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Pay-TV Stocks Down on Cord Cutting, What Will Q3 Unfold?
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The third-quarter 2017 earnings seasons is picking up with a few companies having already started reporting their financial numbers. In such a scenario, we have witnessed disappointing share price performance and declining subscriber count reports from some of the major U.S. pay-TV stocks – AT&T Inc (T - Free Report) .
Consequently, other stocks like Verizon Communications Inc (VZ - Free Report) , Comcast Corp (CMCSA - Free Report) , Charter Communications Inc (CHTR - Free Report) and DISH Network Corp have also reported a fall in their share price.
On Oct 12, 2017 shares of AT&T declined 6.10% to $35.86, while Verizon’s shares decreased 1.04% to $48.35. Cable companies like Comcast’s shares declined 3.93% to $35.95, share price of Charter moved down 2.58% to $355.71, whereas DISH Network shares plunged 5.07% to $49.03.
AT&T and Comcast have already unveiled their subscriber losses. Let’s take a closer look into their recent updates on their financial numbers: -
AT&T: In its latest filling with the Securities and Exchange Commission, AT&T has reported a loss of 390,000 subscriber in its traditional pay-TV video service, inclusive of 90,000 net video subscribers’ loss, in third-quarter 2017 results.
AT&T blames recent natural calamities such as the multiple hurricanes that hit the U.S. coasts and a devastating earthquake in Mexico for declining subscriber count. Intense competition in traditional pay-TV markets have also affected the count. Subscriber reduction is likely to continue in the fourth quarter as the company is yet to fully restore its operations which were negatively impacted by natural calamities.
On a positive note, the company added 300,000 internet video subscribers on its Over-the-top (OTT) DirecTV Now service. Notably, the company will release third-quarter results on Oct 24, after the closing bell.
Management stated that the company’s consolidated revenues in the third quarter will be affected by $90 million ($210-million pre-tax). Consequently, earnings per share (EPS) will decline 2 cents. Nevertheless, AT&T has reconfirmed its 2017 financial outlook. In January, management projected that its consolidated revenues will grow in low-single digit in 2017. Adjusted EPS growth will be in the mid-single digit range. Adjusted operating margin will expand in 2017. Full-year capital expenditures and free cash flow will be approximately $22 billion and $18 billion, respectively.
Comcast: Comcast is also expected to lose around 100,000-150,000 video subscriber in the third quarter. Comcast is among the few top pay-TV operators with the capaability to expand video base amid an acceleration of cord-cutting in the last 18 months. The operator added 161,000 customers in 2016 and ended the first six months of 2017 adding another 8,000 pay-TV subscribers, despite record industry attrition in the second quarter of 2017
Notably, the third quarter of any year is generally known for weak seasonality in the pay-TV segment.
Why the Downturn?
The major reasons behind the subsequent fall in share price are cord-cutting and increasing competition from online video streaming service providers in the domestic pay-TV industry. Moreover, the industry is currently witnessing massive consolidation.
Let’s have a closer look at the current doldrums in the U.S. pay-TV industry.
Cord-Cutting: In the last 3-4 years, the internal dynamics of the U.S. pay-TV industry have been gradually shifting from cable-TV operators to large telecom operators and low-cost OTT service providers. The industry has been losing customers to wireless telecom operators and online streaming service providers. Online video streaming providers such as Netflix Inc (NFLX - Free Report) , Hulu.com, YouTube etc., have become a severe threat to cable-TV operators because of their extremely cheap source of TV programming. Moreover, this business model is gaining momentum, even during economic uncertainties.
In the second quarter of 2017, Comcast lost34,000 video customers and 22,000 voice customers, while Charter Communications lost 90,000 video customers. DISH Network lost 196,000 pay-TV subscribers in the said quarter compared with a loss of 281,000 in the year-ago quarter.
The trajectory of subscriber losses in pay TV continues to signify an unprecedented annual decline.
