like a lot, but for a company with over 28 million broadband customers, $3 translates to $1 billion to the bottom line.

Comcast also made changes to other fees. For example, the fee for a returned payment (bad check or credit card number) went from $10 to $30.

Charter

The Charter rate increases already went into effect in November. Charter raised the rates on the three most popular tiers of cable TV – Spectrum Select, TV Silver, and TV Gold by $7.50 per month. Charter also raised the rate for the broadcast fee by from $12.00 to $13.50. The company raised the rate on a settop box by 50 cents, from $7.50 to $8.00. A customer with one settop box saw an overall increase of $9.50 per month.

Charter raised the price of its basic Internet package (100 Mbps – 200 Mbps) from $65 to $70.

AT&T   

AT&T announced rate increases that take effect in January. AT&T raised cable rates for customers using U-verse by $3 to $7 per month. The U-family package increases by $3 while the largest U400 package increases by $7. The broadcast TV fee will increase up to $2, depending upon the market. AT&T also will increase the Federal Regulatory Recovery Fee by $0.07, and for the life of me, I have no idea what this is. I’m not aware of any FCC charges on cable TV and this is something AT&T pockets.

AT&T raised rates on DirecTV customers yet again, after having a rate increase in August. The new increases range from $1 per month for basic choice up to $8 per month for the Premier package. AT&T is also raising the regional sports fees by as much as $2, depending upon the market.

The largest rate increase at AT&T went unannounced as the company has decided to cut back and not renew promotional rates. As promotional plans have ended, AT&T is moving customers to full rates. In just the third quarter of this year, DirecTV lost almost 1.1 million customers as customers have balked at paying full rates.

Cord Cutting Picking Up Pace

Leichtman Research Group has published the cable TV customer counts for the first quarter of 2019 and it’s apparent that the rate of cord cutting is accelerating. These large companies represent roughly 95% of the traditional cable market.

1Q 2019 2,018
Customers Change % Change Losses
DirecTV / AT&T 22,383,000 (543,000) -2.4% (1,189,000)
Comcast 21,866,000 (120,000) -0.5% (371,000)
Charter 16,431,000 (145,000) -0.9% (244,000)
Dish TV 9,639,000 (266,000) -2.7% (1,125,000)
Verizon 4,398,000 (53,000) -1.2% (168,000)
Cox 3,980,000 (35,000) -0.9% (115,000)
Altice 3,297,300 (10,200) -0.3% (98,000)
Frontier 784,000 (54,000) -6.4% (123,000)
Mediacom 764,000 (12,000) -1.5% (45,000)
Cable One 320,611 (11,500) -3.5% (37,465)
83,862,911 (1,249,700) -1.5% (3,515,465)

A few things strike me about this table. First, the annual rate of loss is now 6%. That’s faster than we ever saw for telephone landlines which lost 5% annually at the peak of the market losses. We are only into the third real year of cord cutting and already the rate of customer growth has leaped to a 6% annual loss.

The other big striking number is that the overall traditional cable penetration rate has now dropped to 70%. According to the Census, there are 127.59 million households and adding in the customers of smaller providers shows a 70% market penetration. That’s still a lot of homes with traditional cable TV, but obviously the conversation about cutting the cord is happening in huge numbers of homes.

Another interesting observation is that AT&T is now at the top of the list. They’ve stopped reporting customers separately for DirecTV and for AT&T U-verse, which combined makes them the large cable provider in the country. However, at the rate the company is bleeding traditional cable customers, Comcast is likely to be number one again by the end of this year. AT&T has been encouraging customers to shift to DirecTV Now, delivered only online. However, that service also lost 83,000 customers in the first quarter, so the overall AT&T losses are staggering, at an annual rate of loss of over 8%.

The big losers in total customers are still the satellite companies. As those companies have gotten more realistic about pricing they’ve seen customer flee. There have been numerous articles in the press in publications like Forbes wondering if Dish Networks is even a viable company after these kinds of losses. There is also recent speculation that AT&T might spin off DirecTV and perhaps even merge it with Dish Networks.

The biggest percentage loser is Frontier, losing 6.4% of their customers in just the first quarter. It’s been obvious that the wheels are coming off of Frontier and the company just sold off properties in western states last month in order to raise cash.

