Leichtman Research Group, Inc. Research Notes 2Q 2015 Actionable Research on the Broadband, Media & Entertainment Industries In this issue: Netflix: Four Years Later T Netflix: Four Years Later Over Half of U.S. Households Have a TV Connected to the Internet Major Pay-TV Providers Added About 10,000 Subscribers in 1Q 2015 Nearly 1.2 Million Added Broadband in the First Quarter of 2015 Industry by the Numbers he summer of 2011 doesn t seem that long ago, yet since that time we have seen varying degrees of change depending on the area. In sports, the Dallas Mavericks had just won the NBA Championship, and the Boston Bruins were busy hoisting the Stanley Cup. In the media and entertainment industry, the US pay-tv industry had about 100 million total subscribers, and Netflix had about 20 million streaming subscribers in the US. Over the past four years, the Mavericks and Bruins have not been able to repeat those successes again. The pay-tv industry has about the same number of subscribers as it had four years ago. While over the same period, however, Netflix has doubled the number of streaming subscribers in the US. It was just four years ago, in July 2011, when Netflix made the bold and controversial decision to change itself into a streaming-focused business. Initially the decision was nearly universally poorly received by consumers, analysts, and investors alike the company lost subscribers, its stock price tumbled, and consumers perceptions of the company weakened. Yet, ultimately this decision helped to transform the company, and the video landscape, but not always in the ways that are perceived, or were predicted. To date, the impact of Netflix (and other Internet-delivered video) has been more significant on the time spent watching traditional TV, than it has been on pay-tv industry subscriptions and related consumer spending. The evolution of Netflix as a company can be seen in its reported results over the past few years: At the end of 1Q 2015, Netflix had 41.4 million total streaming subscribers in the US (including 1.1 million free subscribers) compared to 29.2 million at the end of 1Q Did you know? 19% of Netflix subscribers agree that their Netflix subscription is shared with others outside their household Page 1
2013, and 21.4 million at the end of 3Q 2011 (the first quarter that Netflix separately reported streaming subscribers) In 1Q 2015, quarterly domestic revenue for Netflix was $1.16 billion, with streaming revenue accounting for 85% of the total. In 1Q 2013, domestic revenue was $882 million, with 72% from streaming, and in 4Q 2011 domestic revenue was $847 million, with 56% from streaming (this was the first quarter that streaming and DVD revenue were reported separately) At the end of 1Q 2015, Netflix still had 5.6 million DVD subscribers down from 8.0 million and the end of 1Q 2013, and 13.9 million at the end of 3Q 2011 In addition to the domestic results, at the end of 1Q 2015, Netflix also had 20.9 million International streaming subscribers up from 7.1 million at the end of 1Q 2013, and 803,000 at the end of 1Q 2011. Consumer spending on Netflix streaming increased by $700 million over the past year, but this increase was actually less than the increase in spending on pay- TV services. LRG s annual Emerging Video Services studies also help to show how subscribers streaming of Netflix, and satisfaction with the service, have increased over the past few years. Some of these findings include: In 2015, 71% of Netflix subscribers reported being very satisfied (8-10) with the service up from 66% in 2014, 58% in 2013, and 50% in 2012 33% of Netflix subscribers stream video from Netflix daily and 71% weekly compared to 22% daily and 61% weekly in 2012 With the growth in Netflix s subscriber base, this extrapolates to 15% of all adults in the US streaming Netflix daily and 31% weekly up 6% daily and 16% weekly in 2012 Along with Netflix s high penetration among younger individuals, usage among younger age groups is particularly strong, with 50% of all ages 18-34 now streaming Netflix weekly compared to 28% in 2012 Combined, the data show Netflix s evolution over a relatively short period of time. Yet, Netflix s domestic revenue remains relatively small when compared to spending on pay-tv. Consumer spending on Netflix streaming increased by $700 million over the past year, but this increase was actually less than the increase in spending on pay-tv services. The domestic streaming business for Netflix produced revenues of $3.6 billion over the past year (2Q 2014-1Q 2015), an increase from $2.9 Page 2
