Cord Cutting Picking Up Steam

Cord cutting continued to pick up speed in the second quarter of this year. The numbers below come from Leichtman Research Group which compiles these numbers from reports made to investors.

The numbers reported are for the largest cable providers and Leichtman estimates that these companies represent 93% of all cable customers in the country.

The overall penetration rate of households buying traditional cable has dropped to 67.4% at the end of the second quarter of the year. The penetration rate had dropped just under 70% at the end of 2018.

For the quarter the cable companies lost 1.7% of subscribers which would equate to a trend of losing 6.7% for the year. However, that number needs to be put into context. The biggest drop of customers came from AT&T / DirectTV which lost over 1.3 million customers so far this year. The company decided to end discount plans to customers and has been letting customers go who won’t agree to pay full price after the end of discount plans. The company says they are glad to be rid of customers who are not contributing to the bottom line of the company. At some point soon that purge should end, and the company should return to a more normal trajectory. Normalizing for AT&T, the whole industry is probably still losing customer currently at a rate between 4% and 5% of total market share annually.

4Q 2018 2Q 2019 1Q Change 2Q Change 2Q
Comcast 21,986,000 21,641,000 (121,000) (224,000) -1.0%
AT&T / DirecTV 22,926,000 21,605,000 (543,000) (778,000) -3.5%
Charter 16,606,000 16,320,000 (145,000) (141,000) -0.9%
Dish TV 9,905,000 9,560,000 (266,000) (79,000) -0.8%
Verizon 4,451,000 4,346,000 (53,000) (52,000) -1.2%
Cox 4,015,000 3,940,000 (35,000) (40,000) -1.0%
Altice 3,307,500 3,276,500 (10,200) (20,800) -0.6%
Mediacom 776,000 747,000 (12,000) (17,000) -2.2%
Frontier 838,000 738,000 (54,000) (46,000) -5.9%
Cable ONE 326,423 308,493 (5,812) (12,118) -3.8%
Total 85,136,923 82,481,993 (1,245,012) (1,409,918) -1.7%

These same companies have lost over 5 million traditional cable subscribers since the end of the second quarter in 2018.

Some other observations:

  • This is the first time that Comcast has lost 1% of cable customers in a quarter. Until recently the company was holding steady with cable customer counts due to the fact that the company has continued to add new broadband customers, many who bought cable TV.
  • Frontier is bleeding both cable customers and broadband customers, and the company lost 71,000 broadband customers in the second quarter to go with the loss of 46,000 cable customers.
  • The only other companies that lost more than 2% of their cable customer base in the quarter are Mediacom and Cable ONE.
  • The loss of 79,000 customers is the smallest quarterly loss for Dish Networks since 2014.

The biggest losers in the industry are likely the programmers. They are losing millions of monthly subscriptions that were paying for their programming. A few networks are recovering some of these losses by selling programming to providers like SlingTV or PlayStation Now – but overall the programmers are losing a mountain of paying households.

The big question for the industry is if there is some predictable path for cord cutting. Will it continue to accelerate and kill the industry in a few years or will losses be slow and steady like happened with landline telephones?

A New Cellular Carrier?

One of the most interesting aspects of the proposed merger of Sprint and T-Mobile is that the agreement now includes selling some of Sprint’s spectrum to Dish Networks to enable them to become a 5G cellular provider. This arrangement is part of the compromise required by the Department of Justice to preserve industry competition when the major wireless carriers shrink from four to three.

This agreement would have Dish Networks paying $5 billion for the spectrum assets, which complement the spectrum already owned by Dish. The agreement also includes an MVNO agreement between Dish Networks and T-Mobile that would let Dish enter the cellular market immediately before having to build any network. As part of that arrangement, Dish would purchase Boost Mobile from T-Mobile for $1.4 billion, providing them with an immediate base of cellular customers.

