Tag Archives: cord cutting

The Pent-up Demand for Cord Cutting

I just saw an eye-opening statistic. Deloitte’s latest Digital Media Trends Survey reports that 56% of current pay-TV subscribers are keeping TV because they feel trapped by the bundle. Deloitte concludes that there is huge pent-up demand for cord cutting.

This number is not entirely surprising to me because in the last few years I’ve seen new fiber networks get a much smaller percentage of cable customers than would be expected by the subscribership on the incumbents. New fiber providers do surveys showing incumbent cable TV rates between 65% to 75%, and yet they far lower percentages of new customers buying cable TV on their new fiber network.

I always interpreted this to mean that the new fiber competitor attract customers who want faster broadband. I’ve assumed that these were natural cord cutters. But if the Deloitte statistic is to be believed, a large percentage of new customers on fiber networks are using the opportunity of changing providers as a chance to drop the traditional cable that they no longer want.

We know that there is a financial penalty for breaking a bundle, which must be a strong incentive for people to stay with their current provider. The amount of this penalty differs by customer and often has to do with how willing a customer is to fight to keep a cheap price while dropping cable. I’ve always thought the penalty for dropping cable is between $10 and $20 per month.

But sometimes the bundle is more and is forced. I moved and left Comcast less than two years ago. They would not let me buy faster broadband speeds without subscribing to basic cable TV. I tried every year to try to drop the cable – something that I never used and for which I stashed the settop box in the closet. But I was told each year that dropping the cable meant dropping back to a slower broadband speed. In my case I would have saved at least $40 per month from dropping basic cable, but I felt blackmailed into keeping it to keep an acceptable broadband speed.

This statistic has a lot of industry implications. First, builders of new networks can’t count on a big cable penetration. Obviously the Deloitte 56% finding is going to vary from market to market – but it’s such a large number that in almost any market a new network is going to get far lower cable penetration rates than what the incumbent has today. We know nationwide that the overall cable penetration rate last year was 69%, which is now probably closer to 67%. New networks are going to see significantly lower cable penetration rates – if Deloitte is right, perhaps in the mid-30% range.

If this statistic holds true everywhere it is probably one of the main reasons why customer dislike of cable companies is growing. Cable companies have been among the lowest rated companies in terms of customer satisfaction – and in recent years their already low ratings are continuing to drop. Many consumers must feel the way that I felt about Comcast – that they are being ripped-off and held captive by the bundled pricing. The same bundle that they liked when it first saved money is being used against them if they want to drop cable TV.

This statistic also makes new technologies and new ISPs more attractive. People will likely flock to 5G if the speeds are decent and they aren’t forced to take cable TV. This might also be one of the reasons that many are choosing cellular broadband – to get away from over-expensive cable TV.

Finally, this means that the cable companies are sitting on an albatross of a product. There are many millions of homes paying for a product that they no longer want. Last year there were still more homes that dropped telephone landlines than cut the cable cord. But if the Deloitte statistic holds true, it might not take much for many homes to make the cord cutting decision and cord cutting could quickly change to a deluge. The industry-wide implications of that are huge – it would quickly cripple programmers. It would put a huge dent in the retransmission fees that are currently fueling the profits of the major over-the-air networks. A huge drop in traditional cable customers would quickly be felt in the sports world – which is largely financed with TV revenues. It means a drastic drop in the incentive to advertise on TV – the other major revenue that fuels the industry.

I believe that the cable companies have been counting on cord cutting to increase slowly over time, similar to the way that the landline telephone business has slowly ebbed away. But if there is this much pent-up demand to drop cable, it’s not inconceivable that the number of cable customers could drop explosively if there is a consensus that it’s worth it to break the bundle. The whole cable industry is not ready for an explosive drop in customers and it would get ugly quickly.

Prices are Driving Cord Cutting

It’s been general wisdom for several years that high cable TV prices are one of the predominant factors behind cord cutting. TiVo’s recently released Q4 2017 Online Video and Pay-TV Trends Report says that prices are even more important than we thought. TiVo talked to a number of cord cutters in 2017 and found that 86.7% of those who dropped TV in 2017 list high prices as the number one reason for abandoning traditional cable TV. This is up from 80.1% a year earlier.

