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Analysts: Pay TV industry braces for 'worst' 2nd quarter on record

Given the weak subscriber results the pay TV industry had in the first quarter, analysts are casting a wary eye toward second-quarter results.

John Hodulik, a telecom and cable analyst at UBS Securities LLC, recently predicted the pay TV industry would lose more than 1 million traditional video subscribers in the June quarter, representing "the worst result on record."

And while he noted that several factors are contributing to this expectation, including consumers reacting negatively to price increases and some churn related to consolidation within the industry, Hodulik said, "We believe the availability of cheap live streaming alternatives also played a role."

"The decline in multichannel subs is accelerating," Kagan analyst Ian Olgeirson said in an interview, adding that the "significant" declines recorded in the first quarter serve as a "harbinger of larger losses than we have yet seen in the market."

All told, estimates from Kagan, a media research group within S&P Global Market Intelligence, show the pay TV industry lost 802,000 residential and commercial video subscriptions in the first three months of the year. The figure — which includes cable, satellite and telco TV — does not include over-the-top services such as DISH Network Corp.'s Sling TV and AT&T Inc.'s DIRECTV Now. Factoring in those two offerings, Kagan estimates the industry lost roughly 427,000 video subscribers.

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Bruce Leichtman, president and principal analyst for Leichtman Research Group Inc., said he has no doubt the current quarter's results will be worse than those seen in the first quarter. But he noted that is typical for the industry, regardless of cord cutting. He noted the June quarter is "always the most down quarter of the year."

The pay TV business is somewhat seasonal and customer losses generally rise during the summer as college students and "snow birds," or Northerners with winter residences in the South, disconnect service and return home.

Leichtman, who said he is "not a fan of the term cord cutting," does acknowledge, however, the pay TV industry is changing. But he noted those changes are being driven more by new business decisions by the operators than by evolving consumer choices. "The difference is much more about providers — not cable providers, but principally satellite providers — not as aggressively pursuing customers," he said.

Kagan estimates show the satellite industry, including DISH and AT&T's DIRECTV, collectively lost 291,000 traditional video subscribers during the first quarter. By comparison, a year earlier, the industry had gained 169,000 subscribers. "The satellite providers … are looking for higher value customers. They are not chasing lower value subs the way they used to and that's having a big impact on the market," Leichtman said.

DISH has said since 2016 that because of new over-the-top streaming services, it no longer makes economic sense to chase value-oriented customers. "I think we've just gone to a strategy that says it doesn't make sense for us to invest in a customer if we don't think we're going to get a return," DISH Chairman and CEO Charlie Ergen said in July 2016.

As for DIRECTV, Hodulik noted that the satellite service has been steadily raising prices for its customers. "While it's customary for video players to raise rates at the start of the year, this was the third year in which DirecTV raised rates by 5%+," Hodulik wrote in a research report, noting that these price hikes "drove elevated churn partly because it is easy for consumers to try out cheaper streaming alternatives such as DIRECTV Now and Sling TV."

The customer acquisition costs in the streaming business are generally lower. Ergen estimated that including programming discounts offered to new customers, the acquisition costs for a customer in the linear business is probably over $1,000. DIRECTV Now and Sling are cheaper for the satellite operators in terms of adding new customers.

A number of smaller and mid-size cable operators, most notably Cable One, have decided not to chase video subscribers with heavy promotions. Instead, these operators are pursuing the broadband-first strategy, where high-speed data is their primary business. Leichtman said customers would switch pay TV providers to get a better deal. But if operators are not chasing customers with those offers, a subscriber who disconnects may now choose to stay without a pay TV service and instead rely on over-the-air broadcast and streaming offerings.