Saturation: The domestic multi-channel video market has also become extremely saturated, where spectrum crunch has become a major issue in the domestic telecom industry. Most of the carriers are finding it difficult to manage mobile data traffic, which is growing by leaps and bounds. The situation has become acute with the growing popularity of iPhone and Android smartphones as well as rising online mobile video streaming, cloud computing and video conferencing services.
Internet-TV Services’ Failure to Stand against OTT: In order to cope with the loss and remain competitive in the market, pay-TV operators have started offering internet TV services with selected TV channels at cheaper rates. The Internet TV service, launched by leading pay-TV operators in the United States, has been gaining market traction since 2015. Nevertheless, the pay-TV operators are yet to find out an appropriate trade-off between these two types of services. Making online ventures more attractive is resulting in more subscribers for the new services at the expense of traditional pay-TV business model.
Ultimately, cord cutting due to Internet TV is yet to stop, which is currently the biggest threat for pay-TV operators. In terms of customer retention, legacy pay-TV operators are yet to cope with the onslaught of low-cost online video streaming service providers. Hence, how long will they succeed in saving the companies from subscriber loss still remains a question.
Telecom Operators & Cable TV Operators - Segment Overlapping: Competition is intense as both basic phone service providers and cable-TV operators are increasingly entering into each other’s territory. While Verizon and AT&T have long been servicing customers with fiber-based video networks, leading cable companies like Comcast and Charter Communications are venturing into wireless arena.
Currently, both companies are negotiating with national wireless carrier Sprint Corp (S - Free Report) for a possible MVNO (mobile virtual network operator) deal or an outright purchase of Sprint. Meanwhile, AT&T has strengthened its pay-TV services after the acquisition of largest satellite-TV operator DirecTV.
Research Firm Opinions’: Research firm RBC predicted that customer churn in the legacy pay-TV segment could soon accelerate to around 5 million a year. In June 2017, research firm SNL Kagan had predicted that the U.S. pay-TV industry (comprising cable, satellite and IPTV operators) will lose approximately 10.8 million customers by 2021. Total pay-TV subscribers will be around 82.3 million at that time, which will be 20% less than the industry’s historical high level. Last month, Research firm RBC predicted that customer churn in the legacy pay-TV segment could soon accelerate to around 5 million a year.
Why Should You Still Hold Onto the Pay-TV Stocks?
Despite the dismal picture, pay-TV operators currently enjoy certain positives. The cable multi-service operators (MSOs) in the United States have successfully maintained their lead over telecom operators in the high-speed broadband (Internet) market. Moreover, to stay ahead in the competition, cable companies are introducing latest technologies like DOCSIS 3.1 technology. DOCSIS (Data Over Cable Service Interface Specification) is a communications protocol that allows cable MSOs to provide high-speed broadband connections.
Meanwhile, several research firms have estimated that major pay-TV operators who offer both traditionally managed TV services and next-generation online services will hold nearly 80% of the market share till 2022. In June 2017, research firm Strategy Analytics estimated that annual spending on subscription video and TV services in the United States will reach $130.3 billion in 2019.
Bottom Line
The presence of online video streaming providers is posing significant threat to the existing pay-TV business model. Video offering, which represented the core business function of cable-TV operators, is losing popularity. At this juncture, pay-TV operators must revamp their business model otherwise they may gradually lose market share.
4 Stocks to Watch after the Massive Equifax Hack
Cybersecurity stocks spiked on recent news of a data breach affecting 143 million Americans. But which stocks are the best buy candidates right now? And what does the future hold for the cybersecurity industry?
Equifax is just the most recent victim. Computer hacking and identity theft are more common than ever. Zacks has just released Cybersecurity! An Investor’s Guide to inform Zacks.com readers about this $170 billion/year space. More importantly, it highlights 4 cybersecurity picks with strong profit potential.
