4Q11: Was That a Jump?

Or Just a Bump?

 

With apologies to Lyle Lovett, we just don't know.

Neither does the Street.

Data from the fourth quarter of 2011, showed distinct signs of life for the traditional pay TV business.  The top 12 publicly reported companies closed a net gain of more than 360,000 subscribers.   (Those "public" companies include numbers for Insight, released by new owner Time Warner Cable shortly after the purchase closed in February.)

The gain came mostly courtesy of the usual suspects as AT&T U-verse, DIRECTV and Verizon FiOS all scored upsides.  In the surprise category, DBS' DISH Network also came out in the plus column after a depressingly long string of losses with five out of the previous six quarters ending in the red.  DISH closed the three month period with 22K net new subscribers, causing a muted jig on Wall Street.  Wrote ISI's Vijay Jayant and Judah Rifkin, the numbers should "give investor confidence that DISH is on its way to 'righting the ship,' or at least, steering the company from a precipice of continued sub losses."

Also on the plus side of the ledger is a loss or, more accurately, a lesser loss:  Cable giant Comcast closed its 2011 books with a 4Q basic video losses of just -17,000 v. -135,000 for the year-earlier period.

 This helped elicit some near-giddy responses ("Even the bulls didn't see this coming," said Bernstein Research's Craig Moffett) as Comcast sweetened the pot further with a dividend increase and a strong share repurchase program.

Will Housing Help?

 

So the overall feeling was good, and analysts, investors and just plain observers all crossed their fingers that the decent reports on basic pay subscribers might signal the long-awaited uptick in housing.  Noted the ISI analysts:  "Given the fact that Comcast – as the largest MSO in the land – is most representative of the general demographic posture of the U.S. compared to other cable operators, we believe that while early, one might be able to conclude that video strength could have been driven by renewed strength in the housing sector, which, if true, would be a good thing for the entire Pay-TV industry."

The latest data on housing, however, is mixed at best. (The U.S. National Association of Realtors reported that home sales fell 0.9% in February.) And in the end, as noted by Moffett, on a net subscribers base of ~100M U.S. pay TV households, subs gained by traditional pay TV players in Q4 "is literally and figuratively a rounding error."

Broadband Equation

 

If the jury is still out on video, there was no such problem for broadband.  The top 12 two-way players (including U-verse and FiOS) added more than 1M net net high-speed internet subscribers in the fourth quarter ... with cable giant Comcast rolling in in with more than 30% (336K) of the total.  "Just when you thought that HSI couldn’t get any better...it does," wrote ISI's Jayant and Rifkin.
In second place was Verizon FiOS which added 201K net new HSI subs.  AT&T U-verse took third place with an additional 187K HSI subs added within its video footprint. 

For folks on the satellite side of the equation, these broadband gains are hardly the stuff of good cheer.  The lack of a two-way pipeline (for now anyway) has lead to a generally down view of the industry's potential.  In Moffett's opinion, for example, the DBS play has little room to grow.  In fact, he says, the business appears to be in the "late, and perhaps last, stages for growth." 

DIRECTV and DISH are both pedaling hard on plans to add broadband to their mixes:  Both offer extensive two way services, albeit over other people's pipelines and both have game plans to make broadband a bigger part of their mix.  
For DISH, those plans rely heavily on deals made with DBSD North America and TerreStar Networks across the last year.  DISH hopes to use spectrum from those two entities to build a hybrid satellite/terrestrial wireless network to complement its nationwide video service.  Unfortunately for the Charlie Ergen enterprise, the FCC put bureaucratic brakes on the plan as it turned down DISH's request for waivers needed to spur its development and opted instead for a rule making process.  This, DISH noted drily, will likely delay the FCC stated mission to find new spectrum for wireless services. 

As for DBS heavyweight DIRECTV, no one (outside of the executive suite) knows exactly when or how a broadband plan will emerge ... but virtually all observers insist that such a plan is in the works.  For one thing, rumors continue to swirl around a DTV streaming service, which would, of course, require broadband.  Observers note that the giant signed a three-year extension of its alliance with AT&T back in November and talk of a larger AT&T/DIRECTV deal continues to circulate.

Voice Holds Its Own

 

The third leg of the triple play option continues to gain strength on the wireline side.  For the fourth quarter 2011, the 10 largest MSOs (including the now-absorbed Insight,) gained just 399K net new VoIP subscribers.  That's down from the 4Q10 gain but still a strong showing. 

