Pay Television Faces ‘Toxic Mix’ as Subscribers Cancel in Record Numbers

The six largest publicly traded U.S. cable and satellite-TV providers combined to lose about 580,000 customers in the second quarter, the biggest such decline in history, according to company and Bloomberg data.

The economy is forcing the industry to face the reality of cord-cutting -- pay-TV customers canceling their subscriptions in favor of online options such as Netflix Inc. (NFLX) and Hulu LLC. While cable executives dismiss the idea that subscribers are switching to “over the top” Internet competitors, the reason isn’t as important as the decision to stop paying for TV, said Craig Moffett, an analyst at Sanford C. Bernstein in New York.

“Rising prices for pay TV, coupled with growing availability of lower-cost alternatives, add to a toxic mix at a time when disposable income isn’t growing,” Moffett said. “For younger demographics, where in many cohorts unemployment is north of 30 percent, and especially for those with limited or no interest in sports, the pay-TV equation is almost inarguably getting less attractive.”

The catalysts, according to cable and satellite executives, include increased competition from telephone companies AT&T Inc. (T) and Verizon Communications Inc. (VZ), which added a combined 386,000 video customers, and a sluggish economy that forced lower-income customers to cancel service.

As new home sales slumped in May and again in June, installations suffered, and there weren’t enough new subscribers to make up the difference, Cablevision Systems Corp. (CVC) Chief Operating Officer Tom Rutledge said yesterday on a conference call.

Low-Income Areas

“The economic impact on our customers in lower-income neighborhoods is more pronounced,” Rutledge said. “We see less gross adds in low-income areas, and that’s the result of economics and vacancies.”

Of the six largest publicly traded U.S. cable and satellite providers, only DirecTV added customers in the second quarter. Comcast Corp. (CMCSA), Time Warner Cable Inc. (TWC), Charter Communications Inc. (CHTR) and Cablevision lost a total of 471,000 video customers in the quarter. Dish Network Corp. (DISH) lost 135,000 after adding 58,000 in the previous period.

Dish Chief Executive Officer Joseph Clayton said yesterday that one of his goals is to reposition the company away from marketing to lower-income customers. Instead, he wants Dish to rely on its technology and promotions to persuade customers to buy more expensive offerings and increase average revenue per user.

Going Upscale

Clayton rejected the idea of relaxing credit standards to appeal to lower-income people, saying he’s “looking for a better class of customer.” He plans to change the company’s advertising strategy away from “cheap, cheap, cheap” and seek out higher-paying subscribers who might have bypassed Dish for DirecTV (DTV) in previous years.

“The cable companies have been losing for years, but what you’re seeing is the satellite guys joining some of that,” said Ian Olgeirson, senior analyst at market research firm SNL Kagan. “They are seeing the same kind of effects of being a mature industry. How do you support your base of customers when you don’t have a bunch of new households to convert? It’s difficult to sustain in a down economic quarter.”

Some analysts caution that second-quarter results are not always an appropriate guide for the state of the industry, given seasonal factors such as departing college students cutting off service and summer vacationers watching less TV.

The larger trend is clearly one of video losses, said Jason Bazinet, an analyst at Citigroup Inc. in New York, who notes that pay-TV subscribers have declined in three of the past five quarters.

“While second-quarter seasonality likely played a role, some households may have left the pay-TV universe entirely,” he wrote in a note to clients.

To contact the reporter on this story: Alex Sherman in New York at asherman6@bloomberg.net.

To contact the editor responsible for this story: Peter Elstrom at pelstrom@bloomberg.net

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