It’s not hard to understand why price is becoming such a big factor. Over 50% of households now say that their monthly cable bill is more than $75 per month. And only 15% pay less than $50, down from 18% a year earlier. Annual rate increases that are far greater than the cost of general inflation are pushing cable prices out of the affordability zone for many households.

Interestingly we see this same trend manifesting in another way. In a recent survey Parks Associates report that a little over 20% of households now use digital antennas in their homes to receive over-the-air networks like ABC, CBS, NBC, FOX and PBS. That’s up from 15% in 2015. That’s a huge swing and means that over 6 million homes have started using antennas in just the last two years.

Nationwide more than 3 million households (2.4% of all households) dropped cable in 2017 – as witnessed by the subscribers of the largest cable TV companies. Just about every one of my clients will tell you that they lost a larger percentage than the average. The nationwide numbers are bolstered by the fact that Comcast lost only 0.7% of its cable customers and Charter lost 1.4%. But telcos did far worse with AT&T losing 14.6% and Frontier losing 16.1%.

Higher prices are almost entirely due to increased programming costs. Small companies have seen programming costs grow over 10% per year, and the rate of annual growth is increasing. Some have reported annual increases to me as high as 15% in the most recent two years.

One of the biggest drivers of high programming costs are the retransmission charges that local affiliates of the major networks charge to cable companies to cover the over-the-air networks. In large cities a lot of the local TV stations are owned directly by the major networks like NBC or ABC, but in smaller markets these are generally owned by others. The independent local stations have no recourse but to raise retransmission rates each year since the networks increase the costs to them for remaining as an affiliate. In the end, all of the extra revenues from retransmission fees flows up to the major networks, which now see this as a major source of revenue growth.

It’s not just the major networks that are increasing rates. Practically every cable network is increasing rates at a faster pace than a decade ago. It’s a really odd economic phenomenon to see big price increases occurring in an industry that is losing customers at this pace. Any economics 101 book would suggest that the laws of supply and demand would drive prices for programming in the other direction.

But the cable industry is perverse due to regulations. The cable rules require stations to carry local networks that are within their range. I know a number of cable companies who would gladly provide rabbit ears to customers rather than continue to raise rates every year – but they are required by laws passed by Congress to carry these stations. The same laws also force cable companies to carry large lineups in the basic and expanded basic tiers that we are all familiar with.

These laws mean that cable providers have few options on what networks to carry. I don’t know any cable providers who wouldn’t like to try something different and perhaps offer smaller packages of the most-watched networks that people could afford to buy. But the legal requirements for cable lineups embolden the programmers to charge exorbitantly because cable operators have no power to push back. The most a cable provider can do is to take all of the networks from a given programmer off the air – and even this is impractical since each of the few major programmers own a lot of networks.

You can’t really fault the programmers since they are all publicly-traded companies which are responding to Wall Street demands that they increase profits quarter after quarter. The whole cable ecosystem is polluted by the need to increase profits. It’s sad, because without the price increases each year all of the companies involved could continue to make high margins and big profits.

Even with all of this turmoil in the industry I don’t hear of any discussion in Congress about tackling the issue and relaxing the current rules that are breaking the industry. Instead we see people fleeing traditional cable TV and buying smaller packages of the same programming online from Sling TV, DirecTV Now and Playstation Vue.

The rate of cord cutting is clearly accelerating and it’s not going to take many more years until these issues can’t be fixed – because by then the majority of households will be getting programming online rather than from cable companies.

The Cable Industry – 4Q 2017

It was just a year ago where there were numerous industry articles asking if cord cutting was real. There were many who thought that cord cutting would fizzle out and would not be a big deal for the cable industry. But the numbers are not from Leichtman Research Group for the end of 2017 and it shows that cord cutting is now quite real. The following numbers compare the fourth quarters of 2017 and 2016.

4Q 2017 4Q 2016 Change
Comcast 22,357,000 22,508,000 (151,000) -0.7%
DirecTV 20,458,000 21,012,000 (554,000) -2.6%
Charter 16,997,000 17,236,000 (239,000) -1.4%
Dish 11,030,000 12,025,000 (995,000) -8.3%
AT&T 3,657,000 4,281,000 (624,000) -14.6%
Cox 4,200,000 4,290,000 (90,000) -2.1%
Verizon 4,619,000 4,694,000 (75,000) -1.6%
Altice 3,405,500 3,534,500 (129,000) -3.6%
Frontier 961,000 1,145,000 (184,000) -16.1%
Mediacom 821,000 835,000 (14,000) -1.7%
Cable ONE 283,001 320,246 (37,245) -11.6%
 Total 88,788,501 91,880,746 (3,092,245) -3.4%

These companies represent roughly 95% of the entire cable market, so these numbers tell the story of the whole market. From what I can see from many of my clients, many small cable companies are likely doing even worse than the big companies.