In sheer numbers, Comcast, as usual, led the pack with 146K net new voice subs gained across the quarter. 

While wireline voice continues with steady gains, the increasingly high-stakes wireless space remains in turmoil.  One early bet from cable companies Comcast, TWC and Bright House – Clearwire – has been shaken but a very visible investor defection as Google sold its stake in late February.  That left majority owner Sprint Nextel on the hook a large chunk of cash to bail the company out of an estimated $2B hole.  (The cable partners have shown little stomach for further investment)
While observers mostly believe that Sprint will ride (again) to the rescue, the cable players have veered off into another direction , this time via a massive deal with Verizon Wireless.  The $3.9B agreement would have Verizon purchasing spectrum from the three Clearwire partners plus Cox Communications.  As part of the deal, the group signed on for a joint marketing arrangement which has already resulted in a cable presence in some Verizon Wireless stores.

Of course, the FCC is involved.  Equally of course, competitors are screaming both about the spectrum and the marketing deal.  For the moment, the concentration is on keeping the marketing deal out of FCC investigations.  But stay tuned ... this one is sure to keep the waters roiling.•

Just the Numbers: 3Q10 ~ 4Q11

 

The Cable Center Bibliography

 

If you are interested in reading more about this topic the following is a selection of additional periodicals provided by The Cable Center’s Barco Library.  Dedicated to chronicling cable’s varied and colorful history, The Barco Library houses the largest collection of cable telecommunications equipment, photographs, and marketing and informational materials in the industry.  

Visit www.cablecenter.org for more information.

Crowe, Deborah. “Ad Sales Boost Crown Media’s Quarter” Los Angeles Business Journal (February 24, 2012)

Sherman, Alex. “Cablevision Declines After Forecasting Lower Free Cash Flow in 2012” Bloomberg Businessweek (February 28, 2012)

Szalai, Georg. “Liberty Media Reports Mixed Fourth-Quarter Results for Starz” Hollywood Reporter (February 23, 2012)

“The Death Knell for Interactive TV Advertising?” Multichannel News (February 22, 2012)

Farrell, Mike. “Rutledge Sees Potential In Charter Footprint: New CEO Says Unsold Passings are "Big Opportunity" Multichannel News (February 27, 2012)

Crupi, Anthony. “CAB Touts Another Killer Year for Cable - Ad-supported nets take in $22.1 billion in ad sales revenue” Adweek (February 27 2012)

Krause, Reinhardt. “Comcast Video Gains Turn On Cable Industry Stocks” Investor’s Business Daily (February 15, 2012)

Eggerton, John. “NAB Says Time Warner Cable Q4 Earnings Tell Retrans Story:  Group Calls It Laughable to Suggest Broadcasters Responsible for Higher Cable Rates”  Multichannel News, (January 27, 2012)

Farrell, Mike. “Comcast Pares Q4 Video Losses, Loses Just 17,000 basic Customers in Q4, vs. -135,000 in 2010”
Multichannel News, (February 15, 2012)

Lieberman, David. “Big Media Q4 Corporate Earnings Roundup: Can Moguls Stop Worrying About Cord-Cutting As The Economy Improves?”  deadline.com, (February 20, 2012)

Miller, Hugo. “Rogers Fourth-Quarter Profit Advances 8.3% on Wireless Gains”
Bloomberg Businessweek, (February 22, 2012)

Lee, Edmund. “Discovery Communications Profit Rises 76% on Strong Ad Sales”
Businessweek, (February 16, 2012)

Hot Spots ... Put These on Your Radar

 

One helpful thing about the media biz (at least for those of us who write about it) ... it never lacks  for controversy, speculation and rumor.  Or, of course, change.

To keep up, and keep your business on track, you need a score card.  Here's the latest from The BRIDGE ...

Online TV:  This one is so obvious we're almost embarrassed to include it.  But it affects everybody ... and nobody really knows quite where it's going.

Some observers (primarily those hailing from the Silicon Valley or current or wanna-be non-traditional services) insist that online TV is poised to gobble the traditional pay model.  Just witness, they say, Netflix's 49.1% boost in unique paying subscribers (to year-long average of near 22M) across the past year.  And this despite a widely publicized pricing debacle.  Or consider the gains made by Hulu Plus (much to the horror of some of its backers) 1.5 million paid subscribers in 2011.  And noted Hulu boss Jason Kilar in a blog, "We are attracting more than 2x the number of subscribers each day when compared to this time last year."

