Walking Away from Cable

Several different events in the last week got me thinking about an interesting trend in the cable industry. First, in my community there is a Redbox outlet in a neighborhood grocery store. My wife and I were discussing how busy they seem to be in renting out movie DVDs. All of the Blockbuster and other movie rental outlets have closed. Until I moved to this neighborhood recently I hadn’t notice any video stores or related outlets in a long time. But this Redbox seemed to have a lot of business.

I also saw an article in FierceCable that noted that only 5% of US households have subscribed to a vMVPD – an online cable provider like Sling TV, DirecTV Now or Playstation Vue. My first thought is that a 5% market penetration seems pretty phenomenal for an industry that is barely two years old. But the article notes that while 5% of households are current subscribers to online programming, another 8% of the market has tried and dropped one of the services. Since only about 20% of the total households don’t have traditional cable service it makes you wonder what the real upper potential for this market might be – it might be a lot smaller than the vMVPDs are hoping for.

I also went to a Superbowl party. The half dozen families attending are from my neighborhood and it turns out all of the households are cord cutters and don’t subscribe to traditional cable service. I was the only one that used a vMVPD and I currently have a subscription to Playstation Vue. None of them had tried a vMVPD and they seemed to have no interest in doing so. (I only use Playstation Vue because it’s the cheapest way to get Big10 sports and Fox Sportsnet so I can watch Maryland sports teams – I rarely watch the other linear programming).

National broadband penetration rates are now at 84% of all households. I’ve seen many of the opponents of spending money to build rural broadband say that households just want broadband to watch video. Netflix has made a huge dent in the market and served nearly 55 million US homes at the end of 2017. Add to that some percentage of the 90 million homes that subscribe to Amazon Prime, and it seems like there might be some truth in that.

But if households are cutting the cord, why aren’t more of them buying one of the on-line cable alternatives? Those services have packages that carry only the most popular cable channels at half the price of buying traditional cable.

I think the answer is a combination of two factors. One of the predominant factors is price. Every family at the neighborhood party has kids and they dropped traditional cable because it was too expensive. That has to be the factor that explains why the Redbox outlet is doing so well. Most of the movies available from Redbox are also available online. But getting online means also having an Internet-enabled TV or else buying a Roku or other web interface. And even then, watching many of these newer movies means subscribing to yet a different online service. I think there is a cost barrier, or perhaps a technology barrier that is keeping households using a traditional DVD player and Redbox.

Two different households at the party told me that they were satisfied with just watching Netflix and the free programming available on YouTube. And that is the second important trend. Households are getting used to watching just a subset of the programming that is available to them. When somebody drops cable TV and doesn’t buy a vMVPD service it means they have walked away from all of the content that is available only in those two media.

Most of my neighbors still watch the major networks using rabbit ears (something I don’t do). So they are still watching whatever is available on local CBS, NBC, ABC and FOX. But the families on my street are learning to live without the Game of Thrones, or the Walking Dead. They are no longer watching ESPN, Discovery, Comedy Central, the Food Network and the hundreds of channels that make up traditional cable TV.

This means their kids are not growing up watching traditional cable networks, and thus are not developing any brand loyalty to those networks or their programming. If you don’t learn to love a network when you are a teenager, will you decide to watch it when you are older?

I don’t have any answers to these questions, and obviously I can’t define a trend just from talking with some of my neighbors. But I found it intriguing that they all had dropped traditional cable and had not replaced that programming with something online. This tells me that there must be a lot of people who are not enamored with linear programming whether it’s on cable or online. And a lot of people are convincing themselves that it’s okay to walk completely away from the big pile of programming that is offered by the cable TV networks.

This is potentially a watershed phenomenon, because somebody that walks away from traditional programming is probably not coming back. These folks are cord cutters who are literally walking away from most of the programming available on traditional cable. Those networks and their programming are going to become irrelevant to them. But interestingly they are still going to consume a lot of video content – just not that created by the traditional cable networks. In my mind these households are looking a lot like Generation Z in that they are foregoing traditional programming and watching something else.

The vMVPDs are banking that people will transition down to their smaller packages when they leave a cable TV provider. But will they? This is a phenomenon that you can’t determine from industry-wide statistics, other than perhaps by seeing the dropping number of paid subscriptions to the various cable networks. People like my neighbors are dropping cable due to the expense, but they are quickly learning to live without traditional cable programming and aren’t chasing the online alternatives.