Carrier Evolution

Keep it in perspective, but in the second quarter of 2012 the U.S. subscription video entertainment business, accustomed to growing every year, suffered its biggest-ever decline in subscribers.

Net U.S. subscriber additions for subscription TV fell by 350,000 in the second quarter. These results were slightly worse than the 340,000 decline during the same period in 2011. You can make up your own mind about why the decline is happening. The second quarter is seasonally the toughest quarter of the year, but most of us would argue there is some combination of less interest in the product, affordability issues and use of substitute products at work.

U.S. satellite providers also lost subscribers during the first quarter, down 62,000. DirecTV’s loss of 52,000 subscribers was its first-ever decline.

Cable TV operators lost 600,000 subscribers in the second quarter. And it is no fluke. Cable subs have decreased during each of the last 21 consecutive quarters.

Telcos offering IPTV services have been the winners. For anybody who has followed the U.S. video entertainment market for some decades, that U.S. cable operator video penetration is as low as 44 percent of TV homes is a shocking statistic. There was a time when penetration was as high as 70 to 80 percent of homes in some areas.

Competition from satellite and telco competitors is the reason for the sharp reversal.

Some 97 percent of U.S. homes own a TV, and about 90 percent of all U.S. homes buy a subscription TV service.

Telco IPTV penetration on a global basis, measured against the installed base of worldwide broadband subscribers, reached 15 percent in the first quarter of 2012, representing 67 million subscribers and eight percent of the world’s 812 million video entertainment service subscribers, according to TeleGeography.

North American telcos, led by Verizon and AT&T, have succeeded in selling IPTV service to almost 40 percent of their broadband subscriber base. That is not to say telco TV now reaches 40 percent of homes. That statistic means the tier one telcos are selling video entertainment to 40 percent of their customers who buy broadband access.

Since telcos have almost half of all broadband customers, and since broadband is purchased by about 80 percent of U.S. households, you can roughly estimate that telcos now sell video services to perhaps 20 percent of U.S. households.

But keep in mind that telcos are not able to sell video to many locations, using their fixed networks, for technology reasons. Where they can do so, market share could be in the 30 percent range.

Generally speaking, getting a video customer means taking that customer away from a cable TV or satellite TV provider who already had the customer, as household penetration of subscription TV is over 80 percent. The market, in other words, is saturated.

There are some important implications. You might well argue that 40 percent video penetration of a service provider’s own customer base is “about as good as it is going to be,” when strong cable TV and satellite TV competitors own the rest of the customers, and when taking a customer therefore is tough.

In any market with three dominant and well-heeled contestants, you might expect an ultimate market share distribution that could easily be split three ways, with any single contestant getting 20 percent to 40 percent share.

If telcos have 20 percent share, could that share double? In principle, yes. If telcos get 30 percent share, could share then double again? Probably not, if the other two contestants (satellite and cable) continue to perform at a high level.

But there is one big change in potential market share structure that long has been speculated, namely a purchase of both U.S. satellite companies by one of the tier-one U.S. telcos. That, in principle, could mean telcos then would have as much as 60 percent share of video service customers.

Elsewhere, PriceWaterhouseCoopers predicts that 27 percent of Australians will have an IPTV service by 2016. That might not strike you as startling, except that entertainment video subscriptions historically have been much less popular in Australia than in many other markets.

Right now, IPTV is very much in its infancy in Australia, with a number of ISPs and carriers offering services but, in terms of the country’s eight million or so households, only moderate adoption.

The PwC study predicts that, over the next four years, total IPTV penetration will rise to 27 percent.

Australian households have shown fairly scant enthusiasm for subscription TV, with current penetration estimated at around 28 percent.