Dish already owns spectrum valued at several billion dollars. The company has been under pressure from the FCC to deploy that spectrum, and Dish recently began building a nationwide narrowband network to support IoT sensors. The company admits they are not happy with the IoT sensor business plan but didn’t want to lose their spectrum. Perhaps the best aspect of this deal from Dish’s perspective is that they are being given a new time clock to use existing spectrum in a more profitable way.

This deal has plenty of critics who don’t believe that Dish can turn into a viable competitor. This includes numerous consumer groups as well as a group of state Attorney Generals who have filed to block the merger. The merger is far from a done deal and is going to court, although it has crossed the major hurdles of getting DOJ approval and informal approval from the FCC.

Dish Chairman Charlie Ergen says the company is ready to become the fourth facility-based cellular carrier in the market. He thinks that launching with a new 5G network will provide some advantages over carriers that will be upgrading older networks. The company faces some significant challenges such as gaining access to tower space in crowded markets. The other cellular carriers have also been busy and have invested significant amounts of capital in building fiber to support cellular small cell sites.

The challenge of building a new nationwide cellular network from scratch is intimidating. As a satellite provider, the company does not already operate an extensive landline network. The logistics of hiring the needed talent and constructing the core network infrastructure is a major challenge. A few years ago Dish had estimated the cost to build a nationwide cellular network at $10 billion. The company says they have already released an RFI and an RFP to start the process of hiring contractors to build the new network.

Ergen says the company could build the core network in 2020 and could construct a network to cover 70% of the homes in the country by 2023. As far as being competitive, Dish says they would enter the market with ‘disruptive’ pricing to capture market share.

Dish needs something like this if it is to survive. The company lost over 1.1 million satellite TV customers last year, a little over 10% of its customer base. It looks like cord cutting is accelerating this year and one has to wonder how long they will remain as a viable business.

Interestingly, Dish won’t be the only new competitor in the cellular market. Comcast recently spent over $1.7 billion on spectrum. The company has been reselling cellular service and offering low-price broadband as part of its bundle for the last few years. The company reporting hitting 1.2 million cellular customers at the beginning of this year. While Comcast is not likely to tackle building a nationwide network, they could become a formidable competitor in the urban markets where they are already the cable provider. Other cellular companies like Charter and Altice are considering a similar path.

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.

Reclaiming Spectrum

The FCC recently wrote a letter to DISH Networks warning the company that it had not complied with the FCC’s build-out requirements for its AWS-4 and its E and H blocks of 700 MHz spectrum. The warning was more sternly worded than what we normally see from the FCC, and perhaps they will take steps to reclaim the spectrum if DISH is unable to meet the required deployment of the spectrum. The company has a long history of sitting on spectrum and delaying its use. They recently told the FCC that they want to use the AWS spectrum to launch a nationwide IoT monitoring network and that they are interested in entering the cellular business with the 700 MHz licenses.

Today’s blog is not about DISH specifically. Instead, I want to talk about the FCC reclaiming spectrum. This is an important issue for rural America because the majority of licensed spectrum sits idle in rural America for a number of reasons. We could go a long way towards fixing the rural broadband problem if the unused spectrum could be reclaimed by the FCC and repositioned for rural use. There are a number of reasons why the spectrum sits idle today.

Coverage Rules. Most FCC licenses come with coverage requirements. For instance, a given spectrum might need to eventually be deployed to cover something like 70% of the households in a license area. That rule allows spectrum holders to deploy spectrum to urban areas and legally ignore the surrounding rural areas.

There is nothing wrong with this from a business perspective. Cellular companies only need to use their full inventory of spectrum in urban areas where most customers live, and the FCC rules should not require deployment of spectrum where nobody will use it. But the coverage rules mean that the spectrum will remain unused in rural areas as long as the primary license holder is serving the urban areas – effectively forever. Since the spectrum is licensed, nobody else can use it. This problem is caused by the way that the FCC licenses spectrum for large geographic areas, while the spectrum buyers are interested in serving only a portion of the license areas.

