Two Views on Skinny Bundles

The industry is abuzz this year with talk about skinny bundles. But there is a lot of disagreement about whether skinny bundles are really going to be effective and if they will put a serious dent in the pay-TV market. Today I look at opposing views from two major players in the industry.

First are the recent statements by David Zaslav, the CEO of Discovery Communications. He says the skinny bundles we see in the US are not really ‘skinny’ and are instead just another way to package traditional programming. He says that Discovery sells programming around the world and that in almost 200 other worldwide cable markets there are true skinny bundles that cost between $8 and $12 per month. He says these bundles are popular and give people a real alternative to the big cable bundles.

By contrast all of the major bundles on the market today in the US are priced at $30 to $60 and just provide a different alternative to the cable companies. The current US bundles are expensive because they include high-cost programming like sports, movie channels and major cable networks.

Zaslav’s statements are somewhat ironic since his company is one of the major programmers that drives up the size and the cost of traditional cable TV big channel line-ups. Discovery today includes a suite of 13 channels such as the Discovery Channel, TLC, Animal Planet, Science, and a host of other Discovery channels. Many of my clients are required to carry all of these channels if they want to carry any of them, and at least eight of these channels are required to be in the lower expanded basic tier where most customers have to pay for them. It’s also interesting that most of the current on-line skinny bundles in the US are not carrying the Discovery networks.

An interesting contrast to this comes from Charlie Ergen, Chairman and CEO of Dish Networks. He is wildly enthusiastic about the current US skinny bundles, including his own Sling TV. He says the company first launched Sling TV to try to lure cord cutters back to a paid subscription. But the company found out that they were instead taking customers away from pay-TV including his own satellite customers from Dish networks.

He believes that the public perceives the current US skinny bundles as a real alternative to the traditional pay-TV bundle. Sling TV has done better in the market than original projections. At the end of the 1st quarter of 2017 the company had 1.3 million customers, about double where they sat just last June. The other similar subscription services from Hulu and YouTube are also doing quite well and together are carving off a noticeable slice of the traditional TV market.

But Ergen admits that his Sling TV is a replacement for traditional TV, not a wildly different alternative. A lot of customers like on-line services because they offer the the ability to start and stop service at will or to add or subtract additional small packages of channels to the line-up as their interests change. It’s certainly possible that much of the success of these new bundles comes from consumers who are fed up with the big cable companies.

It’s also debatable if people who move from traditional cable to Sling TV or similar services can be classified as cord cutters. They are cord cutters in that they got rid of coaxial cable feed from the cable company, but they are still subscribing to a lot of the same channels as before and which are still broadcast at set times on a line-up.

For now it looks like the current skinny bundles are meeting moderate success and are attracting a few million customers. They haven’t been around very long and I suspect that a lot of consumers have either never heard of them or haven’t given them any serious consideration. But you can save money with these packages while gaining the flexibility to connect and disconnect on-line at any time – avoiding those dreadful call to cable customer service.

I know I would love to see the skinny bundles that David Zaslav describes. I imagine that each $8 – $12 bundle contains a limited number of channels. At a small size these are probably as close as anybody can get to a la carte programming. And at the end of the day that’s what a lot of cord cutters really want.

The Resurgence of Rabbit Ears

rabbit earsThere is perhaps no better way to understand the cord cutting phenomenon than by looking at the booming sales of home TV antennas known as ‘rabbit ears’ used to receive local television off the airwaves. A study released by Park Associates shows that 15% of households now use rabbit ears, and that is a pretty amazing statistic. That is up from 8% of households from as recently as 2013. And I recall an earlier time when this had fallen below 5%.

For the longest time the TV-watching public was counted in three groups – those who had cable TV (including satellite), those that used rabbit ears to watch local TV only, and those with no TV. We now have a fourth category – those that only watch OTT programming such as Netflix.

I was once in the category of not watching TV at all. I remember twenty years ago I went to Circuit City (now gone) to consider buying a set of rabbit ears and the clerks there weren’t even sure if the store carried them. With some asking around they found that they had a few units of one brand that had been gathering dust.

But today there is a resurgence in rabbit ears and there are easily a dozen major brands. And there are new rabbit ear options coming on the market all of the time. For example, Sling TV just launched AirTV, a $99 box that integrates Sling TV, Netflix and high-quality rabbit ears together with a voice-activated remote control that makes it easy to cut the cord. This looks to be one of the better voice-activation systems around and lets you search programming options by using the name of shows, actors names or genres of types of programming.

