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The Industry

The Waning of the Bundle

For many years the cable companies (and telcos who sold cable TV) have relied on the power of the bundle as a way to gain and then retain customers. The bundle was one of the predominant marketing tools for such ISPs. They showed customers that there was a big savings from buying multiple products.

I can remember the first time I moved into a Comcast area about eight years ago and wanted to buy only broadband. The company strongarmed me and wouldn’t let me buy broadband without some form of a cable product, so I ended up buying the smallest cable product possible – and never even connected the settop box. The days of forced bundles are now gone, but in this case, Comcast got an extra $30 per month from me for several years, which I had to pay since the only alternative was super-slow DSL.

My consulting firm has done market surveys for twenty years, and I can remember for many years that at least 70% of customers of cable companies were buying a bundle. Most of these bundles were not forced like mine. At the peak, over 75% of homes were buying traditional cable TV, and most cable TV customers who became interested in buying broadband readily agreed to the bundle.

Buying a bundle felt like a good deal since the ISP could show you a big savings over buying the various products individually. The bundle savings was the predominant marketing story used for many years to lure existing cable customers into adding broadband. The bundle was possibly the most important reason why the cable companies captured so many DSL customers – because DSL customers in cities were not dissatisfied with speeds in the same way they became during the pandemic.

But then along came Netflix and other online video providers and cord cutting, and millions of customers started dropping cable service. That’s when the downside of bundling became apparent. The big cable companies used bundling to try to bully customers into not dropping cable TV. Let me give an example. If a customer had a $100 bundle of both broadband and cable TV and asked to break the bundle, they might have been told that their new bill was going to be $70. It didn’t matter which of the two services they dropped, the service that remained was going to cost more than half of the current billing. When customers heard this, many of them decided not to break the bundle – they weren’t going to get the savings they hoped for.

The bundle must still be a powerful tool to lure customers because the web is full of inexpensive one-year deal for bundles for new customers – likely aimed at the remaining DSL customers. . But the interest in buying traditional cable is plummeting in the same manner as telephone service did a decade ago. Last year the cable industry collectively lost nearly five million cable customers, and the rate of homes dropping cable seems to be accelerating. One has to think that a lot of those millions that dropped cable last year decided to break the bundle to do so.

By the end of this year, the national penetration rate of households buying traditional cable TV is going to drop below 50%. I don’t think anybody knows when and where the cable market will bottom out – there will likely remain loyal families for many years to come.

I have to wonder if, at some point, the cable companies will give up on the idea of bundling. The metro cable markets are going to soon be flooded by competitors – first by the cellular companies selling FWA cellular broadband, and over the next few years by a ton of new fiber competition. Those new competitors are going to be focused entirely on offering affordable broadband prices, and the bundle issue might muddy the water more than help the cable companies. It’s going to be an interesting marketing evolution to watch.

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The Industry

The Death of the Big Cable Bundles

There is a ton of evidence that customers no longer want the traditional 200 – 300 channel cable packages. For example, we’ve seen the number of customers of ESPN plunge by millions over the last year to a far greater extent than the overall erosion of the cable industry. The ESPN phenomenon can only be caused by cord shaving – or customers downsizing to smaller packages.

We got more evidence of this last week when Verizon CEO Lowell McAdam said that 40% of cable packages sold on Verizon are now skinny bundles. He said that if he had a preference that Verizon would only offer skinny bundles. He doesn’t believe there is customer demand for the larger packages.

This makes sense and we have had the statistics for years to tell us this. A study by Nielsen earlier this year showed that the average person watches around 17 channels to the exclusion of others. That’s means that the average household is wasting a lot of money paying for channels they don’t want.

Other studies tell us the same thing. A Gallup poll earlier this year said that 37% of households don’t watch any sports. And yet sports programming has become the most expensive component of the big cable bundle. And it’s only common sense that within the 63% who watch sports that a lot of them must be just casual sports fans or fans of only one or two sports.

And the trend has to be downward for the channels on traditional cable. In May of this year Nielsen reported that almost 53 million US homes watch Netflix. Another 25 million watch Amazon Prime. Another 13 million watch Hulu, and since they beefed up their lineup and slashed their price the number of viewers is bound to climb.

Unfortunately skinny bundles are not universally available everywhere. Only the largest cable companies have been able to negotiate for the right to sell smaller bundles so far. And among the large cable providers only Verizon and Dish Network are really pushing the skinny bundles. There are also a few skinny bundles on the web, like Sling TV, but every time I look their packages are getting fatter.

I can’t help but speculate what would happen if every household was given the choice tomorrow to downsize their cable bundle and monthly cable bill. Leichtman Research Group announced a few months ago that the average cable bill in this country is now $103.10. That’s an astronomical number, and if that is the average a lot of homes are paying a lot more than that. Contrast this with new the Dish Network skinny bundle that offers 50 channels for $39.99 per month.

The skinny bundle that is doing so well at Verizon isn’t even cheap and starts at $55 per month – but it’s a lot less expensive than the big traditional bundles. And the Verizon price is reduced significantly for customers buying a triple-play bundle.