Ideally unused spectrum should be made available to somebody else who can make a business case for it. There are several ways to fix this issue. First, licensed holders could be compelled by the FCC to sub-license the spectrum to others where it sits idle. Or the FCC could reclaim the spectrum in unused geographic areas and distribute it to those who will use it.

Deployment Delays. Other spectrum goes unused due to deployment delays by license holders. The DISH Network spectrum is a perfect example. The company bought this spectrum for a use that they were unable to execute. Since the spectrum is valuable the license holders deploy delaying tactics to stop the FCC from reclaiming the spectrum. The FCC has largely been derelict in enforcing its own rules and I’m sure that DISH was shocked at the FCC response. DISH probably figured that this would be business as usual and that the FCC would grant them more time as had been done in the past. I have no idea if DISH really intends to deploy an IoT network or go into the cellular business – but those are the kinds of new competitive ventures that the FCC has been publicly asking for, so DISH is telling the FCC exactly what it wants to hear. But it’s likely that DISH just wants another delay until they can find a buyer for their sinking satellite business by somebody who will value the spectrum. Regardless of the reasons, the FCC has ignored its own deployment rules numerous times and granted license holders more time.

Spectrum Speculators. There is a class of investors who buy spectrum with the hopes of selling it or licensing it to somebody else. They will buy spectrum and rig up a bogus use of the spectrum to meet the build-out requirements. I’ve seen wireless links deployed that carry no data but that are intended only to prove to the FCC that the spectrum is being used. The FCC ought to do a better job of identifying the fake deployments that are done only to preserve the license.

There’s no way to know if the letter to DISH signals a change at the FCC and if they intend to enforce the spectrum rules. Better enforcement of the rules alone won’t help rural America if the spectrum gets re-licensed and the same cycle repeats. We need spectrum rules that free up spectrum in rural areas where the spectrum sits idle. Perhaps this could be done by requiring license holders to sub-license the spectrum to others where it sits idle. The FCC has said numerous time that wireless technology can be the salvation for rural broadband, yet they allow the most valuable spectrum to sit idle while WISPs are relegated to delivering broadband using a few tiny swaths of unlicensed spectrum. This is not a hard problem to solve, but it requires the will to solve it, and an FCC that won’t cave-in to the big spectrum license holders.

Another Alternative to Cable TV

In just the last few years we’ve seen a plethora of alternatives to cable TV. It was only a few years ago in 2014 when the Supreme Court rules against Aereo for offering a product that allowed people to bypass the cable company to watch local channels anywhere within a market. In retrospect is looks like Aereo’s biggest sin was being too early to market, because today Sling TV is offering a product that feels the same to customers.

Sling TV’s product is AirTV. The company provides several options, all which include a settop box that includes an antenna to receive local over-the-air networks. AirTV then integrates the local channels into the Sling TV OTT offering for a seamless mix of local and on-line channels. The box let’s a user watch the local channels on any device within range of the customer’s WiFi network. The box also will upload your local channels to the cloud to watch anywhere else while you are traveling.

The differences between AirTV and Aereo are subtle. Both companies avoided paying retransmission fees for the local networks. Both companies used antennas to receive off-air channels like ABC, CBS, FOX, NBC and PBS. AirTV places the antenna in the home while Aereo had an individual antenna for each customer at the central office and then beamed the shows to an Aereo box in the home. A non-technical customer would probably be hard pressed to describe the difference between the services, because from the end-user perspective the products offer the same end result.

The Supreme Court’s ruling again Aereo was also subtle. They ruled that Aereo had infringed on network copyrighted material by beaming the signal from an Aereo customer antenna located at a hub and the customer site. Now only four years later these same content owners seem to have no issues with AirTV beaming local content over the Internet to reach a customer who is traveling.

The big obvious difference between 2014 and now is the proliferation of numerous other OTT offerings that are using subsets of the traditional cable offerings to compete with cable companies. Some of the biggest ISPs like Comcast and Verizon even have their own OTT offering to compete against their own cable products.

