Cord-Cutting Doubled in 2018

The pay-TV industry can only do so much to stop customers from cutting the cord and relying on streaming services like Hulu or Alphabet's (NASDAQ: GOOG) (NASDAQ: GOOGL) YouTube. The top pay-TV providers lost 2.9 million customers last year, up from 1.5 million in 2017, according to a report by Leichtman Research.

Not even virtual pay-TV providers like AT&T's (NYSE: T) DirecTV Now or Dish Network's (NASDAQ: DISH) Sling TV could manage to offset losses from their own companies, much less the industry as a whole. DirecTV's satellite service lost 1.2 million subscribers last year; Dish lost 1.1 million. DirecTV Now and Sling TV added 436,000 and 205,000 net subscribers, respectively. The net adds for the virtual providers are notably down nearly 1 million combined from 2017.

Here are the overarching trends investors need to consider as they look at the cord-cutting trend.

Satellite is losing more than cable and telecom combined

As mentioned, the losses from DirecTV and Dish are massive -- 2.361 million between the two national satellite TV providers. By comparison, traditional cable TV providers lost a combined 910,465, and telecom companies lost 244,000 customers.

The losses at DirecTV make sense. It's a premium product with a premium price, and consumers are shifting toward more low-cost options. AT&T seems content to cannibalize DirecTV customers with DirecTV Now, which has lower customer acquisition costs, but it also has lower average revenue per user and lower profit margins.

Dish, meanwhile, appeals to more cost-conscious customers in rural markets. However, perhaps that's its undoing, as streaming services can go anywhere there's internet access and come with lower upfront and ongoing costs for customers.

Dish is further hampered by the fact that it's sunsetting its internet service. "As of the first quarter 2018, we have transitioned our broadband business focus from wholesale to authorized representative arrangements, and we are no longer marketing dishNET broadband services," it says in the company's annual report. As such, it can't benefit as much from bundling or the rise of streaming compared to its industry peers. That might change if and when it launches its 5G wireless network.

Virtual services are growing, but the outsiders are winning

Net adds at AT&T and Dish's streaming linear video services were down sharply in 2018 compared to 2017. AT&T's DirecTV Now benefited from promotional pricing and bundling, but subscribers fell sharply in the fourth quarter as AT&T pushed subscribers off promotional pricing. Dish's Sling TV growth has slowed as it matures, now reaching four years old -- the oldest service of its kind.

Notably, the services from companies that originally offered traditional pay-TV service are losing ground to digital natives. Hulu surpassed DirecTV Now at the end of 2018, and YouTube TV now reportedly has over 1 million subscribers. While the growth of these services doesn't completely account for the drop in subscribers from traditional pay-TV, it does significantly mitigate the losses.

Digitally native platforms hold several advantages over the incumbents, including not having to worry about cannibalizing their existing services. They're also more likely to have better digital advertising capabilities and content delivery technology. That makes it hard to compete.

As more digital streaming services -- both linear and on-demand -- launch, it'll continue to put pressure on the traditional pay-TV industry. AT&T -- the largest pay-TV company in the country -- plans to offer a video service at practically every price point, but it will continue to lose market share as the internet removes a lot of barriers to entry for competition.

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