Customer erosion has come to U.S. satellite TV in a big way. And though the two main players — DirecTV and Dish Network — have tried to soften the blow with their own over-the-top services, they are still getting bruised.
Comcast’s $31 billion bid for U.K. satellite giant Sky has again put a spotlight on the domestic satellite-TV business. Adding to the surprise over Comcast’s move was a perception of satellite TV’s decline here, unlike their counterparts across the pond.
For years, Dish Network chairman Charlie Ergen has been the poster boy for satellite TV losses. Over the past five years, Dish has lost a whopping 3 million subscribers and, according to Ergen, that decline does not appear to be letting up. Dish’s pioneering OTT service — Sling TV launched in 2015 — is also beginning to show signs of slowing down.
Dish revealed customer numbers for Sling TV for the first time along with fourth-quarter results: the OTT service ended 2017 with 2.2 million subscribers, up 47% for the year. That was better than expected; some analysts had estimated Sling TV had about 1.8 million customers. Dish’s satellite results, though, were stark. Dish finished 2017 with 11.03 million satellite TV customers, 3 million less than the 14.1 million it had in 2013 and 3.1 million behind 2010, its peak subscriber year.
Headed to ‘Less than Zero?’
MoffettNathanson principal and senior analyst Craig Moffett estimated Dish’s satellite subscribers are declining at a rate of 8.8% per year and cash flow is falling at a 21.5% clip.
“One doesn’t often value businesses declining that quickly,” Moffett wrote in a research note, saying an argument can be made for valuing Dish’s satellite business at less than zero.
In the past, Moffett noted, revenue hits from Dish subscriber losses were outpaced by price increases and by declines in subscriber acquisition costs. “That phase is now over as well,” he wrote.
Barclays media analyst Kannan Venkateshwar said, “Overall, these results are likely to underline the need for Dish to make a pivot away from the DBS business sooner rather than later, especially given that incremental subs clearly are coming in at lower margins and even the pace of growth of these subs is slowing.
“It is tough to believe that 2018 will change any of these trend lines, given multiple new competitors like YouTube TV and Hulu,” Venkateshwar added.
Ergen has not been shy about satellite’s decline — for years, he has said the business is maturing — and he was no less candid on a conference call with analysts to discuss Q4 results.
“There’s nothing new on the video business, other than what we’ve been saying for the last five years, which is the video business is going to change,” Ergen said.
Dish’s new CEO — 23-year company veteran Erik Carlson, named to the position earlier this year — is cognizant of the decline but still sees some growth left in the old business.
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“We don’t have the growth dynamics that we had in early years, but we still see some opportunity,” Carlson said on Dish’s fourth-quarter conference call with analysts, adding that the core satellite business continues to be the “engine that’s funding our future.”
Carlson said Dish has spent the past two and a half years improving its subscriber mix, focusing on keeping and acquiring long-term profitable customers. But just how long-term remains to be seen.
Dish’s cash-flow margins have shrunk over the past three years, from 20.9% in 2015 to 17.1% in 2017. Pivotal Research Group CEO and senior media & communications analyst Jeff Wlodarczak said the margin decline is mostly due to shrinking revenue, down about 5% in 2017, and Sling TV’s margins are thin in part because of the startup nature of the business. Still, Wlodarczak gave Sling credit for containing programming costs — he estimated they were up about 3% for the OTT service last year. Exerting further margin pressure is Dish’s plan to build out wireless licenses in an IoT network that will cost up to $1 billion by March 2020.
“I don’t expect margins to grow anytime soon,” Wlodarczak said. “In the end the [satellite TV] business is effectively a declining annuity that still throws off a decent amount of cash.”
Still, the subscriber declines appear to be accelerating. Adding to the pressure is the proliferation of OTT services that have come on the scene since Sling TV launched. In the past year alone, Hulu launched its Hulu Live OTT service, offering 50-plus channels for $39.99 per month, followed by YouTube TV, fubo TV and Philo. That’s on top of existing services like Sony PlayStation Vue, Netflix, Apple TV, Amazon Prime Video and Amazon Channels.
Watch MCN: vMVPDs by the Numbers
Other Options on Offer
Per Moffett, Dish reached its subscriber peak in the first quarter of 2010, finishing the period with 14.3 million customers. It ended 2010 at 14.1 million customers and see-sawed between losses and gains for the next two years, losing 166,000 customers in 2011, adding 89,000 in 2012, adding 1,000 in 2013 and losing 79,000 in 2014.
Subscriber rolls started to fall off a cliff beginning in 2015 — the year Sling TV launched — when Dish lost 607,000 satellite TV subscribers. Those losses doubled to 1.27 million in 2016 and tempered slightly in 2017, with a loss of 995,000 satellite-TV customers.