For the last few years, Comcast and Charter were still holding on to overall cable customers. This was mostly buoyed by new cable customers that came from big increases in broadband customers – these two companies have added the bulk of new nationwide broadband customers over the last two years. But even with continued broadband growth, these companies are now seeing cable counts drop, and it’s likely that their rate of cord cutting among customers they’ve had for many years is probably as high as the rest of the industry.

It’s still hard to predict the trajectory of cable TV. In just two years the industry as a whole has gone from minor customer losses to losing customers at a rate of 6% per year. I don’t see any analysts predicting where this will bottom out – will it level off or will losses continue to accelerate? In any event, any industry losing 6% of customers annually is in trouble. It’s not going to take many years of losses at this rate for the industry to become irrelevant.

Cord Cutting is For Real

It’s obvious in looking at the performance of cable companies in 2018 that cord cutting is now for real. The fourth quarter count of cable customers for the largest providers was recently reported by the Leichtman Research Group. These companies represent roughly 95% of the national cable market.

4Q 2018 4Q 2017 Change
Comcast 21,986,000 22,357,000 (371,000) -1.7%
DirecTV 19,222,000 20,458,000 (1,236,000) -6.0%
Charter 16,606,000 16,850,000 (244,000) -1.4%
Dish 9,905,000 11,030,000 (1,125,000) -10.2%
Verizon 4,451,000 4,619,000 (168,000) -3.6%
Cox 4,015,000 4,130,000 (115,000) -2.8%
AT&T 3,704,000 3,657,000 47,000  1.3%
Altice 3,307,500 3,405,500 (98,000) -2.9%
Frontier 838,000    961,000 (123,000) -12.8%
Mediacom 776,000    821,000 (45,000) -5.5%
Cable ONE 326,423    363,888 (37,465) -10.3%
  Total 85,136,923 88,652,388 (3,515,465) -4.0%

I’m thinking back to 2017 when most analysts were predicting perhaps a 2% drop in 2018 in total market share due to cord cutting. Since 2018 is only the second year with real evidence of cord cutting, the 4% loss of total market share demonstrates big changes in customer sentiment.

The big losers are the satellite companies which lost 2,361,000 customers in 2018. These losses are offset a little bit since the satellite companies also have the largest online video services. Dish’s Sling TV added 205,000 customers in 2018 and AT&T’s DirecTV Now added 436,000 – but the net customer loss for these companies is still 1.7 million for the year.

In 2018 Comcast and Charter didn’t fare as poorly as the rest of the industry. However, their smaller loss of cable customers is probably due to the fact that both companies saw more than 5% growth of new broadband customers (2.6 million in total) in 2018, and those new customers undoubtedly are shielding cord cutting losses by older subscribers.

It’s still too early to make any real predictions about the future trajectory for cord cutting. We know that price is a large factor in cord cutting and cable providers are still facing huge price increases in buying programming. That will continue to drive cable prices higher. The big cable companies have done their best to disguise recent price increases by shoving rate increases into local programming or sports programming ‘fees’. However, the public is catching onto that scheme and also can still see that their overall monthly payments are increasing.

It’s starting to look like online programming might cost as much as traditional cable TV. For the last few years there have been alternatives like DirecTV Now, Playstation Vue and Sling TV that have offered the most-watched networks for bargain prices. But the recent big rate increase from DirecTV Now is probably signaling that the days of subsidized online programming are over.

Further, the online programming world continues to splinter as each owner of programming rolls out their own online products. The cost of replacing what people most want to watch online might soon be higher even than traditional cable TV if it requires separate subscriptions to Disney, CBS, NBC and the many other new standalone packages that a cord cutter must cobble together. A family that really wants to save money on TV has to settle for some subset of the online alternatives, and the big question will be if households are willing to do that.

But at least for now it looks like cord cutting is roaring ahead. The average loss of traditional cable customers in 2018 is almost 300,000 per month, and the rate of loss is accelerating. At least for now, the industry is seeing a rout, and that has to be scaring boards rooms everywhere.

The End of Satellite TV?

DirecTV launched their most recent satellite in May of 2015. The company has launched 16 satellites in its history, and with twelve remaining in service is the largest commercial satellite company in the world. AT&T, the owner of DirecTV announced at the end of last year that there would be no more future satellite launches. Satellites don’t last forever, and that announcement marks the beginning of the death of DirecTV. The satellites launched before 2000 are now defunct and the satellites launch after that will start going dark over time.

