"Cable" is practically synonymous with "pay TV," but that might not always be the case. Cable companies are finding it less and less profitable to offer a bundle of expensive networks to customers.
Smaller companies like Cable One (NYSE:CABO) and Mediacom are at a disadvantage to bigger players like Comcast (NASDAQ:CMCSA) and Charter (NASDAQ:CHTR), which wield greater buying power over media companies. Cable One hasn't managed to strike a deal to carry Viacom networks in five years, whereas Viacom would really feel the hurt if it went so long without a deal at one of the massive cable companies.
But Cable One hasn't found a compelling reason to pay Viacom or even try to hold onto its video subscribers. The company lost over 10% of its customers last year, and it actively pointed them to streaming alternatives when they called to cancel.
Let's take a look at why Cable One and Mediacom aren't trying to hold onto video customers and whether Charter and Comcast could do the same thing in the future.
While pay-TV companies set their own prices, those prices are largely dictated by the media companies that sell their bundles of networks to distributors. As cord-cutting takes hold, advertising budgets shift from television to digital, and media companies offer more direct-to-consumer options, price per subscriber has climbed for many networks.
Cable companies need to decide whether it's worth raising prices to maintain profits or keeping prices low and possibly taking a loss on a video subscriber with the hopes of making up for it elsewhere in the customer relationship (with phone or internet service).
Cable One has decided that taking a loss on video makes no sense for its business. "We don't see bundling as the savior for churn. Our churn is low, and it's going lower," CEO Julia Laulis said on the company's fourth-quarter earnings call. In other words, offering video packages at a loss doesn't help Cable One keep broadband internet subscribers, and it likely doesn't help it attract customers to the service either.
The economics of offering a traditional cable bundle to subscribers is getting worse and worse. It's no wonder small companies aren't fighting to keep video subscribers.
Bigger companies like Charter and Comcast haven't commented on the churn rates of their internet-only subscribers, but it's hard to think consumer behavior changes that much across markets and companies. In fact, churn might be lower at Charter and Comcast since they face less competition and have bigger marketing budgets.
Will bigger companies follow suit?
Craig Moffett, an analyst at MoffettNathanson, suggests that midsize pay-TV providers might not be too far from following the Cable One model. Companies like Verizon (NYSE:VZ) or Cox might let unprofitable video customers go and focus more on high-speed internet.
Verizon, in particular, is developing a nationwide 5G network that it can use to offer fixed-line broadband to the home nationwide. If it sees good results with its broadband-only offering, it might result in greater attrition from its bundled pay-TV subscribers.
Moffett notes that Comcast has a greater incentive to hold onto subscribers due to its ownership of NBCUniversal, but Charter might have an incentive to hold onto video subscribers as well. Holding onto the recurring revenue from video subscribers could allow for bigger acquisitions and greater flexibility, as the cable giants could show more assets on their balance sheet to take on more debt. That positioning could be key as video becomes less and less profitable and the companies look to diversify.
How will it impact the business?
If Cable One's financials are anything to go on, letting video customers leave is a great move for cable companies. Video revenue declined 5% year over year in the fourth quarter, but EBITDA increased 8.8%. EBITDA margin expanded 180 basis points to 47.3%. That's well above the 40.9% EBITDA margin of Comcast's cable business.
The overall impact, at least for small companies, appears to be a positive as long as customers leave gradually. "I think that if next year we lost 10% or 20% customers, there's probably no real difference in the ultimate financials," Cable One CFO Steven Cochran said. "If we went from 10% to 100% overnight, then there are some implications because there is a phasing that has to happen on the workforce side of the business that through attrition over time allows you to meet that." That phasing may be harder for larger businesses with high penetration rates on the internet business already, but it's not unfeasible.