What’s probably the most significant from these numbers to me is that the overall industry cable penetration dropped to 70% by the end of 2017, down from a high of a few years ago of 75%. There were 126.2 million households at the end of 2017, per statistica, and only 70% of them are buying traditional cable – and that number has certainly dropped more into 2018.

The rate of growth of cord cutting is increasing. In 2016 the industry lost just over 1 million customers and in one year that grew to over 3 million.

It’s not hard to see where these customer went. FierceCable reported recently that 5% (over 6 million) of US households subscribe to a vMVPD service – these are online services that carry smaller bundles of traditional cable channels like Sling TV, Playstation Vue and DirecTV Now. It’s easy to forget that just a year ago most of these services were just getting started.

It’s worth noting that AT&T overall saw only a minor drop in total cable subscribers. While AT&T and their DirecTV subsidiary lost 1.2 million customers, DirecTV now has just over 1.1 million customers. But this still has to be hurting the company since analysts all believe that the margins on the vMVPD services are much slimmer than traditional cable.

Of other note are the large percentage losses of cable customers at Dish, Frontier and Cable One.

Another way to consider these losses is on a daily basis, and the industry lost nearly 8,500 customers per calendar day during the year.

It’s obvious in looking at these number that the cable industry is now in the same kind of free fall we saw a decade ago with landline telephones. The phenomenon is widespread and 3 million cord cutters means this is every neighborhood in the country. I believe that the pace of cord cutting will continue to accelerate. It’s looked around my own neighborhood and I can’t find anybody who hasn’t either cut the cord or is thinking about doing so.

What surprises me the most is that the big cable companies are not in screaming to the Congress and the FCC to change the rules governing traditional cable. Those rules force the big channel line-ups, and the cord cutting shows that people can be happy with far less than what the programmers are selling. The cable company could be offering more of the skinny bundles offered by the vMVPDs and could retain more bundled customers.

Why the Big Programming Cost Increases?

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I recently talked to several clients who are expecting an increase in cable TV programming costs of between 8.5% and 9% for next year. They are able to forecast this because most of the contracts for programming cover at least three years of baked-in rate increases.

Every one of these clients is bleeding cable customers. We hear about how the big cable companies are experiencing impact from cord cutting. Last year the big companies altogether lost about 1.7 million customers, which is a little less than 2% of their customer base. But my small clients seem to be losing cable customers at a much faster pace. Cord cutting is obviously a real phenomenon and I’ve seen recent estimates that the big companies are expected to lose around 1.9 million customers this year. But while the big companies are losing customers at a steady pace, smaller cable operators are seeing a much bigger impact.

I think there are a number of reasons that small cable providers are suffering more.

  • Most of my small clients don’t pay the same billing games as the big cable companies. The big companies have created a number of ‘fees’ such as a local programming fee or a sports fee to disguise the real cost of cable. Many customers think these fees are taxes of some sort and they believe that the base price of cable shown on their bill is the actual price they are paying. That lower number is the one that they use when comparing to other alternatives.
  • The big companies are also far more aggressive with their bundling. They work hard to force customers into bundles and they penalize customers for leaving a bundle. Customers often don’t know what they pay for any specific product in a bundle and when they try to drop one product the full bundle savings are applied to that product. Even when small companies have bundles they don’t create a huge financial disincentive to leave the bundle.
  • Big companies are willing to give ‘special’ pricing to keep customers. They tend to give special pricing discounts aimed at new customers to anybody else who is willing to wade through the customer service minefield to ask for it. I think since smaller companies often don’t advertise ‘special’ prices they are far less likely to even be asked to reduce rates.
  • My smaller clients are generally more rural than the big companies, and as such they face far stiffer competition from the satellite companies. Both of the satellite providers now have a ‘skinny’ bundle that a lot of customers are finding attractive.