I just wrote a blog last week that talked about how Wall Street is becoming unhappy with cable programmers. At least one analyst has downgraded Discovery Networks and Scripps. We might finally be seeing is a whole host of issues coming to bear in the industry at the same time. Cable bills are finally getting too expensive for a lot of homes. People are becoming more interested in content that is not on traditional cable. And the programmers are losing a little bit of the total lock they have had on the industry.

It’s hard to say when, or even if the industry is going to break in any significant way. There are still just under 100 million homes paying for some version of cable TV. And the overall effect of cordcutting has only been shaving that by a little over 1% per year. But if the Verizon trend becomes the norm and most customers start preferring skinny bundles then the industry will still be transformed. ESPN has lost 10 million customers since 2013, but over half of those losses have been in the last year. The same thing has to be happening to many other of the less-popular cable channels, and at some point the math just isn’t going to work for the programmers.

We’ve seen a similar phenomenon once before. We saw a gradual erosion of home landline telephones after the advent of the cellphone. But after a few years of gradual declines we saw a deluge of people dropping home telephones. You could barely turn on a TV without hearing about how having a home telephone was a waste of money, and so it became the popular wisdom that home phones weren’t needed. The same thing could happen with skinny bundles and the industry could be transformed in a short period of time if tens of millions of homes downsize their cable bundle. It is going to happen, we’ll just have to wait and see how fast and to what degree it’s going to occur.

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The Industry

Why Aren’t There More Cord Cutters?

Various analysts have been trying to define the number of cord cutters and they differ a bit in their estimates. That’s not surprising since there is no easy way to count cord cutters. One statistic that regularly gets reported is the drop-off in traditional cable TV subscriptions. But even that statistic doesn’t tell the whole story. Usually what is reported is the change in cable subscribers from the largest cable companies. That misses the changes in subscribers from the many smaller cable providers. And the analysts rarely account for the fact that there are approximately 250,000 new housing units in the US each quarter. When you consider that, even should the nationwide cable numbers stay identical from one quarter to the next there are actually 250,000 homes that have dropped or elected not to buy cable.

But even with those caveats, most analysts would agree that there is now probably somewhere in the range of 500,000 households leaving traditional pay-TV per quarter, which works out to about 2% of the industry annually. When looked at from that perspective it’s clear that unless something starts driving people away from pay-TV a lot faster that there are going to be huge numbers of cable subscribers around for many years to come. With the major cable companies starting to offer skinny bundles, it’s certainly possible that the losses will slow or even slightly reverse.

One way to understand why there are not more cord cutters is to look at what people watch. Nielsen, Variety and others publish statistics on the most watched shows and programming on TV. For the most recent full 2014-15 season of TV the list of the 50 most-watched shows on TV is striking in that it is still made up almost entirely of shows that are on the major traditional networks. This starts with The Big Bang Theory that averaged 21.3 million weekly viewers down to The Goldbergs that averaged 9.2 million. Also on the list are Sunday-night, Monday-night, and Thursday-night football.

There are only three series on the list that are not from one of the primary networks: The Walking Dead on AMC at #4 and with 19.9 million average viewers, Downtown Abby on PBS at #20 and with 12.9 million viewers, and Game of Thrones on HBO at #45 and with 9.4 million average viewers. That leaves 44 of the top 50 series that were on ABC, CBS, Fox, or NBC. It is worth a note that Netflix does not release the viewers for their own series and some of them might belong on this list.

In addition to various weekly series there are also numerous one-time events on TV. It turns out last year that 34 out of 35 of the most watched one-time events were all NFL football games, with the one exception being the Macy’s Thanksgiving Day parade. But there are lots of other one-time events like the Emmys, the Oscars, or all of the other kinds of sporting events that people regularly watch.

I’ve always wondered why more people don’t drop expensive cable subscriptions since most of the series and the one-time events they love are on network TV. Most people in a metropolitan area can get great reception with a $100 digital antenna and can watch all of the network series and sports carried on those networks. With Hulu you can see the vast majority of the network shows that you might have missed live. And with Sling TV you can get a few of the most popular cable channels plus ESPN.

The cable companies have done a good job at making it easier for people to keep their expensive subscriptions. For example most of them now offer the TV Anywhere app or some proprietary version of it. This lets people who pay the traditional cable bundle watch many shows from any device over the web. But there generally is a delay of a day or more until most shows make it to the TV Anywhere lineup.

A big part of that answer has to be that there is programming within the big cable bundle that people value enough to keep paying the big monthly bill. For instance, parents with smaller children want access to several cable-only channels that cater to the kid demographic. People really like cooking shows or travel shows or reality TV that are on one of the various cable networks. But again, the vast majority of this programming can be watched on Netflix, Hulu, or Amazon Prime, albeit on a delayed basis. But I guess that many cable network shows are not individually popular enough to be watched by many people, but yet which each has their loyal followers.

Some of the reason for lack of cord cutting is also probably that people are either not quite yet comfortable enough to take the big leap away from cable or are procrastinating on the eventual decision. We saw this as landlines went down and that many people kept a landline in their home for years after they did all of their communications by cellphone. I’ve noticed that most surveys show a lot more people who say they are going to drop cable than who actually do it. Those are the folks that probably have the cable companies worried, because the cord cutting trickle could turn into a flood if the public decides en masse that the alternatives are good enough.

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