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Cord-Cutting Accelerates, Raising Pressure on Cable Providers

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02/19/2020 | 05:09pm EDT

By Lillian Rizzo and Drew FitzGerald

The pace at which people are abandoning traditional pay-TV packages accelerated by more than 70% last year, as prices continued to rise and consumers gravitated to more affordable streaming options.

Large cable and satellite companies lost about 5.5 million traditional pay-TV customers last year, a roughly 8% decline, according to public filings. The numbers -- which exclude smaller providers that have yet to report results for the entirety of 2019 -- are much larger than the loss of 3.2 million subscribers in 2018.

Traditional pay-TV customers are expensive for cable companies to keep, between installation and equipment costs and the ever-rising price of programming, which has led cable and satellite providers to raise their rates. Analysts predict more American households will cut the cord this year.

"Cable companies have made peace with the idea of customers leaving if they want to," said Craig Moffett, an analyst at MoffettNathanson. "The companies will accept programming price increases and pass it onto consumers, accelerating the downward spiral of pay-TV."

Leading cable-TV providers Comcast Corp., Charter Communications Inc. and Altice USA Inc. together lost roughly 1 million pay-TV customers in 2019, according to public filings.

Satellite providers shed even more accounts, led by AT&T's DirecTV. The telecom giant ended 2019 with 3.4 million fewer satellite and fiber-optic TV connections in the U.S. Rival Dish Network Corp. lost more than 500,000 satellite subscribers over the same time frame.

TV package rates have increased steadily over the years, due in large part to rising yearly programming expenses. Much of those cost increases stem from live news and sports channels, two segments that have kept customers stuck to the traditional pay-TV experience.

"It's hard to fully satisfy a sports fan with the offerings available," on virtual TV-streaming services, Mr. Moffett said.

Smaller cable companies are contending with the same challenges, said Dave Shull, chief executive of set-top box provider TiVo Inc.

"These cable companies are seeing very little margin, which is very frustrating to them," Mr. Shull said. "The bundle is breaking down as a result of these massive price increases."

Pay-TV providers are also competing for subscribers with more streaming services. Existing platforms including Netflix Inc., Hulu and Amazon.com Inc.'s Prime Video were joined by Walt Disney Co. 's Disney+ and Apple Inc.'s Apple TV+ late last year. Later this year, Comcast Corp. 's Peacock and AT&T Inc.'s HBO Max will make their debut.

Cable giant Comcast said its average cable bill would increase 3.6% in 2020, compared with a 3.3% rise in 2019. Meanwhile, Altice, which operates under the Optimum and Suddenlink brands, said cable-TV prices increased 4% to 5% recently, higher than its historical average of between 3% and 3.5%.

Comcast, which lost 733,000 cable customers in 2019, said during a recent earnings call that it expects more pay-TV losses in 2020 on the back of rate increases, and the consumer shift to streaming platforms.

"This is just the new normal," said Jennifer Fritzsche, a telecom analyst at Wells Fargo Co. "People don't need 500 channels, so the skinnier bundle is winning out."

But so-called skinny bundles haven't picked up all of the slack as they struggle with the same input costs. Dish's Sling TV gained some customers over the past year but shed accounts for the first time last quarter. AT&T's streaming TV bundle also lost customers. PlayStation Vue, a TV bundle from Sony Corp., closed down in late 2019 because of high costs.

Most internet-based cable alternatives also raised prices. Sling TV's basic monthly rate has climbed to $30 today from $20 in late 2015. Online TV from AT&T started at $35 a month when it launched in 2016. Its equivalent now costs $65 a month.

Hulu illustrated the widening gulf between traditional channels and newer streaming options by twice raising the price of its live TV service last year. The cost of Hulu + Live TV is now $54.99, $15 higher than its rate at the start of 2019.

One silver lining for cable companies: They are signing up more broadband subscribers, who have a stronger positive impact on financial margins.

Charter Communications Inc., which operates the Spectrum brand, referred to its cable-TV business as a complement for broadband customers. The company has said cable-TV customer losses aren't material to driving its business model.

Despite the losses, pay-TV monthly average revenue per customer, on a quarterly basis, has remained steady across the providers -- often with small increases.

In some cases, cutting the cord is leading to higher average revenue per user in broadband. Recently, Altice said that when a customer ditches its cable-TV subscription, or switches to a lower-priced TV offering, the money being saved often goes toward a more expensive, higher-speed tier of broadband.

Comcast in particular has pivoted away from chasing unprofitable cable-TV customers, and instead is focusing on its broadband customers and higher-end traditional TV customers. The company recently began providing Flex, its streaming device, free for its broadband-only customers.

Comcast's strategy apart from cable-TV also includes launching its own streaming platform. The company's NBCUniversal unit will release Peacock to Comcast and Cox Communications Inc. customers in April, and will be available to all U.S. consumers in July.

Write to Lillian Rizzo at Lillian.Rizzo@wsj.com and Drew FitzGerald at andrew.fitzgerald@wsj.com


Stocks mentioned in the article
ChangeLast1st jan.
ALTICE USA, INC. -3.52% 21.515 Delayed Quote.-18.47%
APPLE INC. -1.15% 242.197 Delayed Quote.-16.59%
AT&T INC. -2.78% 27.97 Delayed Quote.-26.41%
CHARTER COMMUNICATIONS, INC. -1.16% 430.695 Delayed Quote.-10.19%
COMCAST CORPORATION -1.00% 34.055 Delayed Quote.-23.57%
DISH NETWORK CORPORATION -1.28% 18.7176 Delayed Quote.-46.55%
NETFLIX, INC. -2.44% 361.225 Delayed Quote.14.37%
SILVER -0.39% 14.3875 Delayed Quote.-21.56%
SONY CORPORATION -0.20% 6421 End-of-day quote.-1.26%
TIVO CORPORATION -6.14% 5.96 Delayed Quote.-25.12%
WALT DISNEY COMPANY (THE) -2.79% 94.28 Delayed Quote.-32.95%
WELLS FARGO & COMPANY -2.98% 26.4 Delayed Quote.-49.41%
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Sales 2020 112 B
EBIT 2020 20 894 M
Net income 2020 12 518 M
Debt 2020 89 548 M
Yield 2020 2,66%
P/E ratio 2020 12,7x
P/E ratio 2021 11,4x
EV / Sales2020 2,20x
EV / Sales2021 2,08x
Capitalization 156 B
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