million over the prior year, and $2.3 billion two years ago Comparatively, spending on pay-tv in the US still accounts for about $100 billion annually (including a 1.6% increase in video revenue reported by the top cable providers from a year ago, and DBS revenue up about 5% from a year ago) Additionally, while Netflix has doubled its domestic subscriber base, pay-tv subscribers are about at the same number they were four years ago, and are down less than 0.5% from its peak (although pay-tv declines are more rapid than before, as seen later in these Notes, and pay-tv penetration is not keeping pace with rental housing growth). Netflix s impact to date is more on traditional TV viewership. With connected TVs now in over half of all US households, Netflix is increasingly being watched on the TV set. LRG s recent survey found that, 85% of Netflix streaming users report watching Netflix on a TV set (compared to 79% in 2012). Given limits on time, it is likely that this TV viewing is often coming at the expense of traditional TV viewing, which has reportedly declined by about 10% over the past year. Over recent years, Netflix changed as a company, and has also changed the TV market. With the pace of subscriber growth in the US beginning to slightly wane, and about one-fifth of all Netflix subscribers sharing their accounts with others, the path forward for Netflix will continue to evolve in the future. Regardless of how these changes take place, however, Netflix is now solidly entrenched as a key component of the video landscape. Over Half of U.S. Households Have a TV Connected to the Internet L eichtman Research Group, Inc. found that 56% of all US households have at least one television set connected to the Internet via a video game system, a smart TV set, a Blu-ray player, and/or a stand-alone device (like Roku, Apple TV, Chromecast, or Amazon Fire TV) up from 44% in 2013, and 24% in 2010. While 27% of all households have a TV set connected via one device, 29% of households are now connected via multiple devices up from 17% in 2013. Overall, 29% of adults watch Internetdelivered video via a connected TV set at least weekly, compared to 17% in 2013, and 5% in 2010. Along with the increase in connected TV households and devices, there has also been an increase in watching Internetdelivered video on the TV set. Overall, 29% of adults watch Internet-delivered video via a connected TV at least Page 3
weekly, compared to 17% in 2013, and 5% in 2010. In addition, among Netflix streaming video users, 85% say that they watch Netflix on a TV set a slightly higher level than in any previous year. These findings are based on a telephone survey of 1,215 households nationwide and are part of an LRG study, Emerging Video Services IX. This is LRG s ninth annual study on this topic. Did you know? 60% of ages 18 34 stream an SVOD service monthly compared to 20% of ages 55+ Other related findings include: 52% of households get a subscription video on-demand (SVOD) service from Netflix, Amazon Prime, and/or Hulu Plus 43% of adults stream an SVOD service at least monthly 43% of pay-tv subscribers get Netflix compared to 50% of all pay-tv non-subscribers 19% of Netflix subscribers agree that their Netflix subscription is shared with others outside their household On a daily basis, 33% of adults watch video on non-tv devices (including home computers, mobile phones, ipads, tablets, and ereaders), and 58% weekly up from 27% daily, and 53% weekly two years ago 10% of adults are very interested in HBO Now at $14.99 per month without having to subscribe to a pay- TV service Internet-delivered video services and platform have grown significantly over the past few years, and one-third of adults now watch video on non-tv devices daily. Yet, with over half of US households now having at least one connected TV set, Internet-delivered video is also increasingly being watched on the TV, exemplifying the desire to watch longer-form video on the best available screen. Major Pay-TV Providers Added About 10,000 Subscribers in 1Q 2015 L eichtman Research Group, Inc. found that the seventeen largest cable and telephone providers in the US representing about 95% of the market added fewer than 10,000 net video subscribers in 1Q 2015, compared to a gain of over 250,000 video subscribers in 1Q 2014. This marked the weakest first quarter for pay-tv net adds since LRG began tracking the industry over a decade ago. The top pay-tv providers account for nearly 95.2 million subscribers with the top nine cable companies having about 49.2 million video subscribers, satellite TV companies having over 34.2 million subscribers, and top telephone companies having over 11.7 million subscribers. Page 4
Over the past year, pay-tv providers lost about 370,000 subscribers compared to a loss of about 65,000 subscribers over the prior year Other key findings for the quarter include: The top nine cable companies lost about 60,000 video subscribers in 1Q 2015 similar to a loss of about 50,000 subscribers in 1Q 2014 Satellite TV providers lost 74,000 subscribers in 1Q 2015 compared to a gain of 52,000 in 1Q 2014 Total DBS net adds in 1Q 2015 were the fewest in any first quarter, and fourth lowest in any quarter, since LRG began tracking the industry The top telephone providers added 140,000 video subscribers in 1Q 2015 compared to 251,000 net additions in 1Q 2014 Net video adds for the Telcos in 1Q 2015 were the fewest in any quarter since 4Q 2006 Over the past year, pay-tv providers lost about 370,000 subscribers compared to a loss of about 65,000 subscribers over the prior year The traditionally strong first quarter for the pay-tv industry did not prove to be so this year. Despite virtually