AT&T is instead going to concentrate of terrestrial cable service delivered over the web. They are now pushing customers to subscribe to DirecTV Now or WatchTV rather than the satellite service. We’ve already seen evidence of this shift and DirecTV was down to 19.6 million customers, having lost a net of 883,000 customers for the first three quarters of 2018. The other satellite company, Dish Networks lost 744,000 customers in the same 9-month period.

DirecTV is still the second largest cable provider, now 2.5 million customers smaller than Comcast, but 3 million customers larger than Charter. It can lose a few million customers per year and still remain as a major cable provider for a long time.

In much of rural America, the two satellite companies are the only TV option for millions of customers. Households without good broadband don’t have the option of going online. I was at a meeting with rural folks last week who were describing their painful attempts to stream even a single SD-quality stream over Netflix.

For many years the satellite providers competed on price and were able to keep prices low since they didn’t have to maintain a landline network and the associated technician fleet. However, both satellite providers looked to have abandoned that philosophy. DirecTV just announced rate increase that range from $3 to $8 per month for various packages. They also raised the price for regional sports networks by $1. Dish just announced rate increases that average $6 per month for its packages. These are the two largest rate increases in the history of these companies and will shrink the difference between satellite and terrestrial cable prices.

These rate increases will make it easier for rural cable providers to compete. Many of them have tried to keep rates within a reasonable range of the satellite providers, and these rate increases will shrink the differences in rates.

In the long run the consequences of not having the satellite option will create even more change in a fast-changing industry. For years the satellite companies have been the biggest competitor of the big cable companies – and they don’t just serve in rural America. I recently did a survey in a community of 20,000 where almost half of the households use satellite TV. As the satellite companies drop subscribers, some of them will revert to traditional cable providers. The recent price increases ought to accelerate that shift.

Nobody has a crystal ball for the cable industry. Just a year ago it seemed like industry-wide consensus that we were going to see a rapid acceleration of cord cutting. While cord cutting gets a lot of headlines, it hasn’t yet grown to nearly the same magnitude of change that we saw with households dropping telephone landlines. Surprisingly, even after nearly a decade of landline losses there are still around 40% of homes with a landline. Will we see the same thing with traditional cable TV, or will the providers push customers online?

Recently I’ve seen a spate of articles talking about how it’s becoming as expensive to buy online programming as it is to stick with cable companies, and if this becomes the public perception, we might see a slowdown in the pace of cord cutting. It’s possible that traditional cable will be around for a long time. The satellite cable companies lost money for many years, mostly due to low prices. It’s possible that after a few more big rate increases that these companies might become profitable and reconsider their future.

Looking Closer at CAF II Broadband

AT&T is making the rounds in rural Kentucky, not too far from where I live, and is announcing the introduction of their residential wireless broadband product that is the result of the FCC’s CAF II program. Today I’m looking at more detail at that product.

AT&T was required under the CAF II rules to deliver broadband speeds of at least 10 Mbps download and 1 Mbps upload. AT&T says Kentucky announcement that they will be delivering products with at least that much speed, so it’s possible that customers might see something a little faster. Or the company could cap speeds at 10 Mbps and we’ll have to wait for reports from customers about actual speeds.

AT&T accepted nearly $186 million in FCC funds to bring CAF II broadband capabilities to 84,333 households in the state, or $2,203 per household. They say all of those homes will have the broadband available by the end of 2020 (although there is no penalty if some of the homes don’t get covered – which one would expect since many homes are likely to be too far from a cell tower).

AT&T will be delivering the broadband in Kentucky using LTE broadband from cellphone towers. This is delivered to homes by placing a small antenna box (not a dish) on the exterior of a home. They say that they will be using a different set of frequencies for CAF II broadband than what is used for cellular service, meaning there should be no degradation of normal cellular service.

