The economic downturn — pegged by economists as the most-prolonged since World War II — is continuing to hurt subscriber growth, the CEOs of the two largest cable operators said at an investment conference last week.
“It’s still a scary time,” Comcast chairman and CEO Brian Roberts said, speaking at Sanford Bernstein’s 25th Annual Strategic Decisions Conference last Friday in New York.
Roberts said the falloff in subscriber growth in the second quarter has been greater than the typical seasonal slowdown. He pointed out that he had said on Comcast’s first-quarter earnings call that there was a slowing of subscriber growth in March and into April.
“It is across all units. We’re really not seeing a surging of disconnects. We’re just not seeing a surging of orders,” he said.
There appears to be a “lag effect” from job losses, housing vacancy rates and lower housing starts, Roberts said: “There are just less opportunities to sell new things right now.”
Time Warner Cable CEO Glenn Britt, also at the Sanford Bernstein conference, said the company has seen a general slowdown in subscriptions in the last two quarters apparently related to the decline in the housing market.
“There’s a phenomenon of people losing their houses and moving back in with their families,” Britt said. “I have all my marketing statisticians focused on that … if housing gets healthier … there will be a subscription upturn.”
For Comcast, the slowing growth comes after the operator posted better-than-expected results for the first quarter of 2009, improving subscriber losses and nearly doubling its free cash flow, to $1.4 billion.
While Roberts chalked up the situation mostly to a general slowing of consumer expectations, he did acknowledge that Comcast is facing additional competitive pressure from telcos and satellite operators.
“It’s intensely competitive for the next customer,” he said. “It’s really hard to separate what is the economy versus competitive … but I think we’ve anticipated [competition] pretty well.”
That said, Comcast’s strategy is not to win customers at all costs, Roberts said. “It’s not just [customer] units for the sake of units,” he said.
Time Warner Cable gained 36,000 basic-video subscribers in the first quarter of 2009, which the company attributed mainly to the publicity around the broadcast digital TV transition.
Britt said the broader DTV transition — set for June 12 — could produce additional subscriber gains for cable but added that it was too early to tell for sure.
In any event, Britt contended, in the first quarter satellite-TV providers did not steal any net video subscribers from TWC. “We believe in our footprint the satellite companies had essentially no gain,” he said.
As for the telcos, the main competition is on the broadband side, with Verizon Communications and AT&T having built out 20% of TWC’s footprint with video services.
“Clearly it remains true today that our primary video competitors are the satellite companies,” Britt said. “In broadband, it’s clearly the two big phone companies.”
Britt also addressed the backlash against the operator’s recent plans to expand usage-based billing trials for its high-speed Internet services, conceding that the sequence of events was “a bit of a debacle.”
“Clearly we did not handle the public-relations side of it very well,” he said. “We had a bit of a debacle, to be honest. So we pulled back from that.”
Time Warner Cable had planned to initiate usage-based billing trials in Rochester, N.Y., and Greensboro, N.C., in August, followed by San Antonio and Austin, Texas, in October. The operator first tested the concept in Beaumont, Texas, last summer.
But after an uproar from politicians and consumers, TWC in April announced it would postpone those plans “while the customer-education process continues.”
Britt said the usage-based billing tests were “looking out toward the future” to prepare for the growth of applications that use very large amounts of bandwidth.
Whereas broadband service have been defined so far just based on speeds, Britt said, the main issue is that consumption over existing tiers is growing quickly.
“As we have more and more high-consumption applications, we thought the business should work like everything else in life: You use more, you pay more; you use less, you pay less,” Britt said.
Meanwhile, cable customers are beginning to view broadband, rather than video, as the core component of the multi-service bundle.
“In the last year we’re starting to see from consumers the indication that the broadband part is more the anchor part of the bundle than video — that they value that more highly,” Britt said. “I think we’re going to see more of that in the future.”
Asked about capital spending, Britt said he doesn’t see a major rebuild of TWC’s network anytime in the next 10 years.
“I’m very comfortable with our plant,” he said. “For as far as I can reasonably see, in the next 5 to 10 years, I don’t see a need for a massive upgrade.”
Capex on customer-premises equipment, specifically set-top boxes, could decline in the future if set-tops could be made “dumber” over time, Britt said.
“We’re having a debate internally now about ways to make those boxes essentially dumber over time,” he said. “They’re actually pretty powerful computers … If there’s a way to make those less intelligent, there’s a way to make those less expensive and less obsolete.”
For Comcast, one of the biggest capital-spending initiatives in 2009 is to convert more markets to “all-digital” operation, meaning only a few broadcast and public, education and government channels remain in analog format, Roberts said.
In Portland, Ore., its initial market for the cutover, Comcast will be completely done with the digital transition within the next two or three weeks, according to Roberts.
With the all-digital initiative, code-named Project Cavalry, basic video customers who don’t want to upgrade to a digital tier are provided a free digital terminal adapter that converts the basic lineup to analog. The DTAs cost less than $30, according to Roberts.
By eliminating the bulk of the analog channels in the basic-cable lineup, Comcast will be able to introduce more than 100 high-definition channels in the Portland market, up from the mid-30s today, Roberts said. In addition, the operator will introduce up to 30 ethnic channels and be able to allocate four 6-MHz channels to DOCSIS 3.0 services.
“It is critical to get out of the analog business,” Roberts said. By going all-digital, “this offering, right this second, allows us to super-charge our video product.”
Comcast currently has a half-dozen markets in transition, including San Francisco, Seattle and Philadelphia. The operator hopes to convert virtually all of its markets nationwide to all-digital by the end of 2010.
With the spectrum freed up from the all-digital conversions, Roberts also said he doesn’t see a major rebuild for the cable network in the foreseeable future.
Asked about so-called “cord cutting” — the notion that consumers will cancel pay-TV services in favor of acquiring content via the Internet — Roberts said he didn’t see any evidence it is happening in significant numbers.
However, Roberts added, it’s good that the prospect of cord-cutting has prompted a response from cable operators and programmers. Comcast, for one, plans to launch On-Demand Online service through Fancast later this year that would provide the operator’s own subscribers additional programming.
“I think having this discussion now, when it’s not really happening, is very healthy,” he said.
Roberts was bullish on commercial services, pointing to revenue growth from small and midsize business customers of more than 40% in the first quarter.
“Small businesses want to save a couple hundred dollars per month,” Roberts said. “There has been no competition except for the incumbent. We’re playing offense.”
On wireless, Roberts expressed optimism about the company’s investment in Clearwire. “They’re in an execution phase right now,” he said. “They’ve hired a terrific CEO.”
Comcast expects to launch wireless broadband in a couple of markets in the second half of 2009.