Why are the programmers raising rates so aggressively when it’s clear that the price of cable service is the number one driver of cord cutting? I have several ideas why they might be doing this:

  • These are all publicly traded companies and to some degree they don’t have a choice. Over 90% of cable channels are bleeding customers much faster than the rate of cord cutting. This shows that many customers are cord shaving and downgrading to smaller, less expensive packages. The programmers are compelled to increase profits, and with declining sales they can only compensate by raising programming rates. That sounds insane because it sounds like the beginning of a classic death spiral. But you must remember that any large publicly traded company that performs poorly is subject to being purchased by somebody else who will then force profits back up again. Our dreadful quarterly profit driven economy is forcing the programmers into a path that is not in anybody’s best interest.
  • They are all chasing hit shows. There are now a lot more companies like Netflix and Amazon creating unique programming, which adds to the pressure on the programmers. The financial rewards from producing even one hit show is gigantic, so they all keep spending money trying to find that next big hit, and raising rates to cover the cost of producing content.
  • Another theory is that the current rate increases are their last hurrah. They can see where the industry is headed. I saw an interview with the head of programming for FOX and he said that he expects that the company is going to have to ultimately collapse most of its many channels as they keep losing customers. And so perhaps these rate increases are the chance for making big profits for a few more years before the wheels come off. It seems that end is coming anyway, so maybe raising rates now is a way to milk every last penny out of a fading industry.

Programming content is certainly never going to go away. But companies like Netflix and Amazon are showing that there are reasonable alternatives to the huge TV bundles. I just wish I knew what to tell my clients. The most common question I seem to be getting these days is, “Should I even be in the cable business any longer?” I’m starting to think that the answer for many of these businesses is no – or it will be no within a few short years.

Why Isn’t Everybody Cutting the Cord?

Last year at least two million households cut the cord. I’ve seen headlines predicting that as many as 5 million more this year, although that seems too high to me. But both of these numbers are a lot lower than the number of people who say they are going to cut the cord in the coming year. For several years running various national surveys show that 15 million or more households say they want to cut the cord. But year after year they don’t and today’s blog looks at some of the reasons why.

I think one of the primary reasons people keep traditional cable is that they figure out that they won’t save as money with cord cutting as they had hoped. The majority of cord cutters say that saving money is their primary motivation for cutting the cord, and once they look hard at the actual savings they decide it’s not worth the change.

One issue that surprises a lot of potential cord cutters is the impact of losing their bundling discount if they are buying programming from a cable company. Big cable companies penalize customers who break the bundle. As an example, consider a customer who has a $50 broadband product and a $50 cable product, but for which the cable company charges $80. When a customer drops one of the two products the cable company will charge them $50 for the remaining one. That means there is a $20 penalty for cutting the cord and thus not much savings from cutting the cord.

Households also quickly realize that they need to subscribe to a number of OTT services if they want a wide array of programming choices. If you want to watch the most popular OTT shows that means a $10 subscription to Netflix, an $8.25 per month subscription to Amazon and a Hulu package that starts at $8. If you want to watch Game of Thrones you’ll spend $15 for HBO. And while these packages carry a lot of movies, if you really love movies you’ll find yourself buying them on an a la carte basis.

And OTT options are quickly proliferating. If you want to see the new Star Trek series that means another $5.99 per month for CBS All Access. If your household likes Disney programming that new service is rumored to cost at least another $5 per month.

And none of these options bring you all of the shows you might be used to watching on cable TV. One option to get many of these same networks is by subscribing to Sling TV or PlayStation Vue, with packages that start at $20 per month, but which can cost a lot more. If you don’t want to subscribe to these services, then buying whole season of one specific show can easily cost $100.

And then there is sports. PlayStation Vue looks to have the best basic sports package, but that means buying the service plus add-on packages. A serious sports fan is also going to consider buying Fubo. And fans of specific sports can buy subscriptions to Major League baseball, NBA basketball or NHL hockey.

Then there are the other 100 OTT options. There is a whole range of specialty programmers that carry programming like foreign films, horror movies, British comedies and a wide range of other programming. Most of these range from $3 to $7 per month.

There are also hardware costs to consider. Most people who watch a range of OTT programming get a media streaming device like Roku, Amazon Fire, or Apple TV. Customers that want to record shows shell out a few hundred dollars for an OTT VCR. A good antenna to get local programming costs between $30 and $100.