I saw a news article in Kentucky that says the price will be $50 per month, but that’s a special one-year price offer for customers also willing to sign up for DirecTV. Following are more specific details of the normal product and pricing:

  • Customers can get a price of $60 per month for 1-year by signing a 12-month contract. After the year the price increases to $70 per month and is set at $70 per month for those not willing to agree to a contract.
  • Customers signing a contract see no installation charge, but otherwise there is a $99 one-time fee to connect.
  • There is an early termination charge for customers that break the one-year contract of $10 for each remaining month of the contract.
  • There is a $150 fee for customers who don’t return the antenna box.
  • There is a monthly data cap of 170 Gigabytes of downloaded data. Customers pay $10 for each additional 50 GB of download up to a maximum of $200 per month. AT&T is offering a 340 GB monthly data cap right now for customers who bundle with DirecTV – but that’s a temporary offer until October 1.
  • AT&T also will layer on a monthly $1.99 administrative fee that they pocket.

I think the pricing is far too high considering that the $186 million given to AT&T probably paid for all, or nearly all of the cost of the upgrades needed to deliver the service. Some of that money probably was used to bolster fiber to rural cell sites and the funding would have been used to add the new electronics to cell sites. AT&T used free federal money to create a $72 monthly broadband product, and before even considering the data cap is a product with a huge margin return since AT&T doesn’t have to recover the cost of the underlying network.

The small data cap is going to generate a lot of additional revenue for AT&T. The monthly data cap of 170 GB is already too small. Comcast just reported in June that the average download for all of their 23 million broadband customers was 151 GB per month. That means there are already a significant number of homes that want to use more than AT&T’s monthly 170 GB cap. We know that monthly home demand for broadband keeps growing and the Comcast average just a year ago was 128 GB per month. With that growth, within a year the average customer will want more than AT&T’s cap.

A few years ago when I was on Comcast they measured my 3-person home as using nearly 700 GB per month. On the AT&T plan my monthly bill would be $180 per month. Within a few years most homes will want to use more data than AT&T’s cap. The FCC really screwed the public when they didn’t insist that carriers taking the funding should provide unlimited downloads, or at least some high data cap like 1 terabyte. That stingy data cap gives AT&T permission to print money in rural America.

The 10 Mbps speed is also a big problem. That speed today is already inadequate for most households who now want to engage in multiple simultaneous streams. I’ve written many times about the huge inefficiencies in home WiFi and a 10 Mbps connection is just barely adequate for two video streams as long as there are no other broadband uses in the home at the same time. A typical home with kids these days is going to want to simultaneously watch video, do homework, play games, browse the web, download files or work from home. A home with a 10 Mbps speed is not close to equivalent to much faster urban broadband connections. You don’t have to look forward more than a few years to know that a 10 Mbps data caps is soon going to feel glacially slow.

Finally, cellular data has a higher latency than landline broadband, with latency as high as 100 msec. Customers might have problems at times on this product maintaining video streams, making VoIP calls or staying connected to a school or work server.

I’m sure that a home that has never had broadband is going to welcome this product. But it’s not going to take them long to realize that this is not the same broadband available to most homes. They are also going to realize that it’s possibly the last speed upgrade they are going to see for a long time since AT&T and the FCC want to check off these homes as now having broadband.

Is AT&T Violating Net Neutrality?

I got a text on my AT&T cellphone last month that told me that my wireless plan now includes sponsored data. Specifically they told me that I could now stream movies and other content from DirecTV or U-Verse TV without the video counting against my monthly data cap. This has been available to AT&T post-paid customers for a while, but now is apparently available to all customers. What I found most interesting about the message was that it coincided with the official end of net neutrality.

AT&T is not the first cellular company to do this. Verizon tried this a few years ago, although that attempt was largely unsuccessful because they didn’t offer much content that people wanted to watch. T-Mobile does something similar with their Binge-on program, but since most of their data plans are unlimited, customers can watch anything on their phones, not just the Binge-on video.

The sponsored data from AT&T would be a direct violation of net neutrality if it was still in effect and is a textbook example of paid prioritization. By excusing the DirecTV content from cellular data caps they have created an advantage for DirecTV compared to competitors. It doesn’t really matter that AT&T also happens to own DirecTV, and I imagine that AT&T is now shopping this same idea around to other video providers.

So what is wrong with what AT&T is doing? Certainly their many customers that buy both AT&T cellphones and DirecTV will like the plan. Cellular data in the US is still some of the most expensive data in the world and letting customers watch unlimited video from a sponsored video provider is a huge benefit to customers. Most people are careful to not go over monthly data limits, and that means they carefully curtail watching video on cellphones. But customers taking advantage of sponsored video are going to watch video that would likely have exceeded their monthly data cap – it doesn’t take more than a handful of movies to do that.