It seems like the genie is out of the bag now and anything goes in the programming world. We recently saw Charter introduce a package that feels like a la carte programming where customers only get the channels they want. We see millions of customers opting for smaller packages by cutting the cord or migrating to smaller packages.

If you go back and read the big cable company complaints against Aereo you could make many of the same arguments against AirTV – and yet they are not being pushed out of business, as happened to Aereo. The cable companies can’t stop anybody from selling rabbit ears, but one would think they would have a valid complaint against a company that bundles the rabbit ears with other programming without paying retransmission fees.

One reason that AirTV might not be getting push-back is because they are owned by Dish Networks. A lot of the alternative programming today is being offered by the biggest players in the industry, and perhaps Aereo was singled out because they were a brash outsider. Clients ask me all of the time about creating their own small packages and I regret having to tell them that the programmers won’t even talk to small companies about the possibility.

Smaller cable operators don’t have the same options as Comcast, Charter, Dish Networks or AT&T. Small cable providers must still follow FCC rules that require traditional cable TV packages and lineups. Any small cable provider that wants to buck these rules probably ends up on the wrong side of a lawsuit or else is threated by the programmers with losing their programming contracts. Small cable operators, who are already losing money on cable TV are not willing to risk a legal battle with one of the big programmers.

I love seeing companies like AirTV blazing new ground because I hope that what they are doing will eventually filter down to the rest of the market. Sling TV has made it clear that they don’t expect to make money on AirTV and their real goal is to create stickiness for the Sling TV product. I know a lot of small cable operators who would be thrilled to reach breakeven with a cable product, and I’m hopeful that in the next few years they might have the option to resale a bundle like Sling TV and AirTV rather than continuing to lose money with traditional cable.

The End of Satellite TV?

Randall Stephenson, the CEO of AT&T, recently announced that the company will be working to replace their satellite TV (DirecTV) with an OTT offering over the web. The company plans to launch the first beta trials by the end of this year. The ultimate goal will be for the online offering to eventually replace the satellite offering.

He didn’t provide any specific details of the planned offering other than comparing it to the current DirecTV Now offering that carries about 100 channels and is a direct competitor to landline cable TV.

Obviously the company has a lot of details to work out. DirecTV currently has over 20 million customers and along with Comcast is the only other cable provider that added customers over the last year ending in the second quarter. The biggest online live broadcast offering today is Dish Network’s Sling TV with around 2 million customers. AT&T faces numerous technical challenges if they want to transfer their huge customer base onto the web.

People always speculate why AT&T bought DirecTV and perhaps now we finally have the answer. The product will be marketed nationwide, not just in the AT&T footprint. The big advantage for AT&T is that they are not saddled with FCC rules that create the large cable bundles of 200 channels, and so perhaps they have found a way to make online bundles of cable channels profitable again. It seems that there are probably more profits in a 100-channel line-up than in traditional cable offerings. The same may not be true for skinny bundles and there is a lot of speculation that low-price OTT offerings like Sling TV at $20 don’t make any money.

This move would enable AT&T to leap forward and to easily keep up with the latest video technology. Almost all legacy video is using dated technology like the satellite DBS, the QAM on cable networks and even AT&T’s own first-generation IPTV headends. With an online product the company can get completely out of the settop box and the installation business for TV. They can also easily keep up with new formats and standards, such as the ability to immediately be able to offer 4K video everywhere. Going online makes it a lot easier to meet future customer demands as the industry continues to change rapidly.

But this has to be scary news for rural America. AT&T and Verizon have both made it clear they would like to tear down legacy copper networks, which will make it hard or impossible for some parts of rural America to make voice calls. If copper wires disappear then Cable TV over satellite is the only other modern telecom product available in a lot of rural America. If it’s phased out then much of rural America falls off the telecom map entirely.