The other reason that I think people don’t cut the cord is that it’s not easy to navigate between the many OTT options. They all have different menus and log-ins and it can be a pain to navigate between platforms. And it’s not easy to find what you want to watch, particularly if you don’t have a specific show in mind. It’s hard to think that it’s going to get any easier to use the many OTT services since they are in competition with each other. It’s hard to ever see them agreeing on a common interface or easy navigation since each platform wants viewers to stay on their platform once logged in.

Finally, none of these combinations gets you everything that’s on cable TV today. For many people cutting the cord means giving up a favorite show or favorite network.

If anything, OTT watching is getting more complicated over time. And if a household isn’t careful they might spend more than their old cable subscription. I’m a cord cutter and I’m happy with the OTT services I buy. But I can see how this option is not for everybody.

 

OTT News – August 2017

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It’s been a busy time in the OTT market with players coming and going and the choices available to customers growing more complicated and confusing.  Here are some of the bigger recent events in the industry.

Continued Cord Cutting. The major cable providers lost 946,000 cable customers in the second quarter – the worst quarterly loss ever. This puts cord cutting at an annual loss rate of 2.7% of customer, up from only 1% a year ago. It’s obvious that cord cutting is picking up momentum, and the wide variety of OTT viewing has to be a contributor. Nielsen recently reported that 62% of homes now watch OTT content at least occasionally.

It’s getting harder for analysts to count cable customers. For example, Dish Networks is not reporting on the specific performance of its satellite service versus SlingTV. The losses for the quarter were also eased a bit by the fact that Charter began counting seasonal customers even when they go dormant, such as the snowbird in Florida who subscribe only in the winter but who keep the account active.

ESPN / Disney OTT Offering. Disney announced that it would be launching two new OTT offerings in 2019 – a standalone ESPN offering and a standalone Disney offering. Along with this announcement they announced they will be withdrawing Disney content from Netflix. The ESPN offering will not duplicate the cable version of the network and will not include things like the NFL and NBA. But it will include major league baseball, the NHL, major league soccer, grand slam tennis events and college sports. Analysts think this offering is mandatory since ESPN has lost 13 million subscribers since 2011 and advertising revenues dropped 8% last quarter.

The standalone Disney offering is also interesting in that the company has decided to take Netflix on head-to-head. Because of contractual arrangements Netflix will still have access to content produced by Disney such as the numerous shows produced by Disney’s Marvel Studios. But starting in 2019 Disney is going to make new content only available on their own platform. This prompted Netflix to purchase Millarworld, a major comics producer.

NBC Closing Seeso. NBCUniversal says that it will be ending the Seeso OTT offering later this year. This is an offering that consisted largely of NBC comedy and related entertainment such as Saturday Night Live and the Tonight with Jimmy Fallon.

This failure is a big warning to the many cable networks that have been contemplating using the strategy of shoving existing content online. Industry analysts say that simply taking linear content online is not a recipe for success. It seems that the platform is just as important as the concept and the bigger platforms like Netflix keep customers engaged and enabling them to move from show to show without leaving the platform. But it’s too easy for a customer to leave a limited-offering platform, thus diminishing the perceived value for customers to buy a subscription.

Facebook OTT Offering. Facebook has announced the launch of Watch, an OTT service that will include content from A&E, Univision, Major League Baseball and other content such as worldwide soccer. For now the new service is being launched overseas with some limited US trials, but is expected to hit the whole US market later this year.

The offering is being structured like YouTube to enable content creators to launch their own channels. Facebook is currently funding some content providers to seed content on the new service. They are hoping that within time the platform becomes self-sustaining and can be an alternative to the wildly popular YouTube. Facebook is counting on their ability to lure enough of their billion plus users to the new platform to make it a success. The company’s goal is to keep people on their platform for more than just social networking.

Apple. Apple will be entering the OTT world and announced that they will spend $1 billion to create programming content over the next year. This puts them into rarified company with Netflix that is spending $6 billion, Amazon at $4.5 billion and HBO at $2 billion. There is no news yet of the nature or timing of an Apple OTT offering.

Latest Industry Statistics

The statistics are out for the biggest cable TV and data providers for the first quarter of the year and they show an industry that is still undergoing big changes. Broadband keeps growing and cable TV is starting to take some serious hits.

Perhaps the most relevant statistic of all is that there are now more broadband customers in the country than cable TV customers. The crossover happened sometime during the last quarter. This happened a little sooner than predicted due to plunging cable subscribers.