Since most people have had cable TV for a long time many have no idea of what they can receive off air for free. The FCC has an interesting map that shows you the expected reception in your area. In my case the map shows that I can get a strong signal from every major network including CW and PBS along with signals from MyTV, Univision and a few independent local stations.

The Parks study also looks at other industry statistics. A few of the most interesting ones include:

  • Penetration of pay-TV was down to 81% in 2016 and has fallen every year since 2014. Parks cites the normal reasons for the decline including the growth of OTT programming, the increasing cost of a cable TV subscription and growing consumer awareness that there are viable alternatives to cable TV.
  • Satisfaction with pay-TV keeps dropping and only one-third of households now say that they are very satisfied with their pay-TV service.
  • OTT viewing continues to rise and 63% of US households now subscribe to at least one OTT offering like Netflix while 31% of households subscribe to more than one.
  • In 2016 12% of households downgraded their pay-TV service (meaning dropped it or went to a less expensive option). This was double the percentage (6%) who upgraded their pay-TV service in 2016.
  • Very few cord nevers (those who have never had cable TV) are deciding to buy pay-TV, with only 2% of them doing so in 2016. This is the statistic that scares the cable companies because cord nevers include new Millenial households. This generation is apparently not interested in being saddled with a pay-TV subscription. In past generations the percentage of new homes that bought pay-TV closely matched the overall penetration of the market – buying TV was something you automatically did when you moved to a new place.

These statistics show how much choice the OTT phenomenon has brought to the marketplace. Ten years ago there wouldn’t have been industry experts predicting the resurgence of rabbit ears. In fact, rabbit ears were associated with other obsolete technologies like buggy whips and were used as the butt of jokes to make fun of those who didn’t like the modern world. But this is no longer true and new rabbit ear homes are perhaps some of the most tech savvy, who know that they can craft an entertainment platform without sending a big check to a cable company.

 

Is Cord Cutting Real?

2000px-Scissors_icon_blackNow that the 2015 cable numbers are final, we can take a fresh look at cable customer trends and at how real cord cutting might be. The best place to start to understand the number of cable customers has always been Leichtman Research, and they found that cable providers lost 385,000 cable subscribers for the year. This is more than double the 150,000 customers lost in 2014 and nearly quadruple the 100,000 loss for 2013. Leichtman says that number represents about 95% of the industry and they have no reliable way to count customers at many of the smallest providers.

The interesting thing about that number is that it differs from many other industry reports that report that the industry had turned around the losses from the year before . For example, right after the end of the year there were reports that the biggest cable companies had a net gain of customers for the year – and they did. But if one looks at those gains closer, it’s obvious that Comcast and Time Warner and a few other large companies put a major emphasis on adding cable customers after their stocks got pummeled in the spring of 2015 when Wall Street reacted negatively to news of cord cutting. Those companies spent a huge amount of advertising dollars last year to get their customer counts up slightly by the end of the year.

But outside of the biggest companies there were plenty of other companies with significant losses for the year. Cablevision and Cable One each lost 87,000 customers for the year and Mediacom lost 35,000. The private companies of Cox, Bright House Networks and Suddenlink together lost over 153,000 customers.

The satellite providers were interesting as usual. Dish reported losing 81,000 customers for the year and DirecTV gained 167,000, for a net gain of 86,000 customers for satellite. But Dish included Sling TV in their counts, and without that the combined loss for the two companies would have been 450,000 for the year. It’s really quite ridiculous to count an OTT service like Sling TV the same as a cable subscription since that is the type of service that cord cutters are changing to. And so, if we subtract out Sling TV from the national counts, the actual loss of cable customers for the year was actually over 900,000.

But even that is not the end of the story. Statistca reports that there were about 1.1 million new housing units added in 2015 (meaning single family homes, condos and apartments). If you assume that nationwide cable penetration is around 75% you would expect the cable providers to have added about 825,000 new cable customers for the year from those new housing units. And if they did so, then those additions would mask losses of cable customers elsewhere. So this would mean the industry lost an additional 800,000+ customers or a total of over 1.7 million customers for the year. I’m not sure why the people that count cable customers never account for the growth of the overall market.

