Cable Subscribers Fall Again, What Can the Industry Do to Win Back Customers?

For the first time in history the number of people paying for cable-like TV services has fallen for a year.

Mar 22, 2014 at 4:18AM

While the death of the cable TV industry has long been talked about there is finally some proof that it's actually happening.

The U.S. multichannel segment posted its first full-year loss of subscribers in 2013, according to research firm SNL Kagan. The segment -- which consists of cable companies, satellite providers, and telephone companies that sell TV -- lost 251,000 subscribers in 2013, dipping to approximately 100 million combined subs.

That drop could be taken as a one-time anomaly, but SNL Kagan's researchers do not believe that to be the case.

"While seasonally driven quarterly declines have become routine for industry watchers, the annual dip illustrates longer-term downward pressure even as economic conditions gradually improve," the report stated.

Cable companies are being hit the hardest

SNL Kagan estimates cable operators lost nearly 2 million video subscriptions for the full year and 388,000 in the fourth quarter to finish 2013 with fewer than 54.4 million basic subs. The satellite companies did better -- likely contributing to the decline of cable as DISH (NASDAQ:DISH) and DirecTV (NASDAQ:DTV) "controlled churn and produced net subscriber gains for the year, forestalling an annual decline for perhaps another year," SNL Kagan reported. 

Satellite gained 101,000 subscribers in the fourth quarter and posted a total year gain of 170,000 subscribers. 

Services offered by telephone companies also posted gains led by AT&T's (NYSE:T) U-verse. "The combined multichannel video subscribers served by Verizon Communications's (NYSE:VZ) FiOS and AT&T U-verse reached 10.7 million at the end of the fourth quarter, behind net adds of 286,000. CenturyLink's (NYSE: CTL) PrismTV gained 9,000 subscribers to end at 175,000 customers, and Consolidated Communications Holdings's (NASDAQ: CNSL) IPTV product added 1,000 customers.

These numbers show that it's not the idea of paying for television that customers are abandoning, but the idea of paying the high prices of the traditional cable companies.

Where are cable's customers going?

In addition to leaving for satellite (which is generally cheaper than traditional cable) and phone company services, some customers are simply cutting the cord. Instead of subscribing to a traditional package of channels, these users are buying services like Netflix (NASDAQ: NFLX) and Hulu and changing how they consume media. In some cases customers may be dropping cable due to cost and simply going without.

In 2012 AllThingsD reportedon the struggles of the cable industry and quoted Bernstein analyst Craig Moffett, who released a research note saying that cord cutting was real.

"The growth rate remains below the level of even anemic new household formation, suggesting that penetration is falling even as the pay TV subscriber base is still growing. And that, in turn, suggests that yes, there are homes that are cutting the cord. Whether they are doing so because of online video options (as the technology press would have it) or poverty/affordability (as we would argue) is unclear," he wrote.

Cable faces new competition

In addition to satellite, telcos, Netflix, and Hulu, cable companies are also facing new options for customers like WWE's (NYSE: WWE) network,  a digital streaming service that does not require a cable subscription. While the WWE has a niche audience some upcoming services seem likely to disrupt the current cable model and make it easier for people to cut the cord and still get the channels they watch most often

Disney has announced a deal with DISH that will allow customers to get ESPN -- arguably the most-loved cable channel -- and the popular (among kids and tweens) Disney suite of channels on a streaming-only basis. DirecTV and Disney are talking as well and rumors abound that a number of other popular channels and content providers are considering services that are not tied to the traditional cable model.

What are cable companies doing?

In an interview with USA Today's editorial board on March 18, Comcast CEO Brian Roberts said "the nation's largest cable provider lost customers 26 quarters in a row until it eked out a gain in the fourth quarter last year."

To stem the loss in the video business, the Philadelphia-based company is offering more on-demand and other video options stored in the cloud and looking to introduce new subscription tiers, he told the paper. "Our (profit) margin has gone back on video," he said, citing rising programming costs as a contributing factor."

Cable needs to change

Whether customers are leaving cable for other services or leaving due to price, it seems unlikely that they will be coming back. To keep their user base, cable companies must find a way to become price competitive and to give customers what they want -- and only what they want.

Cable companies have made money by offering packages of channels that get customers to pay for ones they don't want along with the ones they do. That practice worked for years because a la carte pricing was not offered anywhere else. Now it's becoming easier for customers to get the programming they want without paying for things they don't. 

If the cable companies don't make a major pivot and start giving customers a way to lower their bills by only paying for content they actually watch, then than the industry may go the way of the music business.

You know cable's going away. But do you know how to profit? There's $2.2 trillion out there to be had. Currently, cable grabs a big piece of it. That won't last. And when cable falters, three companies are poised to benefit. Click here for their names. Hint: They're not Netflix, Google, and Apple.

Daniel Kline has no position in any stocks mentioned. The Motley Fool recommends DirecTV and Netflix. The Motley Fool owns shares of 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.

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