AT&T has huge market power with almost 140 million cellphones users on their network at the end of last year. Any video provider they sponsor is going to gain a significant advantage over other video providers. AT&T customers that like watching video on their cellphones are likely to pick DirecTV over Comcast or any other video provider.

It’s also going to be extremely tempting for AT&T to give prioritized routing to DirecTV video – what means implementing the Internet fast lane. AT&T is going to want their cellular customers to have a quality experience, and they can do that by making sure that DirecTV video has the best connections throughout their network. They don’t necessarily have to throttle other video to make DirecTV better – they can just make sure that DirectTV video gets the best possible routing.

I know to many people the AT&T plan is going to feel somewhat harmless. After all, they are bundling together their own cellular and video products. But it’s a short step from here for AT&T to start giving priority to content from others who are willing to pay for it. It’s not to hard to imagine them offering the same plan to Netflix, YouTube or Facebook.

If this plan expands beyond AT&T’s own video, we’ll start seeing the negative impacts of paid prioritization:

  • Only the biggest companies like Netflix, Facebook or Google can afford to pay AT&T for the practice. This is going to shut out smaller video providers and start-ups. Already in the short history of the web we’ve seen a big turnover in the popular platforms on the web – gone or greatly diminished are earlier platforms like AOL, CompuServe and Prodigy. But with the boost given by paid prioritization the big companies today will get a step-up to remain as predominant players on the web. Innovation is going to be severely hampered.
  • This is also the beginning of a curated web where many people only see the world through the filter of the predominant web services. We already see that phenomenon a lot today, but when people are funneled to only using the big web services this will grow and magnify.
  • It’s not hard to imagine the next step where we see reduced price data plans that are ‘sponsored’ by somebody like Facebook. Such platforms will likely make it a challenge for customers to step outside their platform. And that will lead to a segmentation and slow death of the web as we know it.

Interestingly, the Tom Wheeler FCC told AT&T that this practice was unacceptable. But through the change of administration AT&T never stopped the practice and is now expanding it. It’s likely that courts are going to stay some or all of the net neutrality order until the various lawsuits on the issue get resolved. But AT&T clearly feels emboldened to move forward with this, probably since they know the current FCC won’t address the issue even if net neutrality stays in effect.

Industry Shorts – March 2018

Following are a few topics that I find interesting, but which are too short to cover in a full blog:

Surge in Online Video Subscriptions. The number of households buying online video is surging. Netflix added almost 2 million US and 6.36 million international customers in the 4th quarter of 2017. That’s 18% more than the same quarter from a year earlier. There are also a growing number of vMVPD customers. At the end of last year CBS All Access has nearly 5 million customers. Showtime OTT also has nearly 5 million customers. Sling TV now has nearly 2 million customers. AT&T DirecTV hit the 1 million customer mark in December. PlayStation Vue reported 670,000 customers in mid-December. The new YouTube service has about 300,000. Hulu is also growing but doesn’t separately report it’s live TV customers from it’s video on demand customers (reported at 17 million total in December). Note that Hulu let’s customers buy one TV series or movies without needed a subscription.

Cellphone Data Usage Growth. According to the research firm NPD the average US smartphone now is used for an average of 31.4 GB per month of data. This is combined usage between cellular and WiFi data and is evidence that people are starting to really accept the small screen for video. This is up over 25% from a year earlier. The firm reports that video accounts for 83% of the usage.

The number of people willing to use a cellphone for video has also surged. NPD reports that 67% of cellphone users watched at least one video during the 3rd quarter of 2017, up from 57% in the 2nd quarter. Another research firm, Strategic Analytics reported that worldwide cellular data usage grew 115% in 2017, or more than doubled.

Global Streaming Doubled in 2017. Conviva, which provides systems to monitor and analyze online usage also reports that online video content more than doubled last year. They report that there were 12.6 billion viewing hours of online video in 2017 measured across 2.4 billon viewing devices. They report that 58% of video viewing came from North America; 21% from Europe; 19% from Asia 2% from the rest of the world.