While we have no idea if Dish Networks has similar plans, but the fact that they are migrating customers to Sling TV indicates that they might. This could turn ugly for rural America.

Obviously a quality OTT video product requires a quality broadband connection – something that is not available in millions of rural homes. It’s not hard to envision a future in which a home without good broadband might be isolated from the outside world.

It’s clear that the big companies like AT&T are focused only on bottom-line, and perhaps they should be. But one of the primary benefits of having incumbent regulated providers was that everybody in the country was offered the same choice of products. But unfortunately, the never-ending growth of broadband demand has broken the old legacy system. It was one thing to make sure that everybody was connected to the low-bandwidth voice network, but it’s something altogether different to make sure that rural America gets the same broadband as everybody else.

I can remember a time when I was a kid that a lot of rural homes didn’t have cable TV. Some rural homes were lucky enough to get a few TV stations over the air if they had a tall antenna. But many homes had no TV options due to the happenstance of their location. Satellite TV came along and fixed this issue and one expects when visiting a farm today to see a satellite dish in the yard or on the roof. This might become soon another of those quaint memories that are a thing of the past. But in doing so it will add to the political pressure to find a workable rural broadband solution.

Two Views on Skinny Bundles

The industry is abuzz this year with talk about skinny bundles. But there is a lot of disagreement about whether skinny bundles are really going to be effective and if they will put a serious dent in the pay-TV market. Today I look at opposing views from two major players in the industry.

First are the recent statements by David Zaslav, the CEO of Discovery Communications. He says the skinny bundles we see in the US are not really ‘skinny’ and are instead just another way to package traditional programming. He says that Discovery sells programming around the world and that in almost 200 other worldwide cable markets there are true skinny bundles that cost between $8 and $12 per month. He says these bundles are popular and give people a real alternative to the big cable bundles.

By contrast all of the major bundles on the market today in the US are priced at $30 to $60 and just provide a different alternative to the cable companies. The current US bundles are expensive because they include high-cost programming like sports, movie channels and major cable networks.

Zaslav’s statements are somewhat ironic since his company is one of the major programmers that drives up the size and the cost of traditional cable TV big channel line-ups. Discovery today includes a suite of 13 channels such as the Discovery Channel, TLC, Animal Planet, Science, and a host of other Discovery channels. Many of my clients are required to carry all of these channels if they want to carry any of them, and at least eight of these channels are required to be in the lower expanded basic tier where most customers have to pay for them. It’s also interesting that most of the current on-line skinny bundles in the US are not carrying the Discovery networks.

An interesting contrast to this comes from Charlie Ergen, Chairman and CEO of Dish Networks. He is wildly enthusiastic about the current US skinny bundles, including his own Sling TV. He says the company first launched Sling TV to try to lure cord cutters back to a paid subscription. But the company found out that they were instead taking customers away from pay-TV including his own satellite customers from Dish networks.

He believes that the public perceives the current US skinny bundles as a real alternative to the traditional pay-TV bundle. Sling TV has done better in the market than original projections. At the end of the 1st quarter of 2017 the company had 1.3 million customers, about double where they sat just last June. The other similar subscription services from Hulu and YouTube are also doing quite well and together are carving off a noticeable slice of the traditional TV market.

But Ergen admits that his Sling TV is a replacement for traditional TV, not a wildly different alternative. A lot of customers like on-line services because they offer the the ability to start and stop service at will or to add or subtract additional small packages of channels to the line-up as their interests change. It’s certainly possible that much of the success of these new bundles comes from consumers who are fed up with the big cable companies.

It’s also debatable if people who move from traditional cable to Sling TV or similar services can be classified as cord cutters. They are cord cutters in that they got rid of coaxial cable feed from the cable company, but they are still subscribing to a lot of the same channels as before and which are still broadcast at set times on a line-up.

For now it looks like the current skinny bundles are meeting moderate success and are attracting a few million customers. They haven’t been around very long and I suspect that a lot of consumers have either never heard of them or haven’t given them any serious consideration. But you can save money with these packages while gaining the flexibility to connect and disconnect on-line at any time – avoiding those dreadful call to cable customer service.

