OTT’s Success Benefits Cablecos

OTT’s Success Benefits Cablecos
– Broadband Has Become Profitable, Very Profitable
– Losing Pay TV Subs for 9th Straight Year & Paying More in
Content Fees

US cable TV companies are getting about 48% as much revenue
from broadband as they get from pay TV subscriptions,
according to Rider Research’s analysis of actual nine month
numbers from Time Warner Cable, Charter, Cablevision and
Comcast. Numbers from Cox and Bright House are not publicly
available because their stock is not listed on the stock

The four companies have almost the same number of broadband
subscribers as pay TV subscribers — 37.3 million to 41.6
million — but the higher rates they get from pay TV make the
difference — $41.48 per month compared to $77.05 per month.
However, there is no if any content cost for broadband because
the OTT services such as Netflix, Hulu, Apple and Walmart
(Vudu) pay for content, with the exception of ESPN3 which
secured a per broadband subscriber per month fee, similar to
video carriage fees. That means that broadband is likely more
profitable to the cablecos at 48% of the revenue than pay TV.
The costs for building, upgrading and maintaining their
networks are common to both broadband and pay TV. There are
some differences in equipment costs at the head end and in the
home but those differences may be negligible. The biggest cost
differences are in the costs to acquire content and to get
that content to each cablecos various head end by satellite

Consequently, pay TV services continue to balk about increases
in content costs and often edge close to the cliff of losing
the content, at least temporarily, to keep their costs down.
9 months totalBroadbandPay TVSubscribers in millionsRevenue in
billions $Subscribers in millionsRevenue in billions $Time
Warner Cable11.314.4112.348.47Charter
st19.037.1122.0015.079 months total37.3113.9341.6228.86As a %
of pay TVAs a % of broadband90%48%112%207%ARPU per monthARPU
per month$41.48$77.05

In a fashion, pay TV operators run their own OTT services — TV
Everywhere. However, they are not currently charging extra for
the service but are doing it to keep their pay TV subscribers
from spending too much time watching OTT videos or, gasp!,
from cutting the cord. They insist that TV Everywhere viewers
authenticate that have a pay TV subscription for each channel
that they want to watch.

There has been talk about broadband service providers charging
extra for guaranteed bandwidth to deliver flicker- and buffer-
free OTT videos, the chargers to be paid by either the
subscriber or the OTT service. It’s not clear how they would
explain that their pay TV subscribers get flicker- and buffer-
free TV Everywhere but not the OTT services.

Cablecos Benefit from Increased OTT Usage & Video Quality
In fact, it’s to the cablecos’ advantage for OTT services to
succeed — and to offer higher video quality that whet their
broadband subscribers’ appetite for faster broadband. Except
where a telco has gone all-fiber, cablecos have the fastest
broadband of them all so in an all-OTT world, they would end
up with the most broadband subscribers and even be able to
charger rates that are higher than the telcos. Of course,
that’s not what they’re currently hoping for, which is that
all the OTT services would disappear. But that’s not likely to
happen, is it?

So, who will OTT viewers call when they want more speed? At
least one major cableco, Cox, and probably all of them are
touting that their higher broadband speeds, compared to the
telcos,’ allows for buffer-free viewing and says the telcos’
DSL broadband cannot. The actor in its TV commercials call
buffering interruptions “bonding time.”


What’s preventing the cablecos from charging more for
broadband than they do now? It’s probably the phone companies
who charge less for their slower broadband in areas where they
still use their older DSL copper wire technology.

However, with an increasing number of OTT subscribers, all of
whom will want pay-TV equivalent video quality, the cablecos
can probably sell upgrades to speeds that the telcos cannot
offer over their DSL broadband networks. One cableco is offer
a one-notch-up speed increase if the subscribers agree not to
cancel the service for two years. Other cablecos are beginning
to either sell STBs to subscribers or let them buy one from a
third party.

The four cablecos we studied lost about 180,000 pay TV
subscribers in the first nine months of 2012, mostly to the
telcos. They have not lost any meaningful numbers to OTT
services although OTT services are taking away viewing hours
from pay TV. Most consumers still consider OTT as
complimentary to pay TV, not as a replacement.

During the same period the four cablecos added 160,000
broadband subscribers, about the same as the pay TV
subscribers they lost. The money keeps rolling in

One other Point
Broadband has become an enormous and highly profitable
business in its own right. For example, Comcast has taken in
almost $20 billion from it in the first three quarters of
2012. That’s over $26 billion on an annualized basis — and the
number of broadband subscribers continues to increase. If the
cablecos can figure out how to charge more for broadband, not
that anyone wants to see their monthly rate increase,
broadband will be able to generate more revenue for them than
pay TV, although this is likely to not occur in the near

Note: The three big US telcos do not reveal their broadband
and pay TV numbers as the cablecos do. We’re still working on
breaking the code.

US Cablecos Still Losing TV Subs
US cablecos had a net loss of 460,000 pay TV subscribers in
the third quarter of 2012, according to an “IHS Screen Digest
Television Intelligence Report,” which estimates that for the
full year 2012, their subscribers will decline to 56.6
million, down 3% from 58.4 million in 2011. This compares to a
2.8% contraction in 2011.

IHS blames the losses on IPTV-based pay TV service from
Verizon FiOS and AT&T U-verse but DirecTV has also been
reporting subscriber gains.

IHS said the good news for US cablecos is that the Q3 2012
results were their best third-quarter performance in terms of
pay TV subscribers in at least two years. They lost 512,000 in
the third quarter of 2011 and 739,000 during the same period
in 2010. They also had a net loss of 599,000 in the second
quarter of 2012.

“US cable operators in the third quarter trimmed their video
subscriber losses by using heavy promotional bundles as well
as service initiatives such as TV Everywhere, which offers
features like live linear streaming of cable networks in-home
and video-on-demand service in and out of home, through the
open Internet,” said Erik Brannon, analyst for television
research at IHS. “However, subscriber numbers still decreased
in the third quarter because the attractiveness of Over-The-
Top (OTT) services delivered over the open Internet, and an
ailing economy also dissuaded a portion of new households from
even considering taking a pay-TV subscription. These new
households that are eschewing pay-TV in favor of OTT — which
could be called ‘cord nevers,’ rather than ‘cord cutters’—
represent a lost segment of the market for pay-TV operators.”

Brannon said 2012 will represent the ninth consecutive year of
decline in US cable TV subscribers, going back to 2004. The
pay TV portion of the cablecos’ business continues to
struggle. However, US cablecos are making gains in two other
endeavors at the telcos’ expense: broadband and telephony.

It said their broadband subscribers increased in the third
quarter by 983,000, while telephony increased by 276,000.
These gains mean that total US cablecos’ subscriber revenue
generating units (RGUs)—including video, data and voice —
ticked up 0.4% in the third quarter compared to the second.

Isn’t it odd that the cablecos’ strength and growth has turned
out to be broadband and telephony, once the telcos’ strengths
— and not pay TV where the US telcos are expanding and
cablecos are losing subscribers.

About the Author

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