Is Cord Cutting an Urban Legend?

Fans of disruptive technology cheered as cable and satellite television providers began to shake subscribers.

Cable giants were starting to post sequential declines in subscribers. Media market researcher SNL Kagan confirmed the trend last summer, when it revealed that the pay-television user base suffered its first ever quarterly decline.

Premium television now has an unlikely cheerleader coming to its defense. Speaking to Kara Swisher during last week's D9 conference, Netflix (Nasdaq: NFLX  ) CEO Reed Hastings painted a rosier picture of the industry he is presumably disrupting.

He doesn't see his celluloid smorgasboard model or the buck rentals at Coinstar's (Nasdaq: CSTR  ) Redbox as annihilators of the traditional boob-tube mind-set. He believes that the recession, foreclosures, and the lack of household formation led to the temporary slide in pay television. Hastings points out that the industry has actually bounced back by adding 500,000 cable and satellite television subscribers in the latest quarter.

He's right about that much. Market leader Comcast (Nasdaq: CMCSA  ) continues to shed video customers -- 39,000 during the first three months of this year -- but weakness in cable has been more than offset by gains for ambitiously marketed AT&T (NYSE: T  ) U-verse and Verizon (NYSE: VZ  ) FiOS. Satellite television has also picked up new couch potatoes.

This is a sensitive time for all parties. Netflix passed Comcast in sheer number of subscribers earlier this year, and Hastings doesn't want to come off as the villain.

It's not just because Hastings is a nice and likable guy. He can't afford to anger service providers that also watch over massive content vaults. Comcast recently closed on its NBC Universal deal. Every studio that Netflix is dealing with relies on a predictable stream of money from pay television through channels or video on demand.

However, it is unrealistic to expect the convergence of televisions and online connectivity to leave traditional providers untouched. It's hard to justify $80 a month when more and more content is available online. Why can't the future be high-def antennas for local channels, Wi-Fi televisions pulling in Web-served content, and just $8 a month for Netflix's streaming service? Outside of live sports, can you think of a good reason to keep paying your cable bill? Even the hottest premium cable shows are available piecemeal these days.

Cord cutting isn't a myth. Convergence is coming one way or another, and fans of disruption will be the ones having the last laugh.

Is cord cutting real or just a 2010 blip? Share your thoughts in the comment box below.

Motley Fool newsletter services have recommended buying shares of AT&T, Netflix, and Coinstar. Motley Fool newsletter services have recommended buying puts in Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Longtime Fool contributor Rick Munarriz has been a Netflix shareholder -- and subscriber -- since 2002. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 06, 2011, at 12:42 PM, HiWho wrote:

    Used to have

    Cable TV $69

    CellPhone $69

    Vonage $25

    Netflix$16

    Hulu$9

    ~$200/mo (add taxes etc)$2400/year

    I cut Cable TV,Vonage, Hulu, downsized Nflx

    I signed up for Tmobile $79 unlimited everyhting. Have Netflix $10 plan and Internet $29 simply because G speeds are a joke.

    ~$110/mo or $1200/yr

    Once G speeds are fe realz I will cut internet too. I used HD ready tv to scan regular channels.

    Maybe I will get NFL and college footbal via iTunes in fall.

    I look at it as if my parents said lay off TV for a year and you can buy a ticket to Europe.

  • Report this Comment On June 06, 2011, at 1:29 PM, MKArch wrote:

    Unless you think significant numbers of subs who pay for a broadband service provider will forego local news and sports, current tv programming and new movies and will be satisfied with old movies and tv re-runs then cord cutting is an urban myth.

    You should also include Hastings recent admission that NFLX truly is the tv re-run service. While you are at it you should pay attention to recent discussion of Content providers about NFLX. Starz CEO commented a few months ago that if NFLX wants cheap content they'll just get less of and backed up his words by moving to restrict content on the current deal. There was also a recent analyst note that Strarz is telling NFLX in their negotiations for a new deal that they need to charge their subs in line with with what cable charges for Starz content if they want to renew. Showtime also recently moved to restrict content to NFLX, HBO won't even deal with them and the president of Fox entertainment was quoted as saying that Avatar will never make it to NFLX and that while NFLX may be appropriate for tv re-runs it's not appropriate for quality newer movie content at their current price point. Not only is cord cutting an urban myth so is the argument that the content providers value NFLX free loading sub base.

  • Report this Comment On June 06, 2011, at 5:18 PM, richardya wrote:

    The same news was posted a while ago at cableisforgrandma.com with more details

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