A 3-Point Checklist for Investing in Cable

The cable industry is dying.

That’s a refrain you hear quiet often, and it’s true in a sense. The number of homes paying for traditional wired or satellite pay television has been dropping, with the largest pay-TV providers in the United States (which cover about 95% of the market) having lost 795,000 video subscribers in 2016, according to Leichtman Research Group (LRG). That’s almost twice the 445,000 subscribers lost the previous year, but it shows a potentially slowing escalation, as the 2015 drop was over three times the 125,000 subscribers lost in 2014.

Traditional pay-TV, however, no longer tells the full tale for the big names we think of as “cable companies.” Broadband has become equally important, and that’s a metric that’s been growing faster than pay-TV has been falling. Roughly the same group of companies LRG tracks in pay television gained 2.7 million broadband customers in 2016, after adding 3.1 million in 2015, and 3 million in 2014.

Investing in “cable companies” has become about a lot more than cable. In fact, it’s hard to call a behemoth like Comcast (NASDAQ:CMCSA) or AT&T (NYSE:T) a cable company — but it’s still worth examining that part of their businesses. Charter Communications (NASDAQ:CHTR) and DISH Network (NASDAQ:DISH), which round out the four biggest pay-TV companies in the U.S. by subscribers, are more traditional pay-TV plays, and even in those cases you have to look at more than just falling subscriber counts.

1. Look at the full subscription picture

As I noted, there are more broadband users being added than pay-television subscribers leaving. That means that even on a pure by-the-customer basis, in 2016 Charter covered its 187,000-customer cable loss by adding 1.6 million internet subscribers, according to LRG. Comcast gained in both video (161,000) and broadband (1.3 million) for the year, while AT&T lost 131,000 pay-television customers (gaining at DirecTV, but losing with U-verse) and dropped 173,000 broadband subscribers as well. DISH lost a little over 1 million satellite subscribers, according to LRG, replacing 645,000 of them with generally lower-priced Sling TV subscriptions. DISH doesn’t offer internet service.

2. Does the company have leverage?

In addition to looking at subscriber numbers, it’s worth noting that some companies’ non-cable or broadband properties (or assets) give them added leverage (how they use their multiple products and offerings to their advantage) in a competitive environment. Although deciphering that is not a hard science like customer counts.

A brand like Comcast, which owns multiple cable networks, NBC, and a film studio, as well as local sports networks in many markets, may have more tools at its disposal to keep customers happy than DISH or Charter, which are mostly pure service plays (though Charter does own some regional sports networks).

AT&T has a different kind of leverage because it can offer a variety of service bundles. A recent example was in offering customers unlimited-data calling plans — something it wasn’t selling new subscribers at the time — if they also signed up for DirecTV.

Comcast’s asset leverage is less direct than AT&T’s. The media giant’s leverage hasn’t been brought to bear because it hasn’t really had to use it, given its subscriber trends, but it could use everything from exclusive content to discount theme-park tickets if it wanted to, as a way to keep cable/broadband customers happy.

Bundling like AT&T does, and as Comcast and Charter do to a lesser extent, make it hard for customers to just drop cable. If they do, they often lose discounts, pushing up the price they pay for internet, phone services, or whatever else they might have, sometimes making cutting the cord not quite the value it seemed to be.

3. Is there a plan for changing consumer needs?

Just because consumers are cutting the cord doesn’t mean they no longer want many cable channels. In some cases they want their favorites but aren’t willing to pay for the bloated packages that have become the norm with traditional cable. This is an area where DISH and AT&T have early edges. Both companies offer streaming cable-like packages (Sling and DirecTV Now, respectively) that contain many of the most-popular cable and some broadcast networks for prices much lower than traditional wired or satellite pay television.

Comcast and Charter have both tested skinny bundles, but neither has an answer for Sling and DirecTV Now. The problem for AT&T and DISH is that if the market shows it wants that — which it has not yet, with their two services capturing only 1.38 million customers in a 93.6 million home pay-TV universe, according to LRG — Comcast and Charter could easily create their own streaming products.

How does the math add up?

When you check off the boxes for investing in cable, Comcast and AT&T look like the big winners. Comcast’s ability to grow its subscriber counts in video along with broadband in 2017 is simply astounding, and the company’s only weakness is that it lacks a streaming service. So far, it doesn’t need one to hold on to its customers, and sacrificing high-paying, higher-margin cable customers for streaming skinny-bundle users is bad math.

Using these factors, AT&T also rates strongly. It has the ability to tie customers to its brand by bundling services, and it has two alternatives to traditional cable in DirecTV’s satellite and streaming product, which, with 200,000 total subscribers so far, does not appear to be a big drain on the company’s main customer base.

The obvious losers here are Charter and DISH, with the satellite company being the least attractive stock. Charter, which now owns the former Time Warner Cable, still operates like an old cable company. It does bundle its services, and its total subscriber counts are positive, but it rates a solid step below Comcast and AT&T.

DISH has no leverage and hasn’t shown that Sling has allowed it to make big gains from people leaving other pay-television providers. So far, in fact, it seems the company has moved some of its own user base to the lower-paying tier.