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Thousands of over-the-air viewers flock to pay TV after analog shutdown

Pay-TV operators predicted they’d see a windfall of new customers when the DTV transition was complete and over-the-air analog viewers experienced the reality of life in an all-digital television universe. It appears they were right.

However, due to more than expected over-the-air viewers requesting government-issued coupons for subsidized digital converter boxes, estimates of new pay-TV subscribers was lower than expected. This was a disappointment to the subscription television industry and their investors who were hoping to compensate for the thousands of customers who have recently cut the cord in favor of viewing free programming over the Internet.

Wells Fargo Securities analyst Marci Ryvicker, providing the first analysis after the June 12 DTV transition, stated that about 653,000 of the estimated 18.3 million over-the-air only households will switch to pay television. That’s fewer than the 900,000 the analyst had initially predicted.

Cable is expected to be the big winner with 475,000 additional subscribers. Satellite television will gain 137,000 new subscribers, and telco companies — including Verizon’s FiOS and AT&T U-Verse — will gain 41,000 customers.

Complicating the statistics, however, was the timing of quarterly reports of the various pay-TV companies compared with the staggered nature of the DTV transition, which began in February and ended on June 12. According to Ryvicker, cable companies normally tally subscriber numbers one to two weeks prior to the quarter’s end. She estimated that cable operators likely began counting customers on June 15, only three days after the analog turnoff.

Because of this, Ryvicker thinks cable numbers will be more impacted in third quarter reports than in the second quarter. She expects to see the satellite TV counts boosted more in second quarter reports and cable more in third quarter reports.

Ryvicker, like most analysts who follow the publicly traded cable companies, revised her estimates downward after it was revealed that more homes than expected had requested government-issued coupons for digital converter boxes. About 16 million of the estimated 18.1 million U.S. over-the-air TV households asked for the coupons, which would enable them to continue receiving over-the-air signals.

Last month, Tom Eagan, media analyst for Collins Stewart, also reduced his estimates for subscriber growth to about 525,000 new customers as a result of the DTV transition. Eagan’s estimates cover the five major publicly traded cable operators, as well as satellite TV providers DIRECTV and Dish Network, and the telcos Verizon and AT&T.

While appearing to be a big boost for the pay-TV operators, the lower than predicted subscriber counts disappointed investors who had expected the DTV transition to help compensate for continued customer losses. In this dismal economy, an increasing number of mostly younger people are turning off subscription television services and moving to free programming available on the Internet.

In a second research note, Ryvicker noted the “tremendous uncertainly” about the future of cable television’s business model. That “model will have to evolve in order to stave off competition and remain relevant to consumers, whose spending habits have permanently changed, in our view,” Ryvicker wrote.

“Cable may have an even harder time in this recovery (whenever that may be) given the intense competition from the regional Bell operating companies, aggravated by likely long-term changes in both the housing market (directly correlated with subscriber gains) and consumer discretionary spending (directly linked to demand for advanced services),” Ryvicker wrote.

Should cable be unsuccessful in moving to the Internet, it could lose more subscribers than is currently anticipated; cord cutting in video and telephony may increase; and cash flow growth could slow due to higher capital expenditures, Ryvicker noted.