breaking even in the quarter, the first quarter of 2015 marked the first significant sign of an acceleration in pay-tv subscriber losses. In addition to changes in consumer demand for video services spurred by competition from alternatives, the decline of about 0.4% of subscribers over the past year was also driven by several providers becoming more discerning in customer acquisition and retention, focusing on highervalue/lower-churn customers at the expense of the volume of subscribers. Nearly 1.2 Million Added Broadband in the First Quarter of 2015 L eichtman Research Group, Inc. found that the thirteen largest pay- TV providers in the US representing about 94% of the market acquired nearly 1.2 million net additional highspeed Internet subscribers in the first quarter of 2015. These top broadband providers now account for over 88.5 million subscribers with top cable companies having about 53 million broadband subscribers, and top telephone companies having over 35.5 million subscribers. Other broadband findings for the quarter include: Page 5
Did you know? Cable companies had 2.4 million more net broadband additions than phone companies over the past year Overall, broadband additions in 1Q 2015 were similar to those in 1Q 2014 The top cable companies accounted for 86% of the net broadband additions for the quarter versus the top telephone companies The top cable companies added over 1,000,000 broadband subscribers in 1Q 2015, representing 104% of the net additions for the top cable companies in 1Q 2014 The top telephone companies added about 160,000 subscribers, 81% of the total net additions for the top telephone companies in 1Q 2014 AT&T and Verizon added 573,000 subscribers via U-verse and FiOS in 1Q 2015, while having a net loss of 463,000 DSL subscribers. U-verse and FiOS broadband subscribers now account for 54% of Telco broadband subscribers compared to 40% two years ago The top cable broadband providers now have a 60% share of the market versus Telcos for the first time since 2Q 2005 Over the past year, there were about 3,000,000 net broadband adds compared to about 2,700,000 over the prior year Cable companies had another strong quarter for broadband in 1Q 2015, adding over 1,000,000 subscribers in the quarter. This was the first quarter with over a million net broadband adds for cable since 1Q 2008. Cable also accounted for 90% of the 3,000,000 broadband additions over the past year, growing their market share versus Telcos back to 60% for the first time in nearly a decade. The top cable broadband providers now have a 60% share of the market verses Telcos for the first time since 2Q 2005 Page 6
Industry by the Numbers Top Pay-TV Providers in the U.S. Cable Companies Comcast Time Warner Charter Cablevision Suddenlink Mediacom Cable ONE Other major private companies* TOTAL TOP CABLE Satellite TV Companies (DBS) DirecTV DISH TOTAL TOP DBS Telephone Companies AT&T U-verse Verizon FiOS TOTAL TOP PHONE TOTAL TOP PAY-TV PROVIDERS Subscribers at End of 1Q 2015 22,375,000 11,025,000 4,288,000 2,653,000 1,132,000 891,000 421,333 6,435,000 49,220,333 20,412,000 13,844,000 34,256,000 5,993,000 5,739,000 11,732,000 95,208,333 Net Adds in 1Q 2015 (8,000) 33,000 (5,000) (28,000) (6,400) 1,000 (29,884) (15,000) (58,264) 60,000 (134,000) (74,000) 50,000 90,000 140,000 7,716 Sources: The Companies and Leichtman Research Group, Inc. * Includes LRG estimates for Cox and Bright House Networks Company subscriber counts may not solely represent residential households Top pay-tv providers represent approximately 95% of all subscribers Top cable companies do not include overbuilder WOW with 606,500 subscribers Note that LRG consumer research finds that about 1% of households subscribe to both cable and DBS Net additions reflect pro forma results from system sales, acquisitions and reporting adjustments, and may not be directly comparable to prior reports Page 7
Top Broadband Internet Providers in the U.S. Cable Companies Subscribers at End of 1Q 2015 Net Adds in 1Q 2015 Comcast 22,369,000 407,000 Time Warner 12,581,000 328,000 Charter 5,208,000 136,000 Cablevision 2,767,000 7,000 Suddenlink 1,183,600 34,500 Mediacom 1,041,000 28,000 WOW (WideOpenWest) 722,000 (5,800) Cable ONE 496,579 8,125 Other Major Private Companies* 6,595,000 60,000 Total Top Cable 52,963,179 1,002,825 Telephone Companies AT&T 16,097,000 69,000 Verizon 9,246,000 41,000 CenturyLink 6,117,000 35,000 Frontier^ 2,359,500 17,000 Windstream 1,132,400 800 FairPoint 318,378 (3,246) Cincinnati Bell 272,700 2,800 Total Top Phone 35,542,978 162,354 Total Top Broadband Providers 88,506,157 1,165,179 Sources: The Companies and Leichtman Research Group, Inc. * Includes LRG estimates for Cox and Bright House Networks ^ LRG estimate, does not include wireless subscribers Top cable and telephone companies represent approximately 94% of all subscribers Company subscriber counts may not represent solely residential households Net additions reflect pro forma results from system sales, acquisitions and reporting adjustments, and may not be directly comparable to prior reports Page 8
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