Not counted in all of these numbers are the cord shavers and I don’t think there is any way to count them other than perhaps by nationwide surveys. All of the big cable companies have either added or plan to soon add a skinny bundle that to deliver over the cable system. While this is a really new phenomenon, the early reports are that these packages are really popular. For example, Verizon had one of the first skinny bundles and reported that a majority of their new FiOS cable customers in the fourth quarter of 2015 chose the smaller, cheaper bundle.

The skinny bundles are the cable company’s attempt to keep cord cutters connected to their systems, and it’s likely to be fairly successful. If the cable companies can come up with meaningful alternatives to the giant bundles then many people will opt to downside their cable bill.

But I doubt any of the cable companies are going to share the cord shaver numbers and the only place we might see it is by watching the average cable revenue per customer. But the cord shaving phenomenon is just as significant as cord cutting if customers are bailing on the multi-channel bundles and picking plans with a much smaller number of channels. That is going to drastically reduce the number of people watching many of the less-popular cable networks.

I guess my conclusion this year is that cord cutting is real and that it is accelerating. Cord shaving is probably going to quickly become a much more significant phenomenon as people decide to try to only pay for what they want to watch. And while cord cutting is not nearly as significant yet as the number of people that have fled landline telephones, the combined cord cutting and cord shaving is already large enough to start causing real disruption in the industry – and there is no reason to think it’s not going to get a lot bigger.

The Future for Cord Cutters

RCA_CT100-hdI read an article by Nathan McAlone in Business Insider that opined that people are going to look back five years from now and wish for the good old days of the big cable packages. I suspect for many people he might be right.

Right now cord cutters are definitely happier with dropping out of the big packages and finding smaller solutions that fit them specifically. As a family that hasn’t had a cable package in years, the recent emergence of online content feels wonderful to my family. Even with my few paid choices of Netflix, Hulu, Amazon Prime, and Sling TV I have far more options than I know what to do with. I have found myself liking to binge watch obscure series like Death in Paradise on BBC that is about a detective on a fictional island in the Caribbean. Even with the big cable package I would not have been likely to have found or watched this kind of programming.

But there are going to be long term consequences of cord cutting and of the big cable companies migrating to skinny packages. Verizon FiOS recently reported that a majority of their new customers are choosing their small skinny package rather than the traditional big package.

The main consequence is going to be to programmers. Every customer who cuts the cord or downsizes to a skinny package stops paying fees to a big pile of networks in the traditional bundle. We now know that ESPN has lost 7 million customers over the past few years and they cannot be the only one. One has to think that the same is happening to all of the sports networks like the Big Ten Network or Tennis TV. And it’s likely that over time the same thing is going to happen to any network that doesn’t have worldwide appeal such as religious networks, weather networks, music networks, or even the smaller networks such as Discovery Health that are only carried in the big cable packages.

I see several long term consequences of the shift to skinny bundles. First, I see it returning some of the negotiating power to service providers for those networks that are only in the big packages. Cable companies are going to become more and more willing to say no to programmer demands that they must carry the full suite of everything offered by a programming company. The programmers will still be in the driver’s seat for the most popular networks – those channels that everybody wants to put into their skinny bundles like the Food Network or the Travel Channel. But the programmers are going to lose leverage with their less popular networks because cable systems will be more and more likely to push customers to smaller bundles rather than be held hostage to huge payments for content.

I also see some of the less popular networks folding. The only thing that keeps a lot of these networks going is that they get a few cents per month from 100 million households. When that audience retracts a lot of them are not going to be economically viable.

Interestingly I think skinny bundles will mean more profits to cable providers. The margins on the 300-channel line-ups are getting thinner all of the time. There is the possibility of being able to make more money selling 30 channels than there is for selling 300.

And finally, as the article that prompted this blog suggests, I think eventually it will get very expensive for the cord cutter who wants to buy a lot of different content. It might well cost more to put together the channels that you really want than buying today’s big packages. It’s not hard to imagine a world where ESPN costs $20, AMC costs $10, and a regional sports network might cost $15. Before you know it, if you have a wide interest in different programming, you could pay more than today for many fewer choices. But I think in the long run that the average person is going to do what I do today. They are going to buy a pile of programming and then learn to be happy with what they have bought. I find myself watching things now that I would never have considered years ago – and it works for me. I don’t miss the channels that I can’t see.