For the quarter the cable companies continued to clobber the telcos in terms of broadband customers. Led by big growth in broadband customers at Comcast and Charter the cable companies collectively added a little over 1 million new broadband customers for the quarter. Charter led the growth with 458,000 new broadband subscribers with Comcast a close second at 430,000 new customers.

Led by Frontier’s loss of 107,000 broadband customers for the quarter the telcos collectively lost 45,000 net customers for the quarter. Most of Frontier’s losses stem from the botched acquisition of Verizon FiOS properties. Verizon lost 27,000 customers for the quarter while AT&T U-verse was the only success among telcos adding 90,000 new customers for the quarter.

Looking back over the last year the telcos together lost 727,000 broadband customers while the cable companies together gained 3.11 million customers during the same period. The cable companies now control 63.2% of the broadband market, up from 61.5% of the market a year ago.

Overall the broadband market grew by 2.38 million new broadband subscribers for over the last year ending March 31. It’s a market controlled largely by the giant ISPs and the largest cable companies and telcos together account for 93.9 million broadband subscribers.

Cable TV shows a very different picture. The largest seven cable providers collectively lost 487,000 video subscribers for the quarter. That includes AT&T losing 233,000, Charter losing 100,000, Dish Networks losing 143,000, Verizon losing 13,000, Cox losing 4,000 and Altice losing 35,000. The only company to gain cable subscribers was Comcast, which gained 41,000.

Total industry cable subscriber losses were 762,000 for the quarter as smaller cable companies and telcos are also losing customers. That is five times larger than the industry losses of 141,000 in the first quarter of last year. This industry is now losing 2.4% of the market per year, but that r is clearly accelerating and will probably grow larger. The annual rate of decline is already significantly higher than last year’s rate of 1.8%.

At this point it’s clear that cord cutting is picking up steam and this was the worst performance ever by the industry.

The biggest losers have stories about their poor performance. Charter says it is doing better among its own historic customers but is losing a lot of customers from the Time Warner acquisition as Charter raises rates and does away with Time Warner promotional discounts. AT&T has been phasing out of cable TV over its U-Verse network. This is a DSL service that has speeds as high as 45 Mbps, but which is proving to be inadequate to carry both cable TV and broadband together. Dish Networks has been bogged down in numerous carriage and retransmission fights with programmers and has had a number of channels taken off the air.

But even considering all of these stories it’s clear that customers are leaving the big companies. Surveys of cord cutters show that very few of them come back to traditional cable after cutting the cord after they get used to getting programming in a different way.

What is probably most strikingly different about the numbers is that for years the first quarter has performed the best for the cable industry, which in recent years has still seen customer gains even while other quarters were trending downward. We’ll have to see what this terrible first quarter means for the rest of 2017.

 

 

Can a Small Cable Company Succeed?

Today I ask the question of whether anybody small can really succeed with a cable TV product. This was prompted by the news that Cable One, one of the mid-sized cable companies, is bleeding cable customers. For those not familiar with the company they are headquartered in Phoenix, AZ and operate cable systems in 19 states with the biggest pockets of customers in Idaho, Mississippi and Texas.

The company just reported that for the 12 months ending on March 31 that they had lost 12.7% of their cable customers and dropped below 300,000 total cable customers. Most of my clients would consider anybody of this size to be a large cable company. But their struggles beg the question of anybody smaller than the really giant cable companies can seriously maintain a profitable and viable cable product in today’s environment.

The drop in their cable customers was precipitated by a number of factors. One that is very familiar to small cable operators is that Cable One decided in 2015 to drop the Viacom suite of channels from their system. We all remember that in that year Viacom announced huge and unprecedented rate increases of over 60% for the suite of channels that include MTV, Comedy Central, BET and a number of other channels. A number of my clients also decided to drop Viacom rather than pay for the huge increases in programming.

Cable One also shares another characteristic with smaller companies in that they are too small to unilaterally negotiate alternate piles of programming to sell as skinny bundles. So they and other small companies are likely to see customers abandoning them for smaller line-ups from Sling TV and other purveyors of smaller on-line line-ups – including Hulu which just announced entry into this quickly growing market.

And finally, Cable One and most other cable companies are now starting to feel the impact of cord cutting. While only a fraction of their customer losses can be blamed on cord cutting, it is now a real phenomenon and all cable companies can expect to lose a few percent of customers every year to Netflix and others.