On the other side of the equation, however, the numbers show that, far from declining, traditional TV moving is actually growing:  According to Nielsen, primetime households using television bumped up by 2% in 2011; meanwhile, despite its hefty customer rolls, Netflix streaming accounted for only 2% of average total TV minutes.  In addition, recently released numbers from SNL Kagan show that, after several quarters of loss, premium pay services recorded nearly 2.2M subscriber gains in the fourth quarter. 

At this point, the traditional model clearly isn't dead ... or even very sick especially as a host of contracts between programmers and providers continue to insulate the traditional model from the type of havoc which digital services wrecked on audio.
 
Noted Bernstein Research analyst Todd Juenger in a very informative conference call on pay video:  "The video entertainment system will not be blown apart... The content owners (have) successfully resisted the temptation to enable that."

Programming Costs:  Okay, we know ... this one is also a "duh."  But it is a very, very big "duh" when it comes to pay TV bottom lines. 

How big? 

Note this from Vijay Jayant and Judah Rifkin at ISI:  "Programming costs are rising faster than they ever have."  This year, the two say, will likely be the peak ... but 2013 and 2014 will be no picnic.  For its part, DIRECTV expects the already hefty price tag ($11.7B for 2011) to rise by 10% this year; the ISI analysts are pegging a boost of 8.6%.

Of course, any talk about programming costs has to include Disney sports juggernaut ESPN.  The high-price grumbling has always been there but after Liberty's Greg Maffei labeled ESPN's monthly sub fees "a tax on every American household," the grumbling crescendoed.  (Although, to be fair, the problem is not ESPN's alone.  Sports costs, including those of regional sports nets, are soaring all over.)

Today several pay TV ops offer low-cost programming packages without ESPN or pricey regional sports nets.  Don't expect those packages to take off though.  By contract, they can't.  In early February, Disney CFO Jay Rosulo told investors that ESPN's contract with operators require that it be placed on the "first or second most popular tier" offered by carriers.  In short, if those low-price packages become too popular ... presto! chango! ... ESPN jumps in and prices jump up.

Don't expect this one to end easily though.  Consumer groups continue to grumble and, unless the economy picks up considerably, consumers will continue to seek lower prices.  Plus, a word of caution:  In Portugal, where the economy continues to swoon, ZON CEO Rodrigo Costa notes that sports packages have been among the casualties of consumer belt-tightening.

Also on the programming costs plate is the perennial favorite of retransmission costs.  For now it appears that the broadcasters' lobbying prowess is keeping the status quo static ... but the battle continues to get hotter.  As ACA Chairwoman (and WOW! CEO) Colleen Abdoulah claimed at the group's annual meet in Washington, there is "overwhelming evidence that broadcasters are abusing their market power" and plenty of small and large pay TV providers intend to keep hammering this point home. 

Spectrum Wars:  The LightSquared play has been gutted by GPS worries; Charlie Ergen's DISH Network wireless ambitions have been put on hold by FCC rule making; competitors are howling about the billions which several cable companies stand to gain by selling their wireless holdings to Verizon Wireless to say nothing of their cross-promotion marketing deal ... and, while moving like a somnolent snail, the FCC insists that we need more, more, MORE for a wireless broadband future. 

How much more?  No one really knows, of course.  But recently the chairman of the Mobile Future group, Jonathan Spalter, estimated that the nation will hit “spectrum exhaust” in major markets in 2014.

Anyone with a stake in the media businesses should be watching for pitched battles in this space including those mentioned above (LightSquared, DISH Network spectrum battles, plus Verizon Wireless and the cable cos) plus a whole host of issues surrounding streaming video, new devices, emergency services and on and on. 

Broadband Pricing:  Anyone who's been watching growth in broadband usage – and who believes, even halfway, in projections for its growth – will tell you that current pricing schemes cannot last.  Video streaming gobbles up a disproportionate share of bandwidth and somehow operators will need to charge the biggest users lest networks become as crowded, and as fast, as LA freeways.

Enter usage based pricing.  Operators have been tippy toeing their way toward it for quite some time and, after previous failed experiments, Time Warner Cable is making another attempt  The company introduced an "essentials broadband" plan in some south Texas with prices set at $5 below standard broadband tiers and usage limited to 5 GM/month after which overage charges kick in.

Will it work this time?

Maybe not, but watch this as an essential (pun intended) trend for the future.  As Bernstein Research's Craig Moffett commented, "The "most important aspect of the plan is that it familiarizes ALL users with the UBP concept."•