I know I would love to see the skinny bundles that David Zaslav describes. I imagine that each $8 – $12 bundle contains a limited number of channels. At a small size these are probably as close as anybody can get to a la carte programming. And at the end of the day that’s what a lot of cord cutters really want.

The Valuation of a Cable Customer

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Craig Moffett of MoffettNathanson recently set a valuation of an OTT customer from Sling TV at a quarter of the level of a normal Dish Networks customer. Since almost every small cable provider in the industry is interested in their valuation, I thought I’d talk today about Moffett’s numbers and how they might relate to cable valuation for small cable operators.

First the numbers. Moffett said that a normal Dish Networks cable customer is worth $1,100. That valuation reflects both the operating margin on Dish’s cable business as well as the average expected time that a cable customer stays with the company. Valuation in the industry in general is based on a multiple of operating margin – revenues less operating expenses. I don’t know what Moffett used as a multiple in this case since the valuation of Dish is muddled by the fact that they also own a mountain of spectrum.

Moffett set the value of a Sling TV customer (also operated by Dish Networks) at only $274. This low valuation tells us several things. First, the margins on Sling TV has to be significantly less. The company is obviously setting a low price to attract customers. And while Sling TV has a much smaller channel line-up than the big bundles at Dish Networks, Sling TV includes a lot of the most popular (and expensive) channels such as ESPN and Disney. I would also think that the valuation reflects a much higher churn for Sling TV. Customers are free to come and go easily and can buy service one month at a time. This contrasts to many Dish customers who get low prices by signing up for 1-year or longer contracts.

There are also other cost characteristics that are different for a satellite customer compared to on online customer. For instance, for a satellite customer Dish has to cover the cost of the satellite networks, the cost of the receivers used by customers. Sling TV has to instead just pay for transport of programming through Internet. Both parts of the business have to cover advertising and the cost of billing and back office. But it seems like Sling TV would have lower costs since customers must prepay by credit card. It’s hard to know which has a cost advantage, but I would guess it’s Sling TV. But Dish has millions of customers and would have some significant economy of scale.  

How do these valuations compare to the valuations of small cable providers? The big difference between terrestrial cable providers and Dish is having to provide a fleet of technicians in trucks and maintaining a landline network of some sort. Small cable operators also have to operate a headend and always face upgrades to keep up with the latest innovations in the industry. These costs are far more costly per customer for a small cable operator than what Dish is paying. I would think that due to economy of scale that Dish also has an advantage on costs like customer service, billing, etc. The equipment costs for customers are probably similar for Dish and terrestrial cable operators.

I have analyzed the books of a number of small triple play providers in recent years and if costs are allocated properly to products I haven’t seen one that has a positive margin on the cable TV product. While small cable systems generally charge more than Dish Networks they also pay more for programming. But the main reason that small terrestrial cable operators lose money is the work load associated with supporting cable TV. I’ve done detailed time studies at clients and have seen that in a triple play company that way more than half of the calls to customer service and the truck rolls are due to cable issues. If a small company allocates expenses properly between products, then cable is almost guaranteed to be a loser.

What does that mean for valuation? It’s probably obvious that if one of the major product lines of a company is losing money that the negative earnings pulls down the overall valuation of the business. Said more plainly, if the cable business at a small company is losing money, then that part of the business has no value or even a negative value. This is a conversation I have with clients all of the time, and most small cable providers have at least thought about the ramifications of dropping their cable product.

It’s not quite as easy as it sounds, because if somebody drops cable then they need to also pare expenses that were used to support cable. For a small company that means cutting back on customer service and field technician positions – something that small companies are loathe to do. Small carriers also worry that cutting cable will cost them overall customers, particularly if they are competing against somebody else that offers the triple play. It’s definitely a tough decision, but I’ve heard that as many as fifty small telcos have ditched traditional cable.