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Pay-TV Stocks Down on Cord Cutting, What Will Q3 Unfold?
The third-quarter 2017 earnings seasons is picking up with a few companies having already started reporting their financial numbers. In such a scenario, we have witnessed disappointing share price performance and declining subscriber count reports from some of the major U.S. pay-TV stocks – AT&T Inc (T - Free Report) .
Consequently, other stocks like Verizon Communications Inc (VZ - Free Report) , Comcast Corp (CMCSA - Free Report) , Charter Communications Inc (CHTR - Free Report) and DISH Network Corp have also reported a fall in their share price.
All the above-mentioned companies currently carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
On Oct 12, 2017 shares of AT&T declined 6.10% to $35.86, while Verizon’s shares decreased 1.04% to $48.35. Cable companies like Comcast’s shares declined 3.93% to $35.95, share price of Charter moved down 2.58% to $355.71, whereas DISH Network shares plunged 5.07% to $49.03.
AT&T and Comcast have already unveiled their subscriber losses. Let’s take a closer look into their recent updates on their financial numbers: -
AT&T: In its latest filling with the Securities and Exchange Commission, AT&T has reported a loss of 390,000 subscriber in its traditional pay-TV video service, inclusive of 90,000 net video subscribers’ loss, in third-quarter 2017 results.
AT&T blames recent natural calamities such as the multiple hurricanes that hit the U.S. coasts and a devastating earthquake in Mexico for declining subscriber count. Intense competition in traditional pay-TV markets have also affected the count. Subscriber reduction is likely to continue in the fourth quarter as the company is yet to fully restore its operations which were negatively impacted by natural calamities.
On a positive note, the company added 300,000 internet video subscribers on its Over-the-top (OTT) DirecTV Now service. Notably, the company will release third-quarter results on Oct 24, after the closing bell.
Management stated that the company’s consolidated revenues in the third quarter will be affected by $90 million ($210-million pre-tax). Consequently, earnings per share (EPS) will decline 2 cents. Nevertheless, AT&T has reconfirmed its 2017 financial outlook. In January, management projected that its consolidated revenues will grow in low-single digit in 2017. Adjusted EPS growth will be in the mid-single digit range. Adjusted operating margin will expand in 2017. Full-year capital expenditures and free cash flow will be approximately $22 billion and $18 billion, respectively.
Comcast: Comcast is also expected to lose around 100,000-150,000 video subscriber in the third quarter. Comcast is among the few top pay-TV operators with the capaability to expand video base amid an acceleration of cord-cutting in the last 18 months. The operator added 161,000 customers in 2016 and ended the first six months of 2017 adding another 8,000 pay-TV subscribers, despite record industry attrition in the second quarter of 2017
Notably, the third quarter of any year is generally known for weak seasonality in the pay-TV segment.
Why the Downturn?
The major reasons behind the subsequent fall in share price are cord-cutting and increasing competition from online video streaming service providers in the domestic pay-TV industry. Moreover, the industry is currently witnessing massive consolidation.
Let’s have a closer look at the current doldrums in the U.S. pay-TV industry.
Cord-Cutting: In the last 3-4 years, the internal dynamics of the U.S. pay-TV industry have been gradually shifting from cable-TV operators to large telecom operators and low-cost OTT service providers. The industry has been losing customers to wireless telecom operators and online streaming service providers. Online video streaming providers such as Netflix Inc (NFLX - Free Report) , Hulu.com, YouTube etc., have become a severe threat to cable-TV operators because of their extremely cheap source of TV programming. Moreover, this business model is gaining momentum, even during economic uncertainties.
In the second quarter of 2017, Comcast lost34,000 video customers and 22,000 voice customers, while Charter Communications lost 90,000 video customers. DISH Network lost 196,000 pay-TV subscribers in the said quarter compared with a loss of 281,000 in the year-ago quarter.
The trajectory of subscriber losses in pay TV continues to signify an unprecedented annual decline.