Satellite declines shouldn’t come as a surprise, and both Dish and DirecTV have been preparing for that eventuality for years. OTT services like Sling TV and DirecTV Now were supposed to take up the slack. For a moment, they did. Including Sling TV numbers in the mix, Dish lost just 82,000 customers in 2015 and 392,000 in 2016. The growth of those flanking services has begun to slow down, though.
Sling TV added 526,000 customers in 2015 and 878,000 in 2016, per Dish’s financial statements. In 2017, that growth slowed to 711,000 — a 47% increase over the prior year, but given 2016’s 141% gain, a slowdown just the same.
Part of the reason is churn, or the disconnect rate, is high at Sling TV: It was 3.09% in Q4, according to Moffett’s estimates, compared with 1.78% for the satellite business. Ergen blamed some of the volatility on customers switching services month to month to get better deals, and on those who sign up for a service just to watch a specific event and then drop their subscriptions the next month.
“One of the big factors that I don’t think is recognized totally by everyone is [OTT] is somewhat seasonal,” Ergen said on the Q4 call, adding that customers often sign on to view a specific event — mainly sports — taking advantage of a one-month free offer and then canceling when the promotion expires. “One-month churn is particularly high in the industry because people come in and out as a matter of convenience and can move around.”
That could mean that Sling TV and other OTT providers see a customer surge in March, just in time for the NCAA men’s college basketball tournament (March Madness), which begins March 13 and runs through April 2.
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In addition, Ergen said hardware promotions from providers allow customers more flexibility to move around.
“I’m sure there are some college kids who are going a year and never paying a dime for multichannel TV and getting lifetime HBO from AT&T,” Ergen said, adding that pricing discipline is inevitable. “People aren’t suicidal out there in a capitalist society.”
That discipline won’t necessarily come from Dish. During the media portion of the conference call, Dish executive vice president and group president of Sling TV Warren Schlichting said Sling has no intention of eliminating its one-month promotions.
“We like where we are,” Schlichting said. “We feel like it really puts the onus on us to provide value.”
Growth Engine Has Cooled
Dish might be in the hot seat as the bulk of overall satellite losses have been attributed to the Colorado company. But it is not the only satellite-TV provider (or wired pay TV provider, for that matter) to see subscriber rolls decline. DirecTV, once the growth engine of the satellite sector, had its first full year of customer losses under new parent AT&T in 2017, shedding 554,000 net subscribers. That compares with a gain of 1.23 million customers just one year earlier. DirecTV lost about 550,000 customers in 2015, but gained them back as AT&T’s U-verse TV subscribers migrated to the satellite TV service.
AT&T chairman and CEO Randall Stephenson told analysts during its Q4 conference call that losses have been expected at the satellite unit ever since the telco purchased the company for $48.5 billion in 2015.
“Since the day we bought DirecTV, we assumed that traditional linear video would be in a declining mode since that’s kind of the nature of it,” Stephenson said on the call. “OTT and the ability to consume video on mobile devices, we believed would be the trend and the way where things went. We wanted to be in the leadership position and facilitating that kind of consumption of premium video on mobile devices. And we have been in the leadership position in that.”
The key was DirecTV Now, the virtual MVPD service AT&T officially launched on Nov. 30, 2016. DirecTV Now was supposed to take up the slack for losses at DirecTV and wireline offering U-verse TV.
Initially, the strategy worked. U-verse TV subscribers were first encouraged to switch to DirecTV service, and later to DirecTV Now, and a lot of them did. U-verse customers fell precipitously, dropping from 5.6 million in 2015 to 3.6 million at the end of 2017.
“I think if AT&T had not been ‘encouraging’ consumers to swap to DirecTV, satellite TV additions would be far more negative,” Wlodarczak said, adding that consumers focus on data service first and video second.
Cable years ago established itself as the broadband leader: It accounted for 100% of net broadband additions again in 2017. Wlodarczak said consumers looking for a reliable broadband service stop at cable first and quickly learn they can get lower prices if they bundle broadband with video. But even that hasn’t stemmed the bleeding: Cable operators lost 79,000 customers in Q4 and 780,000 for the full year.
Breaking Down the OTT Subs
Stephenson said AT&T firmly believes that it has the product — DirecTV Now — to drive subscriber growth over the next few years.
“We would expect to continue to grow video customers, with our DirecTV Now [product] outpacing our linear customer counts in the sense of net additions,” Stephenson said on the analyst call, adding that customer additions are evenly split between cord-nevers and cord-cutters/shavers. “We still haven’t seen a dramatic uptick in customers that are shifting from our full-value product to DirecTV Now, but we continue to watch that carefully and continue to come up with different ways to make sure we can prove that and track that.”
Nobody believes satellite service is going away tomorrow. For many rural customers — between 10 million and 15 million homes — it is the only reliable way to access broadcast and pay TV content. But subscriber erosion is here, and even with skinnier bundles and promotional offerings, it is likely to stay.
“I think it is going to get a lot worse for satellite TV,” Wlodarczak said.
