Will Today’s Strong Cable Sub Reports Calm Cord Cutting Fears?

This is the top of mind question for media investors today following surprisingly strong Q3 video sub reports from Time Warner Cable and Charter Communications — on top of earlier reports from Comcast and AT&T’s DirecTV.  The upbeat results seem to contradict the view that pay TV is melting faster than execs have let on: That belief depressed media stock prices since August when Disney acknowledged that ESPN had lost more subscribers than it anticipated.

Helped by an ambitious marketing campaign and a transition to digital services, the No. 2 cable operator said it lost just 7,000 video subscribers in Q3 for a total of 10.77 million. That’s the lowest decline for the quarter since 2006, and puts TWC on track to end the year with a net gain.

“We’re the first to acknowledge that we have a long way to go, but the strides have been significant,” CEO Rob Marcus told analysts.

Meanwhile Charter, which is awaiting federal approval for its $55 billion deal to buy TWC, reported that its residential video customers increased by 12,000. That’s a change from a 9,000 loss in the period last year, and brings its total to about 4.1 million.

TWC shares are up 1.8% this morning while Charter’s up 2.7%

With Q3 reports now in from distributors who serve about 70% of pay TV customers, the numbers “point to an annual decline of about 1.0-2.0 million subs,” Bernstein Research’s Todd Juenger says. “This is about the range most Media investors ‘say’ they’re comfortable with.”

MoffettNathanson Research’s Craig Moffett says it’s “time to change the narrative about cord cutting.” Although pay TV is “slowly drip, drip, drip declining,” Comcast, TWC and Charter “have blown away expectations for video subscriber losses, with Charter posting a subscriber gain. All three are now outperforming Pay TV as a whole. Cable is taking share.”

Evercore ISI Media’s Vijay Jayant also notes that industry sub losses in Q2 were “impacted by seasonality and company-specific corporate-level actions” which is why he expected the Q3 numbers to “bounce back.”

It’s not clear yet how much of the upbeat news includes a shift to smaller or so-called skinny bundles, or reflects consumer responses to short term pricing incentives.

But TWC’s Marcus made the case, in a call with analysts, that his company has ambitious plans to improve the customer experience.

The company is testing an Internet delivered version of the TV package that subscribers might be able to use with a smart TV device, such as a Roku box, or on mobile devices without a set top box. TWC is working on providing emergency alerts, closed captioning, and second audio programming. It’s also lining up local broadcasters.

“Over time you’ll see us add features to the TWC app until over time it’s indistinguishable,” he says.

Marcus left the door open to the possibility of offering wireless phone services built around TWC’s WiFi, with back-up from Verizon. “It’s an interesting possibility, but it’s still just an idea.”

But TWC does not plan to bid for airwave spectrum the FCC plans to auction. The capacity will come from local TV broadcasters who’ll share in the proceeds.

In a separate call with analysts, Charter CEO Tom Rutledge said that he’s “actively thinking about that auction and what to do about it.” The company’s position is complicated by its deals to buy TWC and Bright House Networks.

As for the financials, TWC reported Q3 net income of $437 million, down 12.4% vs the period last year, on revenues of $5.92 billion, up 3.6%. The sales number trailed analyst forecasts for $5.96 billion. But adjusted earnings per share of $1.62 were well ahead of projections for $1.57.

Programming costs were up 10.2% to $1.46 billion. The increase was partly driven by hefty expenses to carry the Los Angeles Dodgers on TWC’s SportsNet LA.

Charter moved to a $54 million net profit from a $53 million loss last year, with revenues rising 7.2% to $2.45 billion. That’s a hair below analyst predictions for $2.46 billion. Earnings at 48 cents a share were well ahead of the 39 cents that the Street expected.