Cable TV subscribers in historic decline

Industry hit, but prognosis positive

 
(Photo: Pieter D'hondt/Getty)
(Photo: Pieter D’hondt/Getty)

You’ve probably heard of cord cutters, that segment of consumers who are cancelling their cable TV subscriptions in favour of online-only connections. But how about “cord nevers”? This is the name given to those who don’t sign up for cable in the first place and they may be increasingly responsible for declining cable subscriptions.

That is among the findings of a new report from Englewood, Colo.-based research firm IHS which shows Canadian cable providers lost over 10,000 subscribers in Q2, making for three straight quarters of losses (satellite has recorded losses for five straight quarters). It’s a historical first. Growth for cable has been negative for seven straight quarters, while that for IPTV has been positive for nine consecutive quarters, also according to IHS.

Some of the losses appear to be coming at the hands of IPTV providers, the big two of which are Bell and Telus. But they’ve also been coming from people ditching their TV subscriptions altogether, which helps explain the overall loss for the industry. “People are deciding just to do without cable or going with an OTT (over-the-top) option,” says Mario Mota, head of research and consulting firm Boon Dog Professional Services. “And then you add it all up and you get a net decline. It’s pretty small, but the fact you’ve got three consecutive quarters of decline is a big deal.”

Part of the problem may be demographic in nature. Erik Brannon, analyst with IHS, thinks the market is saturated and that the paradigm shift underway in the U.S.—where young people who matured in a post-2008 climate of cord shaving are now moving on to cord cutting—is happening in Canada but just to a lesser degree.  This is a group that is satisfied entertaining itself with social media and YouTube, while relegating pay TV to a more secondary role in their lives—if at all. “It is of our opinion that children in newly forming households are made up of people who have a tradition in this newly forming lifestyle,” says Brannon.

Between Q1 and Q3 Rogers recorded a net decline of 20,000 subscribers, according to a review of quarterly statements. Shaw recorded a net decline of about 96,000 subscribers between its fiscal Q1 and Q3. By contrast, IPTV provider Telus has seen an increase of 65,000 in that same period of time, while Bell’s last quarter was its strongest yet for its Fibe TV offering at 50,000 new subscribers. (This helped offset significant, ongoing declines in its satellite business.)

IHS-Figure-Chart_new

Nevertheless, both Rogers (which owns Canadian Business Online) and Shaw have maintained the profitability of their cable units, with operating margins hovering comfortably around the 48%-49% level. Internet service growth also continues to be strong with consumers opting for bigger and faster packages as their usage climbs, compensating to a degree for cable TV losses.

It’s a “nice to have,” and Rogers’ SVP content David Purdy says as much, but he concedes that no one ever likes to see subscribers and market share go. And neither Rogers nor Shaw plan to go quietly. “We have pretty significant plans in place to address both our traditional and non-traditional competitors,” he says. “And we’re very focused on it.”

These include rolling out new pricing and packaging that target market segments most at risk of dropping out of the cable ecosystem—youth, low income and seniors. In November 11, for instance, Rogers test marketed an à la carte cable offering in London, Ont., a service area covering about 200,000 people. Purdy says the number of people who opted-in to a la carte service numbered in the “single thousands,” but the test provided some key learnings. “We’re using that to inform our pricing and packaging strategies on a go forward basis,” says Purdy, adding that some related announcements can be expected this fall.

It may be a welcome relief from the promotional wars that have racked the industry for some time and tend to exert downward pressure on margins. In a June conference call, Jay Mehr, Shaw’s VP operations, said the company would be lowering its promotional activity going forward. “We are benefiting from the move from 12-month promotions to 6-month promotions to 3-month promotions and so the customer base is settling down nicely from a revenue perspective.”

Purdy says, “We’re seeing aggressive pricing in the marketplace and in some cases we’re seeing overly aggressive pricing in the marketplace that would indicate some level of desperation.”

But as the numbers indicate, a majority of the subscriber losses would appear to be migrants to Bell and, to a lesser extent, Telus, rather than cord cutters. Not surprisingly, Rogers says it is “focused” on Bell and is responding with a technology solution it hopes will trump the widely hailed flexibility of IPTV service. Says Purdy, “We’ve been doing a number of things to get our hybrid fibre and cable system to a level where, both on broadband and on TV, we have a superior product in market.”

Making its OTT-immune Sportsnet offerings available across multiple devices at any time, increasing the number of movie/TV titles available on-demand and the ongoing rollout of the Nextbox 3.0, a beefy digital PVR, form the other pillars of the strategy. “We’re triangulating right at the heart of our telco competitor,” says Purdy.

For its part in the consumer market, Shaw is responding with its own digital PVR, the Gateway, and offering consumers a new type of service agreement that includes the PVR hardware on a two-year contract similar to that for phones. One advantage is that it attracts customers who can’t front the large up-front cost, but then brings predictability and stability to Shaw’s revenue. “This will be our first ever structured hardware deal … and it really allows us in a consumer-friendly way to continue our step-by-step approach to move away from promotional activity and towards value for money,” said Mehr.

How well these efforts are working remains to be seen, although the IHS’ Brannon says even à la carte pricing, which the IPTV providers have also dabbled in, hasn’t led to a decrease in the rate of subscribership decline he expected to see.

This perhaps suggest that the recent surge in subscriber losses is secular. That’s the bad news for the telcos. But the good news is that between pricing and service innovations, the “Internet hedge” and a so far demonstrated ability to maintain margins and average revenue per user (ARPU), the system isn’t in trouble. Says Brannon, “The total number of subscribers leaving pay TV is going to be so low that increases in ARPU are going to make the transition of these folks away from pay TV virtually a small blip on the radar.”

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