Comcast has stemmed the flood of pay TV defections with triple play and X1. But pay TV is changing, and becoming a lot less attractive in the process.
Here are 4 observations from Comcast’s Q2 2016 results that show how much pay TV is changing. It also shows why Comcast has been very wise to reduce its reliance on pay TV services.
X1 failing to win new subscribers
Comcast is rightfully proud of X1. It has managed to stem the flood of people leaving the video service. In Q2 2012, before X1 started to roll out, 176,000 video subscribers walked out the door and 330,000 quit over the course of the full year. In Q2 2016, Comcast lost just 4,000 subscribers and looks on course to actually have a marginal gain of 10,000 are so for the entire year.
X1 is now broadly available in Comcast’s footprint. And many existing video subscribers are converting to X1. The company says that nearly 40% of all video subscribers have adopted the service. The company also says customer relationships increased an impressive 117,000. Unfortunately, many of these new customers are not taking video services. Broadband led the charge with 220,000 net additions.
Of course, it’s hard to say how many new subscribers are being attracted by X1 because Comcast only reports the net change. However, since subscriber growth is effectively zero, we can say that the people that leave are unmoved by the charms of X1. This effectively cancels out those new customers that are swayed by its benefits.
Despite a massive ad campaign touting the benefits of X1, Comcast is failing to scoop up all the customers that leaving other pay TV providers.
Profitability of pay TV is declining
Comcast video ARPU (average revenue per unit/subscriber) has been increasing steadily for some time. Q2 is no exception. ARPU increased 2.4% over Q2 2015. However, content costs increased much more. The cost of programming born by each video subscriber was $39.84 in Q2 2015. It increased 7%, to $42.61 in Q2 2016.
This trend continues to hurt Comcast’s video service profitability. In Q2 2010, programming costs were 39.3% of ARPU. In Q2 2016, they were 51.3%. In other words, half of all pay TV revenue goes directly to content providers.
The importance of pay TV is waning
Comcast apparently realized some time ago that content cost increases were outpacing its ability to raise prices. It completed its acquisition of NBCU in March of 2013, allowing it to benefit, rather than suffer, from the trend. The rise of broadband has also had a dramatic impact on the sources of Comcast’s revenue.
In 2008, 59% of Comcast’s revenue came from pay TV service. Just 22% came from broadband, and 8% from voice services. In Q2 2016, just 29% of Comcast’s revenue is derived from video services. NBCU is now the largest component, contributing 37%, and broadband provides 17%.
Seasonality is moderating
Subscriber additions have traditionally been strongest for pay TV operators in the fourth and first quarters of the year. The cold weather, so the belief goes, keeps people at home watching television more. Conversely, subscriber additions have been weakest in the second and third quarters. The warmer weather is cited as the reason for this, as people head outside and watch less television.
However, this trend seems to be moderating at Comcast. The difference in subscriber additions between Q3 2011 (the worst performing quarter) and Q1 2012 (the best) was 220,000. In 2014, the difference shrank to 160,000, and shrank a little more in 2015.
This could be due to two factors. There has been a shift toward customers taking more one than one service. In 2012, 35% of customers took a single product from the company. In Q2, 30% had a single product. Cancelling pay TV is a lot harder when multiple services are involved.
TV Everywhere is also allowing subscribers to take their service with them in the warmer months. Watching on the go increases the overall value proposition of pay TV, making it less likely people will leave.
Why it matters
While X1 has helped Comcast stem the flood of people cancelling pay TV, it has done little to reignite growth.
Meanwhile, the pay TV business has become less profitable, as content cost continue to spiral up.
Comcast has wisely made strategic moves which reduce its reliance on pay TV. This will stand it in good stead in the future.