In the battle for pay-TV subscribers, IPTV beats cable, satellite; but the economy casts doubt over all

editor's corner

Jim O'Neil

We're quickly coming up on earnings season and should soon start to hear the latest company line to explain why cable operators are losing pay-TV subscribers.

A year ago, the headlines focused on the number of U.S. multichannel subscribers dropping for the second straight quarter, down 119,000 after a drop of 216,000 a quarter earlier.

The bright spot that kept those numbers from turning into a complete rout for multichannel video program distributors?

AT&T's (NYSE: T) U-verse added 235,000 subscribers, and Verizon (NYSE: VZ) added 204,000 subs to its FiOS TV service.

And the third quarter is supposed to be one of the good ones because college kids go back to school and sign up with their roommates for big packages loaded with sports and movies.

IPTV and cable subscriber gains, Q2 2011

Click here for details of telecom and cable Q2 subscriber gains.

The past three quarters since then, in fact, have been somewhat underwhelming for cable operators. But telcos, despite slowing down the rollouts of their services, (Verizon currently has a footprint of 16 million homes and eventually wants to get to 20 million, and AT&T earlier this year said its U-verse TV service deployment would slow down in 2011 as it focused on increasing subscriber density) continue to add subscribers.

In the fourth quarter of 2010 and the first and second quarters of 2011, AT&T's U-verse TV service added an average 222,000 subs; Verizon, in the same time frame, added an average of 186,000.

Last quarter, only IPTV posted gains, with an increase of 366,000 subs, said IHS Research. Satellite, by comparison, lost 109,000 subs and cable dropped more than 470,000.

It doesn't take a rocket scientist to understand why cable is losing basic video subs and why IPTV providers are gaining.

In the case of Verizon and AT&T, a core component is simply that the services are underpenetrated... at the moment. That's why both have allowed their expansion to slow and focused on increasing their subscriber wins in areas in which they compete with cable. And, since U-verse and FiOS TV generally are the newest technology to hit markets, they're virtually guaranteed to be able to take away around five percent of existing cable subscribers who are either looking for a change or who are just interested in kicking the tires on a new product.

IHS believes IPTV is in the strongest position among MVPDs and predicts it will see a 7.2 percent compound annual growth rate in the U.S. through 2015.

Researchers at SNL Kagan agree, writing that a telco video's expanding footprints "ensure the industry will remain on a growth trajectory despite the overall weakening in multichannel subscription trends."

But it's not just the footprint, it's the technology that differentiates IPTV.

As Julija Jurkevic, media and communications analyst at SNL Kagan, said in a report in May about IPTV: "The platform is fueling hyper-competition and video service innovation in major markets globally. Telcos often provide the spark igniting consumer interest in multiscreen services, HD and VOD, generating in parallel support for investment in next generation broadband networks."

Screen-in-screen features, interactive capabilities, a deep user guide and seemingly limitless content options are features that cable currently just can't match. And, until they can, consumers who have grown to expect those features as the norm are going to continue to walk away from white-bread cable offerings.

Of course, over-the-top delivery options have impacted all three segments of the pay-TV industry. Netflix, Hulu and a slew of other content providers, combined with an HD antenna to capture over-the-air signals, have made it easier than ever for cash-strapped viewers to walk away from tripe-digit pay-TV bills, bill driven higher by Hollywood's demands for more cash for its programming.

Those increases have led, said Bernstein analyst Craig Moffett, to a situation where "rising prices for pay TV, coupled with growing availability of lower cost alternatives, add to a toxic mix at a time when disposable income isn't growing."

With the economic picture still fuzzy, unemployment rampant and the housing market still in the tank, there's a good chance that this quarter could see another pogrom as consumers look for cheaper alternatives.

And that, said SNL Kagan analyst Ian Olgeirson, remains "the elephant on the room."

A forecast for this quarter?

My crystal ball says cable sees another drop, in the range of 902,000; satellite remains relatively flat, adding about 65,000; and the telcos come in just under a year go with 422,000 new subs (226,000 for AT&T, and 196,000 for Verizon).

What do you think?--Jim