cable TV cord-cutting is here to stay

That’s according to media consultant, SNL Kagan.

SNL Kagan is the firm that first called widespread attention to the phenomenon that significant numbers of subscribers to multi-channel entertainment service providers, like cable TV or satellite, are cancelling their service.  People are watching increasingly their favorite programs over the internet through services like Hulu.  And they’re using Netflix as a substitute for on-demand movie watching.

During the middle two quarters of last year, cable et al. in the US actually showed declines in subscriber numbers for the first time ever.  The fact that subscribership has since rallied back into the plus column has some observers concluding that internet-based “over the top” content distribution will remain a fringe phenomenon.  SNL Kagan disagrees.

The consultant points out that:

–while traditional cable/satellite is growing, its expansion is less than the rate of new household formation.  This means the older services are gradually losing market share;

–the number of OTT households will likely rise by 80% this year to 4.5 million, or about 4% of the market;

–for at least the next several years, the consultant expects OTT households to expand by a steady 2 million annually.  This means they’ll number 12 million or so by 2015, and represent 10% of the market.

Netflixing and Huluing are different

Neilson observes that, although they may be the same people, individuals behave quite differently while Netflixing from when they’re Huluing.

–Netflixers, as you’d suspect, primarily watch movies using the service.  A small majority view content on their TV screens, with a game console as their preferred connection device.  42% watch the movies directly on their computers.

–Huluers, as you’d also figure, watch almost nothing but TV shows.  They view their content almost exclusively on their computers, however, although sometimes they’ll hook the computer up to a TV screen.

One constant for both services:   almost no one uses Google TV or Apple TV.  More people watch on cellphones or tablets than on either.

my thoughts

Let’s assume that Huluing and Netflixing give us a peek into the future.  What are we seeing?

–a world where cable TV companies are valuable because they deliver internet access to customers, not entertainment content directly to a TV. Their rivals will principally be the wireless companies that are building their own mobile internet networks.

–a world where TV sets no longer play a prominent role.  Maybe you’ll have one in the house to watch sports events (the only kind of entertainment where people are willing to pay for picture quality), maybe not.  Viewing gets done on computers or tablets.

–a world where the low-end PC disappears.  Tablets are one successor, as the market already realizes.  Traditional PCs, laptop or desktop, with larger, better resolution screens and good audio may be another.   APPL is moving in this direction by eliminating the MacBook from its lineup and offering customers only the MacBook Air and the MacBook Pro as choices.  (This seems to me to open the door to Chromebooks in the education market, but time will tell.)

Implications for INTC are, at worst, mixed and maybe pretty favorable.  It may sell fewer chips, but its product mix will shift to higher value-added products.  Cloud computing becomes much more important.  And the performance bar is raised for ARMH’s much-discussed entry into the PC market.

4Q10 TV numbers from SNL Kagan: better than 3Q10, but not good

4Q10 TV subscriber numbers

The June 2010 and September 2010 quarters were tough to take for the cable, telco and satellite TV industry, which lost a total of 335,000 net subscribers over the six months.

A complex set of interacting factors produced this result:

  1. The stock market’s biggest worry is that some—mostly younger—viewers are unplugging from traditional cable/satellite and substituting a basket of (cooler, but also cheaper) streaming services like Netflix and Hulu instead. That certainly is happening, but the extent isn’t clear.
  2. Recession has caused some viewers to cancel service to save money.
  3. For some years, cable companies have steadily been losing market share to telco-offered TV services at cheaper, introductory rates. A portion of these switchers subsequently cancel service at the end of the first year, as the telco rates revert to higher prices.
  4. Some over-the-air viewers shifted to cable/telco/satellite as the US made the switch from analog to digital TV broadcasting in the June quarter of 2009. A percentage of these viewers have figured out that they can get the reception they want (actually often a better picture) using an over-the-air digital antenna. They are switching back to over-the-air viewing as their cable/satellite contracts run out.

The December quarter was a bit better. According to industry guru SNL Kagan, cable+satellite+telco added 65,000 net new subscribers over the three months. That compares with losses of 119,000 and 216,000 subs during the prior two quarters. Two reasons for the better numbers: the economy is improving; most people who adopted cable as a temporary measure while they figured out digital have already cancelled service, so this headwind is abating.

Not everything is rosy, though. Traditional cable subscribership continues shrink at a steady, and possibly accelerating, pace. The figure of 526,000 subscribers lost during the December quarter only looks good against the much greater defections seen during the middle of the year. For 2010 as a whole, cable lost 2.2+ million subs and has dipped under 60 million viewers.

Also, according to SNL Kagan, the number of occupied housing units rose at a faster rate during the period than the number signing up for cable/satellite. In other words, a decreasing proportion of people establishing new residences signed up for these video services.

