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Fears over pay TV subscriber losses moderate as operator-run streamers grow

The trend of pay TV operators hemorrhaging video subscribers slowed in the second quarter, improving some analysts' views of the industry's outlook.

Traditional pay TV services lost 861,000 net subscribers during the second quarter, as compared to a net loss of more than 1.0 million subscribers in the year-ago period, according to estimates from Kagan analysts Ian Olgeirson and Tony Lenoir. Adding in gains from virtual services such as DISH Network Corp.'s Sling and AT&T Inc.'s DIRECTV NOW, the multichannel universe lost 478,000 net video subscribers, as compared to a 742,000 net loss in the year-ago period. Kagan is a research group within S&P Global Market Intelligence.

While the loss of nearly half a million subscribers is not good news for the industry, that number is less than feared. MoffettNathanson analyst Craig Moffett said in an August research blog that cord cutting — consumers canceling their subscriptions to a cable, telco or satellite video operator — had been expected to accelerate. Instead, losses moderated.

"The more people that cut the cord, the lower the hurdle becomes for everyone else," Moffett said, adding that the growing number of streaming services further heightened cord-cutting expectations.

He believes the tempered declines seen in the second quarter indicate various retention efforts, such as the introduction of live TV streaming services, are keeping customers within the pay TV universe.

DISH's Sling, for instance, saw a net gain of 41,000 subscribers during the second quarter, ending the period with 2.3 million customers. DISH's traditional satellite business lost 192,000 net subscribers, ending the quarter with 10.7 million subscribers. AT&T's DIRECTV NOW tallied 342,000 net adds to reach more than 1.8 million subscribers. Combined with the losses seen at DIRECTV's legacy satellite offering and gains from AT&T's U-verse service, AT&T counted 80,000 total video net adds.

Bruce Leichtman, president and principal analyst at Leichtman Research Group Inc., said in an interview that the two streaming services are "mitigating the losses" in the overall pay TV universe, while also contributing to a "share shift" toward lower-cost virtual services. Leichtman said the shift is a function both of consumers choosing more economical options and providers not chasing lower-value customers.

He believes concerns over subscriber losses were exaggerated in recent years due to the exclusion of live TV streaming services like Sling and DIRECTV NOW, broadly known as virtual multichannel video programming distributors, in industrywide subscriber counts. Only Sling and DIRECTV NOW publicly disclose their subscriber figures; totals for Sony's PlayStation Vue, Hulu Live and Alphabet's YouTube TV remain unreported.

"When some report industry losses and leave this new segment out, it does and has distorted the picture of the industry," he said.

Moffett estimated that after adding in these virtual services, "It's possible that the total number of households paying for a TV subscription in the U.S. … actually grew YOY" for the first time since 2012.

But Kagan's Lenoir said it is still early for too much optimism.

"Yes, the numbers look a bit better than last year, but the losses remain quite elevated," Lenoir said in an interview, adding that "the biggest difference" between last year's second-quarter declines and this year's is that AT&T added 23,000 net U-verse video customers in the second quarter of 2018, versus losing 195,000 in the 2017 period. "Some of this likely is due to aggressive broadband/video bundling promotions," he said.

Between promotions and the emphasis on lower-priced virtual offerings, there is some concern that video providers are swapping higher-revenue traditional video subscribers for lower-priced customers.

AT&T ended the second quarter with a year-over-year increase in video customers but saw overall video entertainment revenues drop to $8.33 billion, down 9% from $9.15 billion.

AT&T Communications CEO John Donovan said the company is monitoring for signs for cannibalization.

"We are watching that very closely," he said, adding that the company is calibrating its products to ensure affordability and engagement for consumers but also value for the company.

"On those lower-end products … the acquisition cost is much lower … and also, the staff costs are lower. The cost to deploy, the cost to maintain is much lower. So over time, as we build those volumes up, those are products that will get scalable margins," Donovan said.

AT&T's streaming products also are expanding to include higher-revenue services. The company is testing a premium streaming product later this year that will give "the full DIRECTV experience" over broadband, according to Donovan, to complement DIRECTV's "top-end product for those who don't want or can't have a satellite dish."