The Birth of a New Digital Divide

eyeballPew Research Center released some interesting data a few weeks ago that suggest that cord cutting might be starting to affect broadband connections and not just cable connections. According to a recent Pew poll, 67% of households now have a landline broadband connection, down from a high in 2013 of 70%.

When you consider both landline broadband and cellular data products together you get a slightly different story and the combination of the two services was 80% of households in 2015, up from 78% in 2013. Pew draws the conclusion that there is now a migration from households with a wireline connection to households that only use cellphone data. Pew reports that 13% of households now rely on cellphone data as their only connection to the Internet.

Luckily the latest Pew poll dug into this phenomenon in more detail and what they found was that 59% of all of the households using only cellular data do not buy a landline data product due to price. This matches very well with the report put out by the Brookings Institute last month that shows that landline broadband adoption rates are very related to income.

But Pew is the first one to suggest that there is an overall drop in landline broadband adoption. For example, when the major ISPs release customer counts every quarter there has been a steady and noticeable overall growth in broadband customers. Within those statistics there has been a steady and noticeable drop in DSL customers and an increase in cable modem customers, but overall the trend has always been upward.

But if the Pew numbers hold up to be right over time, then this might suggest that we are going to reach a market cap on broadband customers that is lower than what the industry has been expecting. And this cap will be driven by the price of the products, not the desire of homes to have broadband.

I was just reminiscing about the changes in prices in the industry the other day. I can remember back to a time in the mid-90s when I paid $19.95 a month to AOL, something a little less than $30 for my landline from Verizon, and around $50 for a cable package that included some movie channels. That was the whole triple play for $100 per month.

But today the cost of telecom products is much higher and has grown much faster than inflation. We now have households where most of the family pays at least $50 each for a cellular line (not including the cost of the phone). While there are still some inexpensive DSL plans available in some places, it costs at least $50 per month to get a decent data speed. And the big cable companies all report the average revenue from all of their cable plans is more than $70 per month. Only about half of households still have landlines and those can vary anywhere from $20 to $40 per month. And the costs don’t stop there. Most people are paying for settop boxes and cable modems, the prices on both have crept up to $7 – $8 each. And all ISPs now have a range of ‘fees’ that many people assume are taxes but which go straight into the ISP’s pockets.

And then there are the new services that weren’t around in 1995: a lot of houses now pay for Netflix and possibly for music services like Spotify, people must now buy cellphones that are generally obsolete every two years, and on top of those prices the carriers want to tack on handset insurance and other fees to cellular bills. Finally, there are data overages. Today that mostly affects cellphone users but, as seen by the rash of complaints against Comcast, is likely to start affecting landline data bills as well.

While it’s possible to work hard and find bundles to try to hold these costs down, without bundles these equate to telecom bills north of $300 per month. And even those that bundle would have a hard time buying these all of these things for under $200 per month.

So it’s not hard understand why households find they can’t afford all of these things. It’s hard to imagine any household that wants to partake in modern services like Netflix being satisfied with only cellular data and its tiny caps. But if you are on a budget something has to give and it’s pretty easy to understand that somebody is going to value a smartphone over a home Internet connection if you can only afford to buy one of them.

When you consider that the ISPs all intend to start increasing the cost of broadband annually like they have always done with cable then one can expect this situation to get worse over time. This means there will be a whole new digital divide defined strictly by income. People will want the products in the market but will be unable to afford them.

Why Aren’t There More Cord Cutters?

rabbit earsVarious 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.

The Non-boom of OTT Programming

Fatty_watching_himself_on_TVI recently looked back at research I did a year ago, and at that time there was a lot of press talking about how over-the-top video offerings were going to soon flood the market, leading to a boom in cord cutters. But in looking at the OTT offerings on the market today it’s easy to see that the flood of new OTT entrants didn’t materialize.

My look backwards was prompted by an article citing the CEO of CBS who said that his network had gotten requests from Facebook, Apple, and Netflix seeking the right for both TV shows and live broadcasts. Those are certainly some powerful companies, and other than Netflix, a company one would expect to be making such requests, it might portend some new OTT offerings. Many pundits in the industry have been predicting an Apple OTT offering for a number of years to go along with the Apple TV product.

