Leichtman Research Group Research Notes

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1 2Q 2016 Leichtman Research Grup Research Ntes Actinable Research n the Bradband, Media & Entertainment Industries In this issue: Back t the Future? S Back t the Future? 65% f U.S. Husehlds Have a Cnnected TV Majr Pay-TV Prviders Added Abut 10,000 Subscribers in 1Q 2016 Nearly 1.1 Millin Added Bradband in 1Q 2016 Industry by the Numbers mething happened in the pay-tv industry in recent quarters that had nt been seen in nearly a decade. The tp cable TV prviders had net vide subscriber additins in tw cnsecutive quarters (4Q 2015 and 1Q 2016) fr the first time in nine years (since 4Q 2006 and 1Q 2007). In additin, the three largest cable TV prviders (Cmcast, Time Warner Cable, and Charter) each reprted net vide gains ver the past year a feat that had nt been seen in years. Hwever, despite the relative success f the tp cable prviders, these gains did nt necessarily extend t the entire pay-tv industry. Hw culd this happen? The term cable is still frequently used synnymusly with the verall multichannel vide prgramming distributin (MVPD) r pay-tv industry. In reality, hwever, cable cmpanies nw accunt fr nly a little mre than half f all pay-tv subscribers in the US. Cable essentially was the pay-tv industry up until the early 1990 s (with the exceptins f large C-Band satellite dishes, and SMATV services in apartment buildings). But, since the intrductin f Direct Bradcast Satellite (DBS) service in 1994, and then vide services frm telephne cmpanies AT&T and Verizn beginning in 2006, cable s share f the market has waned. A lk back thrugh the FCC s Annual Vide Cmpetitin Reprts demnstrates cable s declining market share f pay-tv industry subscribers ver the past twenty years. Year Cable s pay-tv market share % % % % 2014* 53% * Frm the mst recent FCC Annual Reprt released in May 2016 LRG s tracking f the industry als finds that while the ttal number f pay-tv subscribers fr the tp prviders in the US peaked in 1Q 2012 (and has since declined by under a millin subscribers n a pr frma basis), vide subscribers fr the tp cable prviders peaked in 4Q 2001, and have since declined by abut 12 millin. Over the same perid, the tp cable prviders added abut 48.5 millin bradband Internet subscribers. Tday, cable prviders have a higher market share and mre subscribers fr bradband Internet than fr pay-tv. While the tp cable prviders cumulatively lst ver a millin vide subscribers annually frm (including ver 1.5 millin each year frm ), cable s vide lsses have recently subsided Leichtman Research Grup, Inc. All Rights Reserved 1

2 Table 1 shws the net adds fr cable and ther pay-tv prviders by categry ver the past tw years: Over the past year, the tp cable prviders lst abut 225,000 subscribers abut a millin fewer lsses than ver the prir year Over the past year, the tp Telcs lst abut 610,000 subscribers cmpared t a gain f 935,000 ver the prir year Over the past year, DBS lst abut 200,000 subs cmpared t a lss f 105,000 ver the prir year Over the past year, Internetdelivered Sling TV added nearly 500,000 subscribers Frm these data it is readily apparent that cable s cmparative imprvement is cming at the expense f Telc s lsses. Telc declines were exclusively frm AT&T U- verse which lst abut 730,000 subscribers ver the past year, cmpared t a gain f abut 515,000 ver the prir year. In ttal, U-verse lst 12.2% f its vide subscribers ver the past year, cmpared t a gain f 2.2% fr Verizn FiOS. These data als reveal that the dynamics f change in the pay-tv industry are nt slely a functin f cnsumer behavir, but als are determined by the decisins that are made by prviders. Cnsumers didn t suddenly decide that they n lnger wanted t get U-verse. Rather, AT&T made a decisin t emphasize sales f its newly acquired DirecTV DBS service (at the expense f U-verse) because f its lwer prgramming csts fr the cmpany. Given the verall state f the pay-tv market, cmpanies thrughut the industry are becming mre disciplined in the type f custmers that they are willing t spend mney t acquire. It is nt a cincidence that cable s recent quarters f net subscriber gains came fr the first time since the Telcs entered the vide market in With a majr change in fcus frm AT&T, as well as ther prviders, the pprtunity fr cable has changed. While the cable industry certainly will never be as 2016 Leichtman Research Grup, Inc. All Rights Reserved 2

