Analysts warn of 'vicious cycle' in rising cable video subscriber losses

The cable broadband business boomed during the coronavirus pandemic as people worked and learned from home. But as vaccines roll out and a return to normalcy seems on the horizon, attention is once again shifting to cable's video segment.

Analysts expect video subscriber losses to accelerate in 2021 as compared to 2020, especially as operators raise prices for customers. With cable's high-margin broadband business continuing its strength, operators have become increasingly willing to shed unprofitable video customers by ending promotions or raising fees to cover programming cost increases.

"The sector is increasingly indifferent as to whether unprofitable customers get their video service from cable companies or a third-party service," S&P Global Ratings credit analyst Naveen Sarma said in a recent report.

Sarma explained that historically, cable companies had subsidized consumers' bills by absorbing a portion of the programming cost increases imposed by network owners. But operators of all sizes are increasingly unwilling to let these video customer subsidies eat into their bottom line. Instead, they are passing on the full programming cost increases — either through price increases or as direct fees for broadcast and regional sports networks.

"The small and midsize cable companies were forced to shift away from this practice to focus on profitability instead of unit growth and began to fully pass these higher rates directly to consumers. Comcast Corp. followed suit more recently and its net pay-TV subscriber losses has nearly quadrupled in just two years," Sarma said.

Comcast's total video customers decreased by 1.4 million in 2020, versus a loss of 733,000 in 2019 and 370,000 in 2018.

MoffettNathanson analyst Craig Moffett called this a "vicious cycle," whereby cable operators are "less and less inclined to 'save' at-risk video subs," and thus raise prices. This, according to Moffett, only leads to further cord-cutting. Network owners, meanwhile, will further raise programming costs to try and offset losses from the smaller subscriber universe. This once again leads to higher costs, and thus more subscriber losses.

The end result, according to Moffett, is a "new video end game" where content owners continue to move more programming and more investment dollars toward their own direct-to-consumer streaming offerings like The Walt Disney Co.'s Disney+ and AT&T Inc.'s HBO Max.

These "video feedback loops point to a radically different future," Moffett said.

While Comcast saw a steady ramp up in subscriber losses in 2020, Charter Communications Inc. was able to "buck the industry trend by increasing video subs slightly in 2020," according to S&P Global Ratings' Sarma, largely due to its strong broadband subscriber growth during the pandemic.

Charter ended 2020 with 16.2 million total video customers, an increase from 16.1 million customers at the end of 2019.

But for 2021, Sarma expects Charter's subscriber losses to increase to 4% as broadband subscriber growth normalizes. "Longer term, we expect Charter to use 'skinny bundle' options to keep its video subscriber losses lowest in the industry," the analyst said.

Charter in 2019 unveiled Spectrum TV Essentials, a $14.99-per-month video service that offers 60 channels but does not include any pricey broadcast and regional sports networks.

Sarma ultimately expects the rate of subscriber losses for the cable industry to rise to 6.6% in 2021, versus a rate of 4.9% in 2020 and 3.9% in 2019.

Comcast reports its first-quarter results on April 29, while Charter follows a day later on April 30.