People are cord-cutting in droves. Will it accelerate in 2020?
Pay-TV subscribers are leaving their providers in droves. Nearly 2 million customers left their traditional pay-TV providers in the third quarter, according to estimates from Kagan and Leichtman Research Group. Kagan pegs the number at 1.9 million while Leichtman counts 1.75 million defectors. For reference, Kagan estimated the industry lost 1.2 million subscribers in all of 2018.
Cord-cutting is accelerating quickly as prices keep climbing and streaming options become more plentiful and accessible. Kagan says the rate will increase from 6.2% this year to 6.7% next year. Investors need to look at more than just the headline numbers to fully understand what's going on with cord-cutting and whether the acceleration will continue next year.
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The biggest provider will shift gears next year
AT&T accounted for more than half of pay-TV losses in the third quarter. It counted 1.16 million premium TV subscriber losses between its DirecTV and U-Verse services. It's already lost 2.5 million subscribers through the first nine months of 2019.
But AT&T's management said its subscriber losses peaked last quarter after mostly working its way through its "customer cleanup." AT&T is intentionally letting unprofitable customers on promotional pricing cancel their service instead of trying to retain their business. The last cohort of customers on promotional pricing will see their bills increase this month.
While investors shouldn't expect AT&T to stop losing subscribers, the losses will slow considerably next year. If cord-cutting is going to accelerate in 2020, it means other providers will experience a significant increase in subscriber losses.
2020's biggest loser
Comcast has adopted a similar approach to AT&T in that it's not chasing unprofitable subscriptions. As a result, it's seen its video subscriber losses climb considerably over the last couple years. It lost 186,000 video subscribers in 2017, 344,00 last year, and it's already lost 538,000 through the first nine months of 2019.
Comcast is losing a larger percentage of its customer base compared to rivals like Charter. While Charter's also seeing an acceleration in defectors in 2019, the losses have been muted by the company's focus on skinny bundles. It offers a Choice bundle of local channels and another 10 channels of the customer's choice. It also offers a Stream service, which offers a broad selection of entertainment networks delivered over the internet for just $15 per month.
Charter's focus on price-conscious consumers should help it retain customers in 2020, but it comes with a hit to profitability. Management expects bundling video with internet (as 90% of its customers do) will offset the impact of lower-value subscribers.
Most companies are following AT&T and Comcast's lead, though. Cable One, for example, is finding it hard to justify keeping any video subscribers that aren't directly profitable. That should result in more subscriber losses for cable TV providers that could offset the decline in losses at AT&T.
Streaming could push more subscriber cancellations
2020 will see a lot of new streaming video options for consumers.Apple, Disney, AT&T and Comcast will all offer premium subscription video-on-demand options by May next year.
With more streaming options available to consumers, they may be more inclined to cut the cord to make room in their budgets for a couple more on-demand services.
Comcast may use its streaming service to sweeten its cable subscription, but it's also considering offering an ad-supported version of the service for free to everyone. AT&T plans to eventually integrate live programming into its HBO Max product, effectively using it as a way to replace traditional pay-TV subscriber losses. Still, those plans are a couple years off.
As more consumers opt into more streaming, the number of cord-cutters should continue to climb. That's compounded by the fact that many providers are still culling unprofitable video subscribers, and few are willing to take a loss on some video subscriptions to grow other parts of their business like Charter is. While the worst may be over for AT&T, investors should still expect the industry to see elevated subscriber losses in 2020.
Adam Levy owns shares of Apple and Walt Disney. The Motley Fool owns shares of and recommends Apple and Walt Disney. The Motley Fool recommends Comcast and recommends the following options: long January 2020 $150 calls on Apple, short January 2020 $155 calls on Apple, long January 2021 $60 calls on Walt Disney, and short January 2020 $130 calls on Walt Disney. The Motley Fool has a disclosure policy.
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