I’m a cord cutter myself and so I’m always interested in new OTT offerings. But for various reasons, mostly associated with price, I am not very interested in most of what is out there today. We subscribe to Netflix, Amazon Prime, and I’ve tried Sling TV twice. But I have not seen any compelling reason to try the other OTT offerings. The list of pay OTT content that’s available is still pretty short, as follows:

  • Showtime: $11 per month with an Apple TV device (which I don’t have).
  • HBO Now: $15 per month with an Apple TV device, and coming soon to Google Play and through Cablevision.
  • CBS All Access: $6 per month but blocks sports content like the NFL.
  • Nickelodeon Noggin: $6 per month.
  • Sling TV: $20 per month. Mix of sports and popular cable networks.
  • PlayStation Vue: Starts at $50 per month. Includes both broadcast and cable networks. This seems like an abbreviated cable line-up, but at cable TV prices.
  • Comcast Stream: $15 per month, only for non-TV devices and must have a Comcast data product. A dozen broadcast networks plus HBO and Streampix.
  • Netflix: $8 per month.
  • Amazon Prime: $99 per year. Includes free or reduced shipping on Amazon purchases and free borrowing of books and music.
  • Hulu Plus: $8 per month with commercials and $12 without commercials. Mostly network TV series.
  • Verizon Go90: Free to certain Verizon wireless customers.

So why hasn’t there been an explosion of other OTT offerings? I think there are several reasons:

  • The standalone networks like CBS and Nickelodeon are basically market tests to see if there is any interest from the public to buy one channel at a time. These channels are being sold at a premium price at $6 per month and it’s hard to think that many households are willing to pay that much for one channel. Most networks want to be very cautious about moving their line-up online and are probably watching these trials closely. One doesn’t have to multiply out the $6 rate very far to see that any household trying to put together a line-up one channel at a time is going to quickly spend more than a traditional expanded basic cable line-up for a lot fewer channels.
  • HBO and Showtime have nothing to lose. The Game of Thrones has been reported as the most pirated show ever and so HBO is probably going to snag some of the cord cutters who have been pirating the show. The prices for these networks are just about the same as what you’d pay for them as part of a cable subscription. But there aren’t many other premium networks out there that can sell this way.
  • One has to think that the major hurdle to anybody putting together a good OTT line-up is getting the programmers to sell them the channels they want at a decent price. The programmers don’t have a major incentive today to help OTT programmers steal away traditional cable subscriptions. Whereas somebody like Sling TV might buy a few channels from a given programmer, that programmer makes more money when cable companies buy their whole lineup. So it’s likely that the programmers are making this hard and expensive for OTT companies. I’ve not seen any rumors about what companies like Sling TV are paying for content, but Sling isn’t like most OTT companies in that it is owned by Dish Networks who is already buying a huge pile of programming. It’s got to be harder for somebody else to put together the same line-up. The dynamics of this might change someday if there a true bleeding of traditional cable customers fleeing cable companies. But for now cord-cutting is only a trickle and most of these networks are still expanding like crazy overseas to make up for any US losses.

What if Nobody Wants to Sell Video?

television-sony-en-casa-de-mis-padresSome of the largest cable companies in the country have begun to de-emphasize cable TV as a product and it makes me wonder if smaller companies should consider the same strategy. It’s been clear to everybody in the industry that margins on cable have dropped, so the question that every cable provider should ask is how hard should you work to maintain cable customers or introduce any new innovations in your cable products?

The largest company that is downplaying cable TV is Cable ONE. Earlier this year Cable ONE’s CEO James Dolan told investors that cable had accounted for 64% of his profits in 2005, but by 2018 he expects that to drop to under 30 percent. Like many other cable companies, the lost margins on cable have been replaced by sales of broadband products.

Cable ONE has gone farther than most cable companies in de-emphasizing cable. For example, they and Suddenlink decided to drop the Viacom suite of cable networks when the programmer asked for a giant rate increase last year. This decision has cost these companies cable subscribers, and Cable One lost over 100,000 cable customers in the year after the decision, but the companies see this as a good long-term strategy.

If you are a small ISP and offer cable then your situation has to be a lot direr than Cable ONE’s. I have one small client who dropped their cable offering altogether earlier this year and they were surprised to find out how positively it affected them. They went from having a room full of busy customer service reps to having almost no inbound calls. It turns out that cable drove almost all of the inquiries and complaints to the company.

This tells me that it’s likely that offering cable is costing a small company a lot more than they realize. By the time you factor in the true amount of customer service time and truck rolls that are associated with the cable product it’s very likely that for small companies cable is completely under water.

