|As of Q2 2019||Residential + Business Subscribers||Change over Q2 '18|
Commentary on Q2 2019 results
Pay-TV’s no-haggle policy paying off
There’s no more haggling with pay-TV operators for a better price. When you call up threatening to leave without a better deal, they’re likely to tell you to go. Looking at Comcast and DirecTV, the strategy change seems to be paying off.
Pay-TV no-haggle policy
In Q1 2019, Comcast made it clear the company would focus its attention on higher-spending video customers. Speaking on the Q4 2018 earnings call, David N. Watson, Senior EVP & President, CEO of Comcast Cable said:
“And our game plan is going to remain the same, that we’re going after the — and we’ll attract the most profitable video customer relationships that we can.”
In practice, that means when a customer’s sign-up deal expires, and they call to renew it, they’ll likely be told no. A customer looking for a better deal on what they have will be similarly out of luck. And threatening to leave won’t change the answer.
AT&T seems to be following the same no-haggle strategy with DirecTV. Randall L. Stephenson, AT&T Chairman, CEO & President, spoke about how the DirecTV customer base was moving toward the higher-spending households:
“And it says a lot about the customers that are staying on the network, that they tend to be very high-value customers, tend to be very valuable customers as you think about where we are going as a company.”
The focus on high-spending customers is an acceptance that the cost structure of pay-TV no longer works for customers unwilling to spend big. Simply put, the underlying cost of the content licenses have grown so large, operators can’t make money on lower-spending customers.
If the strategy working for Comcast and DirecTV?
Comcast’s margins improve, deliver small profit gain
In the last quarter, margins on Comcast’s video business do seem to have improved. The percentage of video ARPU going directly to programming license costs inched down from 60.7% in Q1 to 60.3% in Q2. At the same time, video ARPU increased 40 cents, to $86.2. In other words, Comcast made an extra 50 cents on every video customer after paying for the content in Q2. Since there were no price increases in Q2 (though there were plenty in Q1,) the ARPU increase likely came from more low-paying customers leaving.
The new no-haggle policy does seem to have increased subscriber losses. In the first half of 2018, Comcast lost 236,000. In Q1 and Q2 of 2019, the company lost 344,000.
Is Comcast a net winner from the no-haggle policy? The extra 50 cents in margin will earn about $30 million extra in Q3. Assuming the rise in subscriber losses over the first half of 2018 is due to the no-haggle policy, the incremental missing 108,000 subscribers (344k-236K) will cost Comcast $28 million in subscription revenue in Q3 and $11 million after accounting for content license fee costs.
In other words, the change to a no-haggle policy is worth a $19 million increase in EBITA in the third quarter.
Direct TV boosts profit with no-haggle
DirecTV saw an increase in ARPU too, with it increasing $2.50 to $117.49. Once again, no price increase in the second quarter suggests more low paying customers left than high.
The no-haggle policy also increased the number of customers leaving. Subscriber losses at DirecTV and U-verse in Q1 and Q2 2018 were 450,000. In Q2 2019, losses increased to 1.3 million.
The increase in ARPU will earn AT&T about $170 million in the third quarter. Once again, assuming the increment in subscriber losses are due to the no-haggle policy, the incremental missing 872,000 subscribers will cost DirecTV $307 million in Q3. Assuming DirecTV is facing roughly the same content costs as Comcast, it will miss a $120 million increase in EBITA in Q3.
So, DirecTV also seems to be around $50 million in EBITA better off.
A sustainable path?
Focusing on the high-paying customers seems to be improving the bottom lines at Comcast and DirecTV. As a short-term strategy, it looks like a good move. Whether it is a sustainable strategy in the long-term is an entirely different question.
Why it matters
The pay-TV no-haggle policy is now being followed by Comcast and DirecTV.
The policy has increased the number of people canceling their subscription.
However, it has resulted in gains in revenue after accounting for content costs.
 ARPU increase could also be due to lots of customer moving to a higher tier of service, though Comcast likely would have trumpeted this during the earnings call if it had happened.
Tables and graphs on this page are derived from public Comcast quarterly earnings statements and from the analysis and calculations of nScreenMedia
|For Q2 2019||Revenue||Change (over Q2 '18)|
|Annual Total||$109.5B 2018||+6.4% over 2017|