HBO, Showtime sidestep soft MSO market

Premium cable channels enjoyed an unexpected growth spurt in late 2011, according to data from SNL Kagan.

HBO, Showtime and Starz all finished the fourth quarter last year strong enough to boost their category by nearly 2.2 million subscribers. That total comes on the heels of relatively sluggish second and third quarters that saw smaller increases of 525,000 and 900,000, respectively.

HBO’s increase of 190,000 subs in the fourth quarter reversed two consecutive quarters of slight declines and represented its biggest quarter-over-quarter lift since June 2006. While Showtime and Starz continue to trail HBO’s 28.4 million subs, they both saw much bigger increases.

Showtime added 700,000 subs in the quarter for a total of 21.3 million subs. Starz also saw a big gain with 595,000 new subs in the quarter, bringing its total to 19.6 million. Both totals represent their biggest quarter-over-quarter increases of 2011.

But what may be oddest of all is how any of those channels managed to grow over a period when cable, satellite and telco services only managed to muster 300,000 sub adds, doing little to scotch fears that cord-cutting is a threat to the multichannel world.

“The whole quarter was so unusual because there wasn’t much basic (cable) growth,” said Deana Myers, analyst with SNL Kagan. “The fourth quarter is typically a growth quarter for premium channels, but the breadth and depth of the increases took me by surprise.”

As for why the sudden growth, Myers theorizes that the sub losses that struck cable operators may have ended up gains for satcasters and telcos that drew new blood with cheaper packages that included premium channels. Nearly all of the 2.2 million additions came from a 50-50 split between satellite and telcos, with cable just accounting for 135,000 of those subs. “Telco and DBS are really good at promoting premium,” Myers said.

Satellite in particular may have been responsible for powering the increases at Showtime and Starz, which saw heavy promotion including a Dish Network campaign that gave away free trial subscriptions to Starz.

Myers believes the pay TV channels also benefitted from aggressive marketing, driven in part by a portion of affiliate deals with a flat-rate structure that incentivize MSOs to sell subscriptions for which they get a highly favorable split of revenues. Showtime and Starz are known to have a higher portion of those deals than HBO.

On the programming side, the revival in HBO’s growth is strange considering its fourth-quarter programming highlights, including “Boardwalk Empire” and several comedies that have since been canceled, weren’t among its biggest audience draws. Showtime, on the other hand, saved its best stuff for that quarter, including two of its biggest series, “Homeland” and “Dexter.” Starz introduced its drama series “Boss” that quarter as well.

Over the course of 2011, the multichannel services added 5.6 million subs, a 5.5% increase over 2010 additions. But that was still a comedown from 7.3 million in 2010.

The numbers may also be an indication that 30 million is something of a ceiling for the pay TV category; HBO has been hovering around 28 million for the past five years and hasn’t cracked 29 million since the first quarter of 2009.

After losing 1.6 million subs in 2010, HBO managed to add 164,000 last year. Showtime made a far bigger jump of 1.87 million subs year-over-year, a gain of 9.6%, while Starz went up 8% with an increase of 1.47 million.

While Showtime and Starz continue to close the gap on HBO, the Time Warner-owned channel still has a commanding lead among pay TV nets. In addition, HBO is a far more diversified biz than the other two, with a massive sub base overseas and more robust ancillary revenue streams from syndie to homevid. Of course, HBO’s costs are much higher than Showtime and Starz as well.

HBO also commands a more generous split of sub fees with MSOs than Showtime or Starz, according to Nomura Research. Regardless, pay TV subscription dollars are an important metric for all three companies, driving a significant portion of profits to their parent companies.

Pay TV nets posted gains even as Netflix regained roughly 600,000 of the 800,000 subs that dropped the streaming service in the third quarter, bringing it to 24.4 million subs at the close of 2011 — more than Showtime or Starz.

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