The cable companies still have one major advantage that gives them a lot of flexibility. In the majority of the markets in the US the cable companies have no real competition with their data products and they have captured the lion’s share of the market. The latest statistics I’ve seen show that less than 10% of the homes in the country have access to fiber, and a lot of that is Verizon FiOS which is no longer expanding. In most markets the cable companies are still competing against DSL – a battle they have largely won.

For a while the telcos were rapidly expanding broadband products based upon paired-copper DSL, like AT&T U-verse, and were capturing a lot of data customers. But a lot of homes are starting to find that a data pipe that delivers around 40 Mbps of data, and which must be shared between cable and data products, is not fast enough for them. This might be the primary reason that AT&T bought DirecTV, to take pressure off their huge embedded base of U-verse customers by moving cable back to the satellites.

There is a lot of press about the growth in fiber-to-the-home. CenturyLink says they will pass 700,000 homes with fiber by the end of the year. AT&T is announcing new markets almost weekly for their new fiber product. And Google is steadily but slowly building fiber to new cities. But even if all of this fiber activity raises the national fiber passings to 20% of homes the cable companies will still be in the driver’s seat in most markets.

The larger cable companies are being proactive in order to preserve their large market broadband penetration rates. They have almost all announced that they are embracing DOCSIS 3.1 and will be significantly increasing data speeds in markets ahead of any fiber builds. Until now fiber roll-outs have had great success when entering markets where they are selling gigabit fiber against a 15 – 30 Mbps cable product. But fiber’s success is not going to be so automatic if cable companies can counter gigabit fiber with a lower-priced 250 Mbps or faster data product.

To come back around to my original point, it’s clear that data is becoming everything for cable companies. Analysts have been wondering for a few years how the large cable packages might eventually unravel. There has been a lot of speculation that cord-cutters and OTT programming will chip away at the business. But the death of the traditional cable packages might instead come when the cable companies all stop caring about cable TV. At that point they will have regained the balance of power against the programmers.

Who is Dropping Cable?

RCA_CT100-hdFierce Cable reports that the average revenues per customer are rising at many cable companies as they lose customers. This seems to indicate that a lot of people that are dropping cable were buying the lower-priced packages.

Here are some of the numbers they reported from the second quarter of 2015:

  • DirecTV lost 133,000 customers but saw the average revenue per customer rise 6.4% to $109.93.
  • Dish lost 81,000 customers but average revenue per customer rose 4.4% to $87.91.
  • Charter dropped 33,000 customers and saw average revenue jump 4.5% to $92.88.
  • Overall the largest cable providers combined saw average revenue per customer in the quarter rise by 6.7%.

Now to be fair about those numbers, a lot of these companies raise rates in the first quarter each year, making the second quarter the first period that sees the full impact of rate increases.

But the numbers do hint at the underlying cause of cord-cutting. I will admit that I’ve always figured cord cutters were coming from the tech savvy and from those who have decided that that they can live with the many alternatives for entertainment available on the web. My perspective has probably been influenced by the cord cutters I know, and it’s always a dangerous thing to take personal experience and extrapolate it to a national trend.

But if it’s true that cord-cutting is more driven by economics then we have a different phenomenon. People are being driven off cable because they are getting priced out of the market. I’ve been predicting for years that this day would come because cable rates have been rising far faster than inflation for a long time. And that eventually has to have an effect.

Just look at the above numbers. I am a bit astounded by the DirecTV numbers. If $109.93 is the average revenue per customer then there are a lot of people spending a lot more than that to offset the low special prices the company offers to new customers.

It’s easy to forget how fast rates can get out of control. But an $80 cable package will cost $105 in five years with a 5.5% annual rate increase or $112 with 7% rate increases. Looking at all of the big companies, one has to wonder how they are going to sell the value of their product 5 and 10 years from now.

I can see how cable rates are becoming unaffordable for lower-income families, but it’s not going to be that long until this starts being out of the range of a whole lot more families. Even without the pressure from OTT programming, the industry is headed down a path of real trouble.

And you have to feel sorry for cable companies. The cost of programming has been skyrocketing. I have a few clients who have seen 15% rate increases over the past two years. They grimace every time they have to raise rates and they are all seeing customers falling off their systems.

