New industry data compiled by Leichtman Research Group shows that broadband ISPs that account for 93% of the U.S. market added over 1.1 million subscribers in Q1 '13, nearly 6 times the 194K pay-TV subscribers that were added in the period by pay-TV operators that account for 94% of the market.
Broadband subscriber additions have outstripped pay-TV's for years, but the 6x ratio is more than double the average of 2.8x from the prior 2 years. The 194K pay-TV additions in Q1 were down 56% vs. the 445K added in Q1 '12, while the 1.1M broadband additions were off 15% from the 1.3M in each of the prior 2 years.
On the surface the data suggests that cord-cutting - a shift from viewing video via pay-TV to via broadband - may finally be taking hold. But while LRG's Bruce Leichtman has indeed found an uptick in his calculations of cord-cutting (up from .2% of U.S. homes to .4%-.5%), he sees a far more nuanced picture of what accounted for Q1's swing, plus lots of uncertainty going forward.
By Bruce's calculations, a business decision by DirecTV was the major culprit for Q1's shortfall. DirecTV's net additions are down by 420K in the past year, contributing to Q1 being the lowest quarter of gross subscriber additions by satellite operators (DirecTV and Dish) in the past 10 years. Bruce believes that DirecTV dialed back its pursuit of lower-spending/higher-churning subscribers because its acquisition costs have risen to nearly $900 per new subscriber, capex for in-home equipment is higher and monthly profitability is lower, due to higher programming and operating costs. All of this makes adding new low value subscribers less attractive.
The effect of DirecTV's action was that the overall pay-TV industry's subscriber growth over the trailing 4 quarters, which has been propped up by low-end acquisitions, dropped by 80K subscribers, the first-time this has ever happened. Whether another pay-TV operator steps in to pick up DirecTV's slack in Q2 and Q3 will inform whether the overall pay-TV industry has transitioned to a "new normal" where broadband growth significantly outstrips pay-TV's.
Another driver of pay-TV numbers will be decisions by lower-income and more entertainment-centric subscribers to stay with pay-TV or not. As noted above, LRG has seen a doubling of its cord-cutting definition over the past couple of years, now amounting to about 500K homes leaving pay-TV annually. In a market with nearly 95 million subscribers that's not a dramatic drop-off, but its acceleration is still noteworthy.
One of the things Bruce is seeing in his data is that despite Netflix's overt messaging to be positioned as an augment to pay-TV, it is sometimes being seen as a substitute, in combination with broadcast (whether via antenna, Hulu, online, etc.). The appeal of "cobbling together" over-the-top online alternatives that save money and are entertainment-oriented has long been on my radar as a cord-cutting catalyst - and once again why Aereo is potentially a big industry disruptor.
It is far too easy to look at the top-line subscriber numbers and conclude a wave of cord-cutting is finally upon us. In truth, the dynamic between pay-TV and OTT is complicated and subject not just to shifting consumer demand but also to the individual quarterly marketing strategies of the industry's largest players. Coming quarters will need to be viewed closely to determine if new trends are emerging and if a tipping point between broadband and pay-TV has actually been reached.