I’m also seeing for the first time that many new network operators are launching new markets without cable TV. Or they are instead looking at models where some external vendor like Skitter TV sells cable to customers.

Unfortunately, the cost of programming is still climbing fast and the margins on cable keep worsening for small cable operators. I expect that some time within the next five years or so we will reach a flash point where the collective wisdom of the industry will say that it’s time to ditch cable – and at that point we might see a flood of small companies exiting the business. But I don’t know of a harder decision to make for a small triple play provider.

OTT News, March 2017

There is a lot of activity going on with web-based video. There are offerings that are starting to look like serious contenders to traditional cable packages.

Comcast Integrates YouTube. Comcast has made a deal with Google to integrate YouTube into the Comcast X1 settop box. This follows last year’s announcement that Comcast is also integrating Netflix. Comcast also says they are working to integrate other SVOD platforms.

Comcast is making a lot of moves to keep themselves relevant for customers and to make the X1 box a key piece of electronics in the home. The box also acts as the hub for their smart home product, Xfinity Home.

One has to think that Comcast has worked out some sort of revenue sharing arrangements with Google and Netflix, although all details of these arrangements have not been reported. The most customer-friendly aspect of these integrations is that the Comcast X1 box is now voice-activated and customers can surf Netflix and YouTube by talking to the box.

Sling TV Adds More Sports. Sling TV has made another move that will make it attractive to more customers by adding the Comcast regional sports networks (RSNs) to their line-up. This includes CSN California, CSN Bay Area, CSN Chicago and CSN Mid-Atlantic. These networks carry a lot of unique sports content that is not easily available anywhere else on-line today. The networks carry pro basketball, pro baseball and a number of college sports. For example, CSN Bay Area is the home station for the popular Golden state Warriors. CSN Mid-Atlantic is the home station for the Baltimore Orioles.

I know in talking to my sports-centric friends that the narrow sports content on-line is the number one issue holding them back from switching to an OTT package. There are still other networks that Sling TV would need to add, like the Big Ten Network and the NFL Channel, to be a totally rounded sports provider. But they have already added a credible sports line-up that includes all the ESPN channels, the SEC Network, the ACC Network, NBA TV, the NHL Channel, the PAC12 Network and a few other sports networks like Univision TDN.

YouTube Launching an OTT Line-up. Cable TV just got another new OTT competitor. The new service is called YouTube TV and brings a fourth major OTT competitor along with Sling TV, PlayStation Vue, and DirecTV Now. The platform is going to launch sometime in the next few months, with no firm release date yet. The basic product will be $35 per month and allows customers to turn the service off and on at will.

YouTube TV will carry the typical network channels as well as ESPN, Disney, Bravo and Fox News – a line-up that sounds similar to its competition. The service will come with unlimited cloud DVR storage. It will allow 3 simultaneous streams per account and 6 user profiles per account. They will first launch in a few major urban markets (probably due to the availability of the local channels for various network channels).

If YouTube has any advantage in the marketplace it’s that they are becoming the preferred content choice for a lot of millennials. The company says they now are delivering over a billion hours per day of content. Millennials are leading the trend of cord cutters (and even more so of cord nevers), and if YouTube can tap that market they should do great.

Dish Network Predicts OTT will Replace Traditional TV. For the first time, Dish Networks Chairman and CEO said he thought that OTT programming is the real future of video. Until now the company, which owns Sling TV, has said that their product was aimed at bringing video to cord cutters.

But Sling TV and the other OTT products are getting a lot better. Sling TV now has over 100 channels that provide a wide set of options for customers. And these channels are not packed into a giant must-take line-up like traditional cable packages, and instead provide a number of smaller packages that a customer can add to the Sling TV base package. Sling TV and the other providers also make it easy for customers to add or subtract packages or come and go from the whole platform at will – something that can’t be done with cable companies.