Big companies like Comcast are probably going to find a competitive option for the big cable packages. They are already looking at their own version of OTT programming. But unless the FCC can break the monopoly of the programmers the smaller cable companies are going to have very few options other than to watch their customers disappear. Almost all of my clients are losing cable customers at a faster rate than the large ones and I have a number of them already seeing 5% to 7% annual customer dropoff.

But the FCC can fix the problem if they choose. One of the biggest problems today is that the major programmers make cable providers take all of their huge suite of channels if they only want one of them. We all know there are a ton of channels on cable systems that hardly anybody watches but that everybody is being forced to pay for. If cable systems could choose the channels they want, like is possible with products in almost every other industry, then they could control their cost and could get the rate increases back under control.

Cord Cutting Might Finally be Here

Fatty_watching_himself_on_TVRecently, Wall Street has been hammering media stocks due to the fact that most of them have reported falling US subscribers. That makes me ask a question I have asked several times before: are we finally seeing the impact of cord cutting? Most cable companies just released 2nd quarter 2015 cable subscriber numbers and except for Verizon FiOS, all of the other large cable providers lost cable customers for the quarter, as follows:

  • DirectTV               -133,000
  • Dish                        -81,000
  • Comcast                 -69,000
  • Time Warner         -45,000
  • Suddenlink            -44,000
  • Charter                  -33,000
  • AT&T                      -22,000
  • CableOne              -21,000
  • Cablevision           -16,000
  • MediaCom            – 3,000

Just for this group of companies that’s a loss of 423,000 cable customers. And the numbers are actually worse. For instance, the Dish numbers might be as high as a loss of 187,000 because they are now netting the gains from Sling TV into the reported today. And Cox is not in these numbers since it’s privately held. The total losses above are something greater than 530,000 for the quarter.

Then you have to consider the fact that historically cable companies would have captured a significant share of new households. With the improved economy there will probably be at least 1 million new households added to US housing this year, and cable would normally have added about 200,000 customers each quarter from these new potential customers. That brings total net losses compared to historic trends to over 700,000 in a quarter.

The large cable companies have been losing customers for several years now. For a while these losses were offset by increases in satellite customers. More recently there was nearly a one-for-one between the losses experienced by the cable companies and the gains of the telcos, mainly AT&T and Verizon. But in this latest quarter Verizon gained only 26,000 and AT&T lost nearly that many, so that sector is no longer growing.

The second quarter is traditionally one of the poorest performing quarters of the year. For example, the cable industry as a whole suffers when campuses shut down for the summer, although those losses generally net out to gains again in the fall. And so it’s unlikely that these losses are going to annualize to the 2 million customers you might expect from these figures. But for the first time there is going to be a significant loss of cable customers for the year.

The cable companies almost all reported improved revenues. Even though they lost a lot of cable customers, the group as a whole gained 377,000 new data customers. Further, the cable companies had significant cable rate increases (although they also had significant increases in programming costs).

But it’s not hard to see how these kinds of losses affect the programmers. Take ESPN – it’s been reported that they charge cable companies more than $5.50 per customer per month. At that rate the loss of 530,000 paying customers annualizes to almost $35 million per year in lost revenues. And if you look at the historic trend including new housing units their loss is even greater than what they traditionally could have expected.

Not reported in the above numbers is the impact of cord shaving. It’s been anecdotally reported that there are a lot of customers cutting back to smaller TV packages, meaning that they are paying for fewer channels. The channels in the premium tiers have to be losing revenue at a significantly higher rate than the basic channels that everybody gets. But the cord shaver numbers are hard to come by and are not reported in cable company press releases.

ESPN is part of Disney which is a very large corporation with diversified revenues, and $35 million lower revenues gets lost in the rounding on their corporate books. But Wall Street is looking at the long term trend and is worried about programmers in general.

Finally, there is another industry measure that may have also spooked Wall Street. Nielsen recently released trends in TV viewing time. Since 2010 viewing hours per week have dropped for all age groups, but particularly for younger viewers. Viewing by 50-64 year old was down 1%, 35-49 year olds down 10%, 25-34 year olds down 23% and 18-24 year olds down a whopping 32%. That speaks tons about the dropping trend for future advertising revenues, which are aimed more heavily at young viewers.

It’s no wonder that Wall Street is punishing the media companies when they are losing revenues from both subscribers and advertising. Many of the programmers are selling enough new content overseas to make up for the US losses, but analysts are obviously worried that this trend is going to quicken in the same manner it did for landline telephones. This could get ugly fairly quickly.