It's getting ugly out there for pay-TV operators.
Comcast (CMCSA - Get Report) and Charter Communications (CHTR - Get Report) added to the tally of third-quarter cord cutting in Thursday earnings reports. Comcast lost 125,000 video subscribers while Charter's pay-TV rolls declined by 105,000, reflecting the broader trend of Netflix (NFLX - Get Report) and other streaming companies luring away traditional cable customers.
Video losses came in at the mid-point of the revised guidance that the company provided in September.
Comcast badly wants to hold onto its video subscribers, although Chairman and CEO Brian Roberts told investors during a Thursday morning investor call that the cable operator has been preparing for the world of cord cutting.
"We anticipated this shift," Roberts said. Comcast invested in its Emmy-winning X1 entertainment operating system that allows users to watch Netflix or Alphabet's (GOOGL - Get Report) YouTube via its platform, developed a remote control that recognizes voice commands and launched the Xfinity streaming app, among other initiatives that enhance its video service.
When customers cut the cord to Comcast's pay-tv offering, Roberts and other executives suggested, they don't kill the cable operator's model.
"Broadband connectivity, both residential and business -- that's now a $20 billion-year business," Roberts said. "That is a big portion of our company. That's growing at double-digit revenue growth, and it is very accretive to our margin." Over the next five years, he added, broadband usage will only increase with the growth of the Internet of things, smart home applications, virtual reality, 4K video, smart electrical grids and other applications.
Cord cutting actually improves some of Comcast's metrics, cable unit CEO David Watson told investors.
While Comcast still wants customers to buy a package of video, mobile phone service, home security and other services, as the company has said that the bundle of services reduces customer defections. Or course, the package also boosts revenues. At the same time, though, Comcast actually has higher profit margins if consumers cut out other services. "The economics are very encouraging if they do select broadband only," Watson said, noting not only the higher profit margins but also the lower cost to deliver just broadband.
Comcast prepared investors for the subscriber losses back in September, when it warned that it would lose 100,000 to 150,000 video subscribers. Without hurricanes Harvey and Irma, CFO Mike Cavanagh said, video subscriber losses would have been 105,000 -- toward the lower end of the previous guidance.
Meanwhile, Charter's video losses were more than double the 40,000 that Wall Street expected. Wells Fargo analyst Marci Ryvicker noted that $10.46 billion in third-quarter revenue and $2.84 billion in Ebitda were below consensus.
The market's reaction on Thursday might have been less negative if Charter had warned investors as Comcast did. "When Comcast infamously cut their Q3 unit growth guidance in September, investors were quick to cut their numbers for Comcast," Craig Moffett of MoffettNathanson LLC wrote in a Thursday report. "They were slower to adjust their numbers for Charter. They should have."
Charter "missed an opportunity to reset investor expectations" Moffett suggested. Also, rumors that Softbank (SFTBY) , Verizon (VZ - Get Report) or Altice (ATUS - Get Report) were interested in buying Charter also boosted the company's valuation, which Moffett wrote "had gotten distinctly out of whack" with Comcast's.
Other pay-tv providers have also reported subscriber declines in the third quarter.
AT&T (T - Get Report) said Wednesday that its loss of nearly 390,000 video subscriber losses in the third quarter were in part driven by its own credit-tightening policies and the hurricanes. JPMorgan analyst Phil Cusick estimates that 95,000 of the subscriber losses in the quarter come from tightened credit.
Meanwhile, Verizon reported a third-quarter loss of 18,000 net FiOS video subscribers last week.
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