Certainly Sling TV has made a difference for Dish. The company has been bleeding satellite customers and had customer losses for the last ten quarters. But the company had a small customer gain of 28,000 customers in the fourth quarter due to the popularity of Sling TV. The company does not report customers by satellite and OTT, so we don’t know the specific numbers.

The Death of the Big Cable Bundles

TelevisionThere is a ton of evidence that customers no longer want the traditional 200 – 300 channel cable packages. For example, we’ve seen the number of customers of ESPN plunge by millions over the last year to a far greater extent than the overall erosion of the cable industry. The ESPN phenomenon can only be caused by cord shaving – or customers downsizing to smaller packages.

We got more evidence of this last week when Verizon CEO Lowell McAdam said that 40% of cable packages sold on Verizon are now skinny bundles. He said that if he had a preference that Verizon would only offer skinny bundles. He doesn’t believe there is customer demand for the larger packages.

This makes sense and we have had the statistics for years to tell us this. A study by Nielsen earlier this year showed that the average person watches around 17 channels to the exclusion of others. That’s means that the average household is wasting a lot of money paying for channels they don’t want.

Other studies tell us the same thing. A Gallup poll earlier this year said that 37% of households don’t watch any sports. And yet sports programming has become the most expensive component of the big cable bundle. And it’s only common sense that within the 63% who watch sports that a lot of them must be just casual sports fans or fans of only one or two sports.

And the trend has to be downward for the channels on traditional cable. In May of this year Nielsen reported that almost 53 million US homes watch Netflix. Another 25 million watch Amazon Prime. Another 13 million watch Hulu, and since they beefed up their lineup and slashed their price the number of viewers is bound to climb.

Unfortunately skinny bundles are not universally available everywhere. Only the largest cable companies have been able to negotiate for the right to sell smaller bundles so far. And among the large cable providers only Verizon and Dish Network are really pushing the skinny bundles. There are also a few skinny bundles on the web, like Sling TV, but every time I look their packages are getting fatter.

I can’t help but speculate what would happen if every household was given the choice tomorrow to downsize their cable bundle and monthly cable bill. Leichtman Research Group announced a few months ago that the average cable bill in this country is now $103.10. That’s an astronomical number, and if that is the average a lot of homes are paying a lot more than that. Contrast this with new the Dish Network skinny bundle that offers 50 channels for $39.99 per month.

The skinny bundle that is doing so well at Verizon isn’t even cheap and starts at $55 per month – but it’s a lot less expensive than the big traditional bundles. And the Verizon price is reduced significantly for customers buying a triple-play bundle.

I just wrote a blog last week that talked about how Wall Street is becoming unhappy with cable programmers. At least one analyst has downgraded Discovery Networks and Scripps. We might finally be seeing is a whole host of issues coming to bear in the industry at the same time. Cable bills are finally getting too expensive for a lot of homes. People are becoming more interested in content that is not on traditional cable. And the programmers are losing a little bit of the total lock they have had on the industry.

It’s hard to say when, or even if the industry is going to break in any significant way. There are still just under 100 million homes paying for some version of cable TV. And the overall effect of cordcutting has only been shaving that by a little over 1% per year. But if the Verizon trend becomes the norm and most customers start preferring skinny bundles then the industry will still be transformed. ESPN has lost 10 million customers since 2013, but over half of those losses have been in the last year. The same thing has to be happening to many other of the less-popular cable channels, and at some point the math just isn’t going to work for the programmers.

We’ve seen a similar phenomenon once before. We saw a gradual erosion of home landline telephones after the advent of the cellphone. But after a few years of gradual declines we saw a deluge of people dropping home telephones. You could barely turn on a TV without hearing about how having a home telephone was a waste of money, and so it became the popular wisdom that home phones weren’t needed. The same thing could happen with skinny bundles and the industry could be transformed in a short period of time if tens of millions of homes downsize their cable bundle. It is going to happen, we’ll just have to wait and see how fast and to what degree it’s going to occur.