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.

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.

Expect Higher Data Prices

Numismatics_and_Notaphily_iconThe US already has some of the highest Internet prices among developed nation. This is due largely to the lack of competition in most markets, meaning that there is no downward price pressure. Brian Fung of the Washington Post reported on a recent congressional hearing where Craig Moffett, a well-known market analyst, said that prices for Internet access are likely to climb in the future.

Moffett’s reasoning is that cable companies, who have most of the data customers in the country, are losing cable customers (or are running out of the ability to continually raise cable rates), and so they are going to have little option but to raise data rates.

The large cable companies, who together control the majority of the data customers in the country, are mostly publicly traded companies (except for Cox) and they are very much driven by the need to have profits climb quarter over quarter, year over year.

For many years the revenues and the profits of the large cable companies have been driven by two phenomena—the quickly growing data market and continual large cable rate increases. While data customer penetration rates are still growing, the rate of growth has slowed down and the vast majority of homes that want and can afford high speed Internet access already have it. And so the cable companies are no longer going to see the steady boosts to their bottom line that comes from double digit growth in very high margin data customers.

The cable companies have also been living off cable rate increases. They loudly blame cable rate increases on increases in programming costs. But the truth is that they have almost always raised cable rates more than what was needed to just cover higher programming costs, and so each rate increase added to the margins from cable and went straight to the bottom line.

But we are now seeing what I call consumer rate fatigue with cable rates. As cable keeps getting more expensive we are going to see more cord cutters, and even more cord shavers. Cable rates have climbed to the point where the cable companies should now hesitate when thinking of raising rates more than needed to cover cost increases. One only has to do the math to see that raising cable rates only 7% per year will increase an $80 monthly bill to over $100 per month in only four short years. The math is finally catching up to the cable industry, and at a time when there are finally online alternatives appearing for content.

Without those two historic bottom line drivers the cable companies are left with having to raise data rates if they want to grow profits to meet investor expectations. The cable companies are all dabbling with new revenue streams such as home power management, security systems, WiFi phones, and other new products. But these new products don’t have the same kinds of high margins as Internet data, nor is it likely that cable companies will sell enough of these new products to make a real bottom line difference.

The industry has been somewhat spoiled for the last couple decades due to having the powerful triple play bundle of voice, video, and data. While the margins on video aren’t great, the other two products have extremely high margins. The bundles have allowed the cable companies to have relatively high penetration rates of all three services. But nobody expects the new products to do nearly as well as the triple play services. Rather than having a few products with very high penetration rates, the cable companies are likely to end up with a product portfolio containing numerous products, each with a relatively small 5–10% penetration. That is going to make them into very different companies than today.

And so expect to start seeing data rates raised every year. This has already begun with the base rates for many cable companies and the large telcos like Verizon. I would expect the rate increases to be small at first but to climb over time to feed the bottom line expectations.

This is all counterintuitive. Most of my clients have 70–80% margins on Internet service today and it’s probably higher than that for the large cable companies. It takes some chutzpah to raise the rates on a product that is already that profitable. But I completely agree with Moffett and I think this is inevitable that data prices will rise, considering the lack of competition in most of our markets.