The really large cable companies are not immune to these same market influences. The giants like Comcast and Charter / Spectrum are going to continue to see big increases in programming costs. Recent Comcast financials show that the company saw a 13% increase in programming cost over the last year (although some of that increase was paid to their own subsidiaries of programmers).

But the handful of giant cable companies are so big that they look like they are going to be able to offset losses in cable revenues in margins with new sources of revenues. For example, Comcast and Charter announced recently that they will be launching a jointly-provisioned cellular business that will help them grow revenues significantly instead of just treading water like smaller cable revenues. And I’ve recently written in here of all of the other ways that Comcast is still growing their business, which smaller companies are unable to duplicate.

The biggest dilemma for small cable companies is that the TV product still drives positive margin for them. While every small cable provider I know moans that they lose money on the cable product, the revenues generated from cable TV are still in excess of programming costs and almost every company I know would suffer at the bottom line if they kill the TV product line.

It has to be troubling for programmers to see cable companies struggling this hard. If somebody the size of Cable One is in crisis then the market for the programmers is quickly shrinking to only serving the handful of giant cable companies. The consolidation of cable providers might mean that the huge cable companies might finally be able to band together to fight back against the big rate increases. Just last week Charter announced that they were demoting a number of Viacom channels to higher tiers (meaning that the channels would not automatically be included in the packages that all customers get).

It’s hard to think of another industry that is trying so hard to collectively drive away their customer base. But all of the big companies – cable providers and programmers – are all publicly traded companies that have huge pressure to keep increasing earnings. As customers continue to drop the programmers raise rates higher, which then further drives more customers to drop out of the cable market. It doesn’t take sophisticated trending to foresee a day within the next decade where cable products could become too expensive for most homes. We are all watching a slow train wreck which the industry seems to have no will or ability to stop.

Why Isn’t Cord Cutting Going Faster?

If cord cutting is such a big deal, then why aren’t more people leaving traditional television? That’s a question I’ve been asked several times lately and it’s a good one.

Cord cutting is definitely real. Numerous articles make cord cutting seem like an imminent disaster for the cable industry. But industry estimates are that between 1.7 million and 2.5 million people walked away from traditional cable TV in 2016. The lower number is the net drop in national cable subscribers while the higher number takes into account the fact that there were over a million new housing units built in the country – and I think the higher number is closer to correct.

And while losses of that many customers hurts the cable industry, it’s hard to yet call it a flood. If annual losses stay at this level the cable industry will still have over 50 million customers twenty years from now. The real story might be that most people aren’t yet cutting the cord. There are a lot of reasons for this, but I think the most important ones are:

People Still Like Cable. Total pay television subscribers just fell to under 100 million sometime last year. There are a lot of households that still like the variety of channels that come with the big packages. While a lot customers are now time shifting by the use of DVRs and TV everywhere, they still like what they are buying.

Bundling Discount. It’s really easy to forget that the big cable companies have priced their bundles in such a way as to penalize customers for leaving just one service. Cord cutters generally want to retain their broadband while dropping cable – and when they go to do this they find that the savings is not as large as they thought. Interestingly, if you want to keep cable and drop broadband the same thing is true. The big cable companies apply the ‘bundling’ discount to whatever product you want to drop – meaning that you then revert to paying full market price for whatever product is kept. People that want to save $20 per month by switching to an OTT service like Sling TV quickly find out that they actually won’t save much.

Cord Shaving Instead. There is a whole lot of cord shaving going on – that is, people migrating to smaller cable packages. Cord shaving lets people who mostly like Netflix to keep local network stations and a few other things they like about traditional TV, without fully cutting the cord. This is best evidenced by looking at the subscriber numbers to the various cable networks, which are losing subscriptions at a much faster pace than total pay TV subscribership. For example, ESPN has lost around 12 million subscribers since their peak in 2013, and the majority of other cable networks are also seeing large subscriber losses. Since the total net subscribers to pay television are dropping more slowly, the only explanation is that customers are opting out of the big cable packages for smaller ones. The cable companies don’t release statistics on cord shaving, and so we can only guess at the magnitude of the changes by seeing what is happening to ESPN and other networks.

The Alternatives are not that Different. Over half of the homes in the country now subscribe to at least one of the OTT services like Netflix. But it appears that most homes are viewing this content as alternate content and not a straight replacement for traditional cable.

