How Cable Companies Became the Surprise Winner of the Cord-cutting Wars
Cable company stocks have been surprisingly strong in 2019, and almost nobody saw it coming.
Variety reported Tuesday that Verizon (VZ) will offer a free year of Disney Plus, the House of Mouse’s new streaming video on demand service, to its broadband and 5G home wireless internet customers.
The news should have been another death nail for cable operators. In reality … not so much.
The popular perception is that the industry is under attack from wireless providers like Verizon, and direct-to-consumer business models, such as Netflix (NFLX).
The combination created a movement: Cord cutters, customers who give up their expensive cable subscriptions for direct streaming over the internet, are a real thing. And the phenomenon is growing fast.
The number of cord cutters is expected to reach one-fifth of U.S. households by 2021, according to an August eMarketer study reported in Adweek. Currently, 21.9 million households have given up traditional pay TV services — or about 17% of the population.
Rising costs for pay TV and poor customer service at the major cable operators have definitely played a role in the transition. But there is another story: The amount of compelling content available directly to customers is rapidly expanding.
Netflix will spend $15 billion in 2019 producing content for its network. Amazon.com (AMZN) will spend $7 billion for video and music. And Apple (AAPL), a latecomer to the streaming wars, will reportedly spend $5 billion ramping up video productions.
The deal between Verizon and Disney (DIS) brings content streaming rights to 50 million wireless customers, according to Variety. They will get free access to the Star Wars, Avengers, Toy Story and classic Disney animation franchises. This is in addition to the 25 original series and 10 exclusive films the entertainment giant has in the works for the months ahead.
This partnership one-ups a similar deal announced by Apple in September. The iPhone maker will offer a free one-year subscription to its Apple+ SVOD service to buyers of new Apple devices.
Considering that the firm routinely ships 200 million iPhones annually, that’s a lot of new streaming subscribers.
All of this should lead to more cord-cutting and fewer cable subscribers. It should be really bad news for cable operators and their shareholders. But that’s not the case. Not even close.
So far in 2019, Charter Communications (CHTR), Comcast (CMCSA) and Altice (ATUS), some of the leading cable operators in the country, are ahead 53.4%, 36.4% and 75.8%, respectively.
To be clear, they are still bleeding customers. Charter lost a net of 141,000 video customers in the second quarter of this year, more than double the net 73,000 subscribers it lost a year ago during the same time frame.
The disconnect is that cable operators are benefitting from diversification into broadband, regional acquisitions that give them virtual monopolies and an industry trend toward no longer competing for video on the basis of price.
In the second quarter, for example, Charter’s broadband business grew by 8.8% year-over-year, to $4.1 billion. Managers also announced that they will raise prices in October.
|Source: Seeking Alpha|
And that’s where the new business model kicks in.
There was a time when cable companies were squarely focused on subscriber counts. Very often they would entice disgruntled customers with more channels or a drastically reduced rate for a promotional period. They’re no longer doing that.
They don’t care if customers quit cable, because broadband is a better, higher-margin business.
Customers are not quitting broadband. They need it to watch YouTube and to stream Netflix, Amazon Video, Hulu and soon Disney Plus.
One smaller operator, Cable One, doesn’t even attempt to talk customers out of cancelling video services, according to a March CNBC story. Instead, customer service representatives are instructed to offer as replacement, over-the-top internet services like YouTube TV and Hulu Live.
The end results? Better profit margins and — ultimately — higher share prices.
As odd as it may seem, cable operators are successfully gearing up for a post-television world. They have accepted that future media content will be streamed over the internet, mostly on demand.
Charter, Comcast and Altice have had excellent runs this year. They are no longer cheap. Shares trade at 44.9x, 13.5x, and 41.7x forward earnings, respectively.
However, the story of their transformation is still largely misunderstood. The stocks are attractive into significant weakness.
Jon D. Markman