Saturation: The domestic multi-channel video market has also become extremely saturated, where spectrum crunch has become a major issue in the domestic telecom industry. Most of the carriers are finding it difficult to manage mobile data traffic, which is growing by leaps and bounds. The situation has become acute with the growing popularity of iPhone and Android smartphones as well as rising online mobile video streaming, cloud computing and video conferencing services.
Internet-TV Services’ Failure to Stand against OTT: In order to cope with the loss and remain competitive in the market, pay-TV operators have started offering internet TV services with selected TV channels at cheaper rates. The Internet TV service, launched by leading pay-TV operators in the United States, has been gaining market traction since 2015. Nevertheless, the pay-TV operators are yet to find out an appropriate trade-off between these two types of services. Making online ventures more attractive is resulting in more subscribers for the new services at the expense of traditional pay-TV business model.
Ultimately, cord cutting due to Internet TV is yet to stop, which is currently the biggest threat for pay-TV operators. In terms of customer retention, legacy pay-TV operators are yet to cope with the onslaught of low-cost online video streaming service providers. Hence, how long will they succeed in saving the companies from subscriber loss still remains a question.
Telecom Operators & Cable TV Operators - Segment Overlapping: Competition is intense as both basic phone service providers and cable-TV operators are increasingly entering into each other’s territory. While Verizon and AT&T have long been servicing customers with fiber-based video networks, leading cable companies like Comcast and Charter Communications are venturing into wireless arena.
Currently, both companies are negotiating with national wireless carrier Sprint Corp (S - Free Report) for a possible MVNO (mobile virtual network operator) deal or an outright purchase of Sprint. Meanwhile, AT&T has strengthened its pay-TV services after the acquisition of largest satellite-TV operator DirecTV.
Research Firm Opinions’: Research firm RBC predicted that customer churn in the legacy pay-TV segment could soon accelerate to around 5 million a year. In June 2017, research firm SNL Kagan had predicted that the U.S. pay-TV industry (comprising cable, satellite and IPTV operators) will lose approximately 10.8 million customers by 2021. Total pay-TV subscribers will be around 82.3 million at that time, which will be 20% less than the industry’s historical high level. Last month, Research firm RBC predicted that customer churn in the legacy pay-TV segment could soon accelerate to around 5 million a year.
Why Should You Still Hold Onto the Pay-TV Stocks?
Despite the dismal picture, pay-TV operators currently enjoy certain positives. The cable multi-service operators (MSOs) in the United States have successfully maintained their lead over telecom operators in the high-speed broadband (Internet) market. Moreover, to stay ahead in the competition, cable companies are introducing latest technologies like DOCSIS 3.1 technology. DOCSIS (Data Over Cable Service Interface Specification) is a communications protocol that allows cable MSOs to provide high-speed broadband connections.
Meanwhile, several research firms have estimated that major pay-TV operators who offer both traditionally managed TV services and next-generation online services will hold nearly 80% of the market share till 2022. In June 2017, research firm Strategy Analytics estimated that annual spending on subscription video and TV services in the United States will reach $130.3 billion in 2019.
Bottom Line
The presence of online video streaming providers is posing significant threat to the existing pay-TV business model. Video offering, which represented the core business function of cable-TV operators, is losing popularity. At this juncture, pay-TV operators must revamp their business model otherwise they may gradually lose market share.
4 Stocks to Watch after the Massive Equifax Hack
Cybersecurity stocks spiked on recent news of a data breach affecting 143 million Americans. But which stocks are the best buy candidates right now? And what does the future hold for the cybersecurity industry?
Equifax is just the most recent victim. Computer hacking and identity theft are more common than ever. Zacks has just released Cybersecurity! An Investor’s Guide to inform Zacks.com readers about this $170 billion/year space. More importantly, it highlights 4 cybersecurity picks with strong profit potential.
Get the new Investing Guide now>>