There are a lot of new alternatives to traditional cable such as Sling TV or Playstation Vue – but I don’t think most customers are seeing them as significantly different than traditional cable content. I’ve been trying some of these services and they honestly still feel like cable. The content is mostly streamed at fixed times and even with smaller line-ups I find I’m not interested in most of the channels they carry. While these alternatives can save money, they often don’t have the same reliability or quality of picture as a cable system. The bottom line, at least to me, is that services like Sling TV still feel like cable offerings to me.

It’s Not Easy for Some. It’s not easy for the technically unsophisticated to totally cut the cord. Unless you live in a major metropolitan market you’re going to want to somehow tie in your local network stations with other online programming, and that is still not that easy. You can get an antenna to pick up off-the-air content, but that is not easily integrated into any easy-to-use program guide or search engine.

It’s also not always easy to drop the cable company. People get tied up in contracts that are expensive to break. There is a whole gauntlet of steps needed to get away from the cable company from listening to retention specialists to returning settop boxes that make leaving a hassle – and the cable companies know that these tactics work.

We may get to a time when cord cutting accelerates more quickly, as happened with landline telephones. But before that happens there needs to be easier to use and more satisfying alternatives to draw most people away from traditional cable altogether. If there is any one issue that might push more households over the edge it’s the price of cable packages – but the big cable providers are now introducing skinny bundles to try to retain the budget minded customers. I’m looking at the numbers and thinking we are going to have traditional cable around a lot longer than many people predict.

Looking at Generation Z

We’ve already seen a lot of analysis about the viewing habits of Millennials. We know as a group that they watch less traditional linear TV than older generations. We know that over 30% of millennial households are already cord cutters and get all of their entertainment from some source other than traditional TV.

But now we are starting to get a glimpse at Generation Z, the next wave of our kids. These are the generation following the millennials. A new survey firm, Wildness, is concentrating on this generation to study trends for companies that want to market to this segment. The firm is a spin-off of AwesomenessTV (and since I assume you don’t know what that is, it’s a leading source of programming for kids on YouTube).

Wildness just did their first survey of Generation Z viewing habits. These kids are the first ones to grow up in a connected world since birth. They looked at 3,000 kids from 12 to 24 and found the following:

  • Nine out of ten watch YouTube daily.
  • For 31% of them their favorite programming is on YouTube.
  • 30% of them follow their favorite brands on social media and post about them.
  • When asked if they could keep only one viewing screen, only 4% said they would keep a television. Their screen of choice is a cellphone.

This does not bode well for traditional linear television. For a long time industry pundits assumed that millennials would ‘come back’ to traditional TV as they got older and started their own households. But they have not done so and now it’s largely accepted that the way you learn to view content as a kid will heavily influence you throughout your life. And Generation Z kids are not watching linear TV.

Another interesting aspect of Generation Z is that they are not just content consumers, they are also content generators. More than half of them routinely generate content of their own (short videos, pictures, etc.) and share with their friends. And a significant amount of their viewing is of content generated by other kids. This has to scare traditional content generators a bit as these kids are not consuming traditional media to the extent of older generations. This generation has blurred and blended their social life with their online life to a much greater degree than older generations. This is the first generation that freely admits to being connected 24/7.

And it’s not just prime time TV shows that are being ignored by this generation. They are also not following sports, traditional news or any of the other standards of programming. At a young age they are discovering that interacting with each other is far more satisfying than watching content ‘crafted’ for them by older generations. Most of the programming they follow on YouTube is being generated by contemporaries (millennials or younger) rather than by traditional media companies.

Anybody that offers traditional cable TV has to look at these statistics and know that the clock is already ticking towards a day when cable TV becomes obsolete. Already today the average age of viewers of prime time shows keeps climbing as younger viewers eschew linear programming.

Last year about 1.7% of all households become new cord cutters. That may not sound like a lot, but it’s over 2.1 million households. And it seems that cord cutters rarely come back to traditional TV. A lot more older households are also favoring Netflix and other OTT content. These households still maintain cable TV subscriptions, but you have to wonder for how long.

I would not be surprised within a few years to see cord cutting accelerate rapidly. It’s getting hard to find households that are satisfied with what they are paying for cable TV. Even those who love traditional cable think it costs too much. And this could lead at some point to a rapid abandonment of traditional cable. But one thing the industry must accept is that when Generation Z grows up they are not going to be buying cable TV.