3 dminant as it nce was in the pay-tv industry, the cmbined bundle with bradband service is helping t prvide a bit f a share-shift back t the future fr cable TV. 68% with 3 r mre set-tp bxes are very satisfied (8-10) with their pay-tv prvider cmpared t 54% with 1-2 set-tp bxes 65% f U.S. Husehlds Have a Cnnected TV L eichtman Research Grup, Inc. finds that 65% f US TV husehlds have at least ne televisin set cnnected t the Internet via a vide game system, a smart TV set, a Blu-ray player, and/r a stand-alne device (like Rku, Apple TV, Chrmecast, r Amazn Fire TV) up frm 44% in 2013, and 24% in Amng thse with any cnnected TV devices, 74% have mre than ne device, with a mean f 3.3 per cnnected TV husehld. Thse with a cnnected TV generally find them t be easy t use: 70% f all with a cnnected TV agree (8-10 n a 1-10 scale) that streaming services like Netflix are easy t access via cnnected TV devices, while 12% disagree (1-3) The study als fund that 77% f TV sets in pay-tv husehlds have a pay- TV prvider's set-tp bx, with a mean f 2.2 bxes per pay-tv husehld. Pay-TV subscribers tend t express little enmity tward set-tp bxes: 20% with a pay-tv HD set-tp bx agree (8-10) that set-tp bxes frm TV cmpanies are a waste f mney, while 44% disagree (1-3) 42% with a pay-tv HD set-tp bx agree (8-10) that set-tp bxes frm TV cmpanies prvide features that add value t the TV service, while 16% disagree (1-3) Overall, there are mre cnnected TV devices in US husehlds than there are pay-tv set-tp bxes. Acrss all husehlds (including thse that d nt have any f these), the mean number f cnnected TV devices per husehld is 2.1, while the mean number f pay-tv set-tp bxes per husehld is 1.8. These findings are based n a survey f 1,206 TV husehlds thrughut the US, and are part f a new LRG study, HD and Cnnected TVs XIII. This is LRG's thirteenth annual study n TVs in the US. Other findings include: Vide represents abut 55% f cnsumer revenue fr the tp cable prviders, bradband 35%, and vice/phne 10% 83% f husehlds with any type f cnnected TV device get a pay-tv service similar t 81% with n cnnected TV devices 38% f adults with a pay-tv service watch vide via a cnnected TV device at least weekly cmpared t 48% f pay-tv nn-subscribers 79% f all TV sets in US husehlds are HDTVs an increase frm 34% f all TV sets in 2010, and 3% in Leichtman Research Grup, Inc. All Rights Reserved 3

4 33% f nn-4k Ultra HDTV wners have seen ne in use up frm 10% in % f thse wh have seen a 4K HDTV in use are interested in getting ne cmpared t 9% f thse wh have nt seen a 4K HDTV Cnnected TV devices are nw in nearly tw-thirds f all TV husehlds in the US, and there are actually mre cnnected TV devices in US husehlds than there are pay-tv set-tp bxes. New frms f cmpetitin frm Internetdelivered vide via cnnected TVs, alng with technlgical innvatins in the pay-tv industry, are allwing cnsumers t chse mre ptins fr accessing and watching TV than they have ever had befre. Majr Pay-TV Prviders Added Abut 10,000 Subscribers in 1Q 2016 L Over the past year, the tp cable prviders added abut 3.37 millin bradband subscribers, while cable vide subscribers declined by abut 225,000 eichtman Research Grup, Inc. fund that the thirteen largest pay- TV prviders in the US representing abut 95% f the market added abut 10,000 net vide subscribers in 1Q 2016, cmpared t a gain f abut 170,000 subscribers in 1Q The tp pay-tv prviders accunt fr 94.2 millin subscribers with the tp nine cable cmpanies having 49.1 millin vide subscribers, satellite TV cmpanies having 34.0 millin subscribers (including abut 665,000 frm DISH's Internet-delivered Sling TV), and the tp telephne cmpanies having 11.1 millin subscribers. Other key findings fr the quarter include: The tp nine cable cmpanies added abut 50,000 vide subscribers in 1Q 2016 cmpared t a lss f abut 65,000 subscribers in 1Q 2015 Tp cable MSOs had nt reprted net gains in a first quarter since 2008 Satellite TV prviders added 305,000 subscribers in 1Q 2016 (including gains frm Sling TV) cmpared t a gain f 95,000 in 1Q 2015 Nt including gains frm Sling TV, DBS prviders added abut 175,000 subscribers in 1Q 2016 cmpared t a lss f 74,000 in 1Q 2015 DirecTV's net adds f 328,000 in 1Q 2016 were mre than in any quarter since 1Q 2009 The tp phne prviders lst 344,000 vide subscribers in 1Q 2016 cmpared t a gain f 140,000 subscribers in 1Q 2015 AT&T U-verse s 380,000 net lsses in 1Q 2016 were the mst lsses ever in a quarter by any prvider While DirecTV and tp cable prviders had a cmparatively strng quarter in 1Q 2016, their gains were largely ffset by a histrically weak quarter fr AT&T U-verse. Overall, the traditinally strng 2016 Leichtman Research Grup, Inc. All Rights Reserved 4