Will cable lower prices to retain customers? I doubt it. For one thing, it’s a matter of conjecture whether, say, a 10% across the board price cut would persuade anyone to stay with cable. However, such a measure would definitely mean a 10% loss of revenue—and perhaps double that percentage as a loss of profit.

Fighting the net neutrality battle is a better way to go. Ironically, it’s the cable companies’ provision of high-speed internet service that allows people to unplug from cable video offerings. If cutting prices is too risky, the logical route for the cable firms to follow to combat unplugging is to attempt to impede their streaming rivals’ access to the bandwidth they need to deliver their services, or charge them a lot for it. Streaming services, in their turn, should argue that the cable firms are quasi-monopolies who have a social obligation to allow equally high-speed access to all for a nominal fee. This battle will ultimately be decided in Washington.

My thoughts

I believe we’re only in the early adopter phase of a switch from traditional cable to streaming services. I understand that special factors may have led to large net losses of video service subscribers in the middle of last year. But I don’t take any particular encouragement from the “rebound” of the December quarter.

On the other hand, I remember thinking during the ATT breakup of the early 1980s that the regional Bells would not be able to survive for long. If someone had told me then that they would only be reaching the end of the profit road for their basic fixed-line business thirty years later, I would have thought they very crazy. Yet, the fixed-line business has fought a successful war of attrition for that long. And the Baby Bells have been done in, not by lower-cost fixed-line rivals, but by wireless, a new technological development. Although I’m inclined to look longer and harder at the streaming services providers, my guess is that value investors will find the cable firms to be fertile fields for investing for decades to come.

The June 2010 and September 2010 quarters were tough to take for the cable, telco and satellite TV industry, which lost a total of 335,000 net subscribers over the six months.

A complex set of interacting factors produced this result:

  1. The stock market’s biggest worry is that some—mostly younger—viewers are unplugging from traditional cable/satellite and substituting a basket of (cooler, but also cheaper) streaming services like Netflix and Hulu instead. That certainly is happening, but the extent isn’t clear.
  2. Recession has caused some viewers to cancel service to save money.
  3. For some years, cable companies have steadily been losing market share to telco-offered TV services at cheaper, introductory rates. A portion of these switchers subsequently cancel service at the end of the first year, as the telco rates revert to higher prices.
  4. Some over-the-air viewers shifted to cable/telco/satellite as the US made the switch from analog to digital TV broadcasting in the June quarter of 2009. A percentage of these viewers have figured out that they can get the reception they want (actually often a better picture) using an over-the-air digital antenna. They are switching back to over-the-air viewing as their cable/satellite contracts run out.

The December quarter was a bit better. According to industry guru SNL Kagan, cable+satellite+telco added 65,000 net new subscribers over the three months. That compares with losses of 119,000 and 216,000 subs during the prior two quarters. Two reasons for the better numbers: the economy is improving; most people who adopted cable as a temporary measure while they figured out digital have already cancelled service, so this headwind is abating.

Not everything is rosy, though. Traditional cable subscribership continues shrink at a steady, and possibly accelerating, pace. The figure of 526,000 subscribers lost during the December quarter only looks good against the much greater defections seen during the middle of the year. For 2010 as a whole, cable lost 2.2+ million subs and has dipped under 60 million viewers.

Also, according to SNL Kagan, the number of occupied housing units rose at a faster rate during the period than the number signing up for cable/satellite. In other words, a decreasing proportion of people establishing new residences signed up for these video services.

Will cable lower prices to retain customers? I doubt it. For one thing, it’s a matter of conjecture whether, say, a 10% across the board price cut would persuade anyone to stay with cable. However, such a measure would definitely mean a 10% loss of revenue—and perhaps double that percentage as a loss of profit.

Fighting the net neutrality battle is a better way to go. Ironically, it’s the cable companies’ provision of high-speed internet service that allows people to unplug from cable video offerings. If cutting prices is too risky, the logical route for the cable firms to follow to combat unplugging is to attempt to impede their streaming rivals’ access to the bandwidth they need to deliver their services, or charge them a lot for it. Streaming services, in their turn, should argue that the cable firms are quasi-monopolies who have social obligation to allow equally high-speed access to all for a nominal fee. This battle will ultimately be decided in Washington.

My thoughts

I believe we’re only in the early adopter phase of a switch from traditional cable to streaming services. I understand that special factors may have led to large net losses of video service subscribers in the middle of last year. But I don’t take any particular encouragement from the “rebound” of the December quarter.

On the other hand, I remember thinking during the ATT breakup of the early 1980s that the regional Bells would not be able to survive for long. If someone had told me then that they would only be reaching the end of the profit road for their basic fixed-line business thirty years later, I would have thought they very crazy. Yet, the fixed-line business has fought a successful war of attrition for that long. And the Baby Bells have been done in, not by lower-cost fixed-line rivals, but by wireless, a new technological development. Although I’m inclined to look longer and harder at the streaming services providers, my guess is that value investors will find the cable firms to be fertile fields for investing for decades to come.