Investors in the cable industry have got to be confused.
On one hand, analysts and financial publications continue to report that the overall market will continue to shrink as streaming-based substitutes continue to grow in both scope and market share. On the other hand, the recent reported third calendar quarter gave many analysts reason to pause the persistent drumbeat that's dogged the industry. After an awful second quarter that saw MVNOs lose over 600,000 subscribers, analysts surveyed by Bloomberg expected the industry to lose a comparatively better 300,000 subscribers in the third quarter. As the numbers started to trickle in, these numbers dropped to as low as 190,000, according to Leichtman Research, or as high as 350,000, according to MoffettNathanson, with DISH Network (NASDAQ: DISH) mudding these figures with its SlingTV offering (more on this later).
This month, however, a new eMarketer study in The Wall Street Journal (subscription required) reintroduced concerns about the future of the industry -- according to the market research firm, by 2019 nearly one in four U.S households will no longer pay for traditional TV.
A dual-faceted problem
While often prefaced as simply existing cable subscribers that have cancelled during a period, there's perhaps a hidden driver in eMarketer's estimate of 23% of U.S households that theoretically won't be paying for cable -- up from 17% this year – and that's the growing number of millennial households that have never had the service, the so-called "cord-nevers."
In a perfectly functioning world, these households would offset the minor amount of current subscribers choosing to cut the cord. According to eMarketer, however, these two types are households are growing in size. Overall, the analyst firm estimates that cord-cutters increased 11% on a one-year basis to 4.9 million households, whereas those who have never had pay-TV increased 5.3% to nearly 16 million.
The industry's response has been to offer tailored solutions in an attempt to make money from these cord-nevers, but this could be more harmful than it initially appears.
A delicate balance among a "darned if you do; darned if you don't" market
While it's easy to conflate cord-cutters and cord-nevers, they tend to value pay-TV differently. While cost is the ultimate motivator, the cord-cutter set no longer sees value at the current prices, whereas cord-nevers appear to have a much lower dollar figure they assign to traditional TV. By offering tailored solutions for the latter, however, it becomes more likely the former finds a cheaper way to consume pay-TV, putting MVNOs in a Pyrrhic victory situation.
Perhaps one of the more ambitious services is DISH Network's SlingTV. While the company doesn't report separate numbers for the streaming-only service, MoffettNathanson analyst Craig Moffett estimates that the cord-cutting friendly service added 155,000 subscribers, masking a relatively massive 180,000 third-quarter traditional TV subscriber loss for DISH Network as the company reports in its combined subscriber count.
In addition, the decision to offer a streaming-based solution is further complicated by competition from other MVNOs and networks as well, which have decided to take their content direct to consumer with a variety of apps streaming services. The most-aggressive network in this regard is Time Warner (NYSE: TWX), whose standalone streaming HBO Now app was No. 4 in overall entertainment and No. 33 in total downloads on Apple's iOS, according to app-analytics firm App Annie, during the week ended Dec. 5.
For cable shareholders, I'd continue to monitor subscriber counts closely. Does the third quarter represent a more stable industry as far as subscriber-count losses are concerned, or merely a one-quarter pause in a shrinking market? Fourth-quarter subscriber count figures will be of key interest for both analysts and investors.