5 first quarter fr the pay-tv industry was tepid this year. Despite slight gains in the quarter, net adds in 1Q 2016 were dwn by abut 160,000 frm a year ag. Nearly 1.1 Millin Added Bradband in 1Q 2016 L eichtman Research Grup, Inc. fund that the seventeen largest cable and telephne prviders in the US representing abut 94% f the market acquired nearly 1.1 millin net additinal high-speed Internet subscribers in 1Q These tp bradband prviders nw accunt fr ver 91.5 millin subscribers with tp cable cmpanies having 56.3 millin bradband subscribers, and tp phne cmpanies having 35.2 millin subscribers. Other bradband findings fr the quarter include: Overall, bradband additins in 1Q 2016 were 92% f thse in 1Q 2015 The tp cable cmpanies accunted fr 99% f the net bradband additins fr the quarter versus the tp phne cmpanies The tp cable cmpanies added abut 1,065,000 bradband subscribers in 1Q % f the net additins fr the tp cable cmpanies in 1Q 2015 The tp phne cmpanies added abut 10,000 bradband subscribers in 1Q 2016 cmpared t a gain f 160,000 in 1Q 2015 AT&T and Verizn added 300,000 subscribers via U- verse and FiOS in 1Q 2016, while having a net lss f 324,000 DSL subscribers Over the past year, there were abut 3,030,000 net bradband adds similar t abut 3,000,000 ver the prir year. Cable cmpanies had anther strng quarter fr bradband in 1Q 2016, adding ver ne millin subscribers in the quarter. This marks the third time in the past five quarters that cable cmpanies have added ver a millin net bradband subscribers. Bradband in the US cntinues t grw, with cable prviders accunting fr 111% f the three millin net bradband additins ver the past year.. 68% f bradband subscribers, and 59% f all husehlds, get a bundle f services 2016 Leichtman Research Grup, Inc. All Rights Reserved 5

6 Industry by the Numbers Tp Pay-TV Prviders in the U.S. Cable Cmpanies Cmcast Time Warner Cable Charter Cablevisin Suddenlink Mediacm Cable ONE Other majr private cmpanies* TOTAL TOP CABLE Satellite TV Cmpanies (DBS) DirecTV DISH^ TOTAL TOP DBS Telephne Cmpanies Verizn FiOS AT&T U-verse TOTAL TOP PHONE TOTAL TOP PAY-TV PROVIDERS Subscribers at End f 1Q ,400,000 11,056,000 4,445,000 2,579,000 1,085, , ,576 6,345,000 49,113,576 20,112,000 13,874,000 33,986,000 5,863,000 5,260,000 11,123,000 94,222,576 Net Adds in 1Q ,000 21,000 15,000 (15,000) (8,000) (2,000) (13,574) -- 50, ,000 (23,000) 305,000 36,000 (380,000) (344,000) 11,426 Surces: The Cmpanies and Leichtman Research Grup, Inc. * Includes LRG estimates fr Cx and Bright Huse Netwrks ^ DISH ttals and net adds fr 1Q 2016 include its Internet-delivered Sling TV service (which began in 1Q 2015) Net additins reflect pr frma results frm sales and acquisitins, and reprting adjustments Tp pay-tv prviders represent apprximately 95% f all subscribers Tp cable prviders d nt include verbuilder WOW with 537,200 subscribers Cmpany subscriber cunts may nt slely represent residential husehlds LRG cnsumer research finds that abut 1% f husehlds subscribe t bth cable and DBS 2016 Leichtman Research Grup, Inc. All Rights Reserved 6

7 Tp Bradband Internet Prviders in the U.S. Cable Cmpanies Subscribers at End f 1Q 2016 Net Adds in 1Q 2016 Cmcast 23,767, ,000 Time Warner Cable 13,640, ,000 Charter 5,727, ,000 Cablevisin 2,828,000 19,000 Suddenlink 1,253,000 30,000 Mediacm 1,114,000 29,000 WOW (WideOpenWest) 722,300 9,800 Cable ONE 508,424 7,183 Other Majr Private Cmpanies* 6,775,000 50,000 Ttal Tp Cable 56,334,724 1,064,983 Telephne Cmpanies AT&T 15,764,000 (14,000) Verizn 9,218,000 (10,000) CenturyLink 6,056,000 8,000 Frntier^ 2,468,600 24,600 Windstream 1,092,000 (3,100) FairPint 311, Cincinnati Bell 292,400 5,000 Ttal Tp Phne 35,202,323 10,693 Ttal Tp Bradband Prviders 91,537,047 1,075,676 Surces: The Cmpanies and Leichtman Research Grup, Inc. * Includes LRG estimates fr Cx and Bright Huse Netwrks ^ LRG estimate, des nt include wireless subs Ttals reflect pr frma results frm system sales and acquisitins Cmpany subscriber cunts may nt represent slely residential husehlds, and reprting adjustments Tp cable and telephne cmpanies represent apprximately 95% f all subscribers 2016 Leichtman Research Grup, Inc. All Rights Reserved 7

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