Satellite TV Taking the Brunt of Cord Cutting. For some reason cord cutting seemed to be hitting the two big satellite TV providers even harder than landline cable companies. Dish Networks and DirecTV together lost 4.7% of their subscribers in the fourth quarter of 2017. We can only speculate for the reasons for the shift. The bundles of the landline cable companies make it harder for customers to drop their cable subscription. But to offset this, many satellite customers are in rural areas where there is often not a good broadband alternative to cable. But perhaps the FCC’s CAF II and ACAM programs are speeding up rural broadband enough for households to consider cutting the cord. It should be noted that AT&T is pushing their DirecTV now product more than their satellite TV, which also might account for part of the shift from satellite TV.

Apple Jumps into Programming. Apple quietly has gotten into the programing business. They’ve allocated over $1 billion in 2018 for the creation of new content. They’ve landed some big-name talent such as Steven Spielberg, Jennifer Aniston and Reese Witherspoon for projects. Apple doesn’t have a content platform and the industry is buzzing with speculation on how they might market and distribute the content.

Pirated Video Content on Rise. Sandvine reports that 6.5% of North American households have accessed pirated video content in the last year. I’ve read reports from Canada of companies openly advertising pirated content, including providing settop boxes that can download IPTV content directly from the Internet. Yesterday’s blog talked about new efforts by content owners to force ISPs to enforce copyright infringement.

Some Unexpected News

In an attempt to stop the massive bleeding of traditional cable TV customers AT&T has cut the prices for cable on both the DirecTV and U-verse platforms. The company lost almost 400,000 linear TV customers in the recent third quarter.

As an example, DirecTV’s ‘Select’ bundle of 150 channels will now be priced for a two-year contract at $35 for the first year and $76 for the second year, compared to the recent prices of $50 for the first and $90 for the second. All of the other packages have similar drops of $10 to $15 in the first year and lower second year prices.

I call this unexpected news because it goes against every trend in the rest of the industry. The average monthly revenue for the 2-year Select contract just fell from $70 per month to $55.50 per month – more than a 20% discount. From what I know about programming prices it’s hard to think that AT&T has any margin at the new prices and they are clearly under water for the first year, spending more for programming than what they will collect in revenue.

This price reduction brings a couple of different ideas to mind. First, it’s clear that AT&T still wants to have traditional linear cable TV customers. Even at little or no margin they see value in that, although I honestly can’t see what that benefit might be. Certainly, one benefit might be to prop up DirecTV through sheer volumes of customers. I think AT&T envisions the future of cable TV to be more in line with the smaller on-line packages being sold as DirecTV Now. But the general public largely is not yet ready to make the shirt to totally online and so perhaps AT&T wants to keep people using its products until that is a more likely shift.

But this price drop also talks about the market elasticity of cable TV. We’ve known for years that customers that cut the cord almost all say they are leaving traditional cable TV because of the cost. That was already happening before the plethora of new on-line alternatives like Sling TV and Playstation Vue. These new alternatives products have created what is called in economic terms as a substitute. Over 900,000 households changed to one of these online cable products in the most recent third quarter, and so it’s obvious that many people now view a skinny bundle like Sling TV to be a reasonable substitute for the big cable packages.

And this makes sense. We know that most households don’t watch many different channels even on a 200-channel cable offering, and so as long as a smaller lineup has channels a household is comfortable with then skinny bundles become economic substitutes for the traditional big cable bundle.

And of course, all of this is compounded by OTT providers like Netflix, Hulu and Amazon prime that provide a huge array of online content that is another competitor to cable TV. I can tell you personally that I am far happier with having one skinny bundle (currently Playstation Vue) and access to OTT content than I ever was with the big cable bundle. I remember channel surfing through the big cable packages at 3:00 in the morning (a time I am often awake) and finding nothing but bad programming and infomercials. The choice from online programming are far better for my tastes and style of watching TV.

This change makes me wonder if we aren’t seeing the end of the tolerance of the public towards costly cable TV products. If the idea that traditional cable TV packages are no longer worth the price we could be seeing a watershed moment in the industry – one where a huge cable provider makes a last stab to keep customers.

It will be interesting to see if any of the other cable providers react the same way. This is a bold move by AT&T and one would think that those seeking a cheaper alternative might be attracted to these new bundles. But of course, every customer that takes one of these packages will probably be bailing on a traditional package from one of the cable companies. This is going to be an interesting battle to watch.