The rate of decline in the pay TV world stabilized in Q1, which still isn’t great news for traditional MVPDs, but could be viewed as a positive for major programming groups, MoffettNathanson analyst Craig Moffett surmised in his analysis of the Q1 results.
In his quarterly Cord-Cutting Monitor, Moffett found that the pay TV subscriber decline, excluding virtual MVPDs, was 3.4% in Q1 2018 versus the year-ago period, and down just 0.5% when factoring subs from OTT TV services that include the likes of Sling TV, Hulu, DirecTV Now, PlayStation Vue, fuboTV and YouTube TV.
Among groups, Moffett estimated that cable operators lost 323,000 pay TV subs in Q1, while satellite lost 418,000 and the telco TV providers shed 68,000. Virtual MVPDs, meanwhile, added about 562,000 subs (-113.7% year-over-year) extending that group’s total to 5.15 million.
“It was a surprisingly mild quarter for Distributors,” even with a soft quarter of new household formation (a decline of about 200,000 occupied households, per U.S. Census Bureau data) factored in, Moffett wrote.
But the news was much better for major programmers. Moffett suggests that their health, and that of the entire pay TV ecosystem, is in part reflected by the “conversion rate” – the rate at which uptake of virtual MVPDs offsets declines among traditional pay TV operators.
“The higher the conversation rate, the better for media companies, and not just because they don’t lose a subscriber; they actually get paid more (a higher per subscriber affiliate fee) as well,” Moffett said.
“That makes cord-cutting relatively painless for programmers that are carried on all the virtual bundles” and a net plus for widely-carried network groups.
Based on informed estimates of sub growth in the virtual MVPD world, the conversion rate is about 70%. The catch, Moffett stressed, is it’s unknown if those high conversion rates are sustainable.
While it stands to reason that they will remain high if traditional subs who are cutting the cord are fleeing to OTT TV, the pessimistic view is that they are leaving for a broader mix of alternatives, including SVOD services, free options, social media outlets, as well as virtual MVPDs.
If the second assumption is correct, this observed conversion rate could “actually be a mirage,” and perhaps be in the neighborhood of 40%.
“For now, all this is speculation. But we’re admittedly nervous,” Moffett wrote.
Factoring it all in, he said major programmers that are included in packages for most virtual all OTT TV services are among the “winners,” while putting satellite in the loser’s bracket, as that group has lost 5% of its customer base in the past four quarters.
Cable operators aren’t winners, but are better off, given their slower decline of 1.8% per year, he said.