Busting the Cord Cutting Myth

Is cutting the cord really that popular? Source: Jason Rosenberg/Flickr

Over the past four quarters, Time Warner Cable (NYSE: TWC) has lost nearly 600,000 television subscribers. There can only be one explanation, right? Cord cutters are finding enough entertainment in the world of Netflix and other over-the-top services.

This is the kind of myopic thinking that can get investors in trouble. The rise of Netflix and fall of Time Warner Cable television subscribers might be related, but it hardly shows us the full picture.

Meanwhile, surveys from Leichtman Research Group show that total pay-TV subscribers are falling. That's a broader view of the market, but it still might miss pieces of the picture. Last year, it reported that the pay-TV industry lost about 105,000 subscribers. The same firm says the top 13 providers lost 150,000 in the third quarter this year and 190,000 in the first nine months of 2014.

I've been skeptical of this cord-cutting "trend" for a while, so I decided to dig in and see what I could find about pay-TV subscription rates.

The raw data
I gathered all of the video subscriber data from the top publicly traded cable, satellite, and IPTV operators. Combined, these companies account for about 85% of the U.S. pay-TV customer base. Notably absent is the privately held Cox Communications, which has approximately 4.4 million subscribers.

Source: Company quarterly earnings reports.

The trends
Looking at the data, some interesting trends start to emerge. Most notably, the telephone companies -- AT&T (T 1.88%), Verizon (VZ -0.53%), and CenturyLink (LUMN -5.15%) -- are growing subscribers rapidly as cable and satellite subscriptions remain mostly stagnant or decline. Nonetheless, subscriber losses at the satellite companies hit hard in the second and third quarters of the year, resulting in net subscriber losses among the companies.

But over the past year, these companies have managed to gain nearly 400,000 net new television subscribers. To break even, the remaining 15 million subscribers spread among the smaller cable companies would have to have disconnected at a rate higher than 2.6%.

Only Time Warner Cable (-5.2%) and Cablevision (NYSE: CVC) (-4.1%) saw declines higher than that. The average of the four cable companies on the list was a 2.2% subscriber loss. Applying the average cable subscriber loss rate to the 15 million subscribers unaccounted for by publicly traded companies brings the total net subscriber adds to 66,000.

By comparison, SNL Kagan estimates pay-TV subscribers increased by 46,000 in 2012, 260,000 in 2011, and 211,000 in 2010. The research firm also estimates subscribers declined by 251,000 last year, well above Leichtman Research's estimate of 105,000. So, you can see how inexact of a science this is.

Why are cable companies losing so many subscribers?
There are a couple of things going on that are drastically affecting the industry.

First, the expansion of the telephone companies' IPTV services has cut into territory that the cable companies once monopolized. Over the last year, the three telecom companies have increased their territory by a combined 5.5 million addressable households.

Naturally, some consumers will be attracted to a differentiated service from one of the phone companies, but they've made switching particularly attractive with aggressive promotions offering discounted bundles and cash incentives. It seems most value-oriented customers aren't cutting the cord for Netflix; they're cutting it for AT&T U-Verse.

The second reason cable companies are losing subscribers is that they continue to raise their average price. The average Comcast revenue per video subscriber increased from $72.63 per month in 2011 to $78.90 per month in 2013.

It's not Comcast's fault, though. Content companies are forcing higher carriage fees on operators, which the cable companies pass on to their subscribers. The rise in cable prices have led some subscribers to look find better offers from new operators, resulting in higher churn rates among cable and satellite companies.

At some point, when churn rates become too much, this strategy no longer becomes profitable for content companies and cable prices stabilize.

Have we reached peak cable?
Whether mass cord cutting is actually going on or not, the best-case scenario shows there's very little growth in the number of cable subscribers. In other words, the market appears saturated, with competitors simply competing for market share.

But if you look at the macro situation, we see something interesting. The number of single people living with roommates and multi-generational households has increased significantly since the Great Recession.

According to Pew Research the percentage of adults aged 18 to 31 living with their parents increased from 32% in 2007 to 36% in 2012. The same study found a one percentage point increase in the amount of people in the age group living in a home with roommates. A survey from Zillow, found that the percentage of households with at least two working-age (23-65) unmarried adults increased from 25.4% in 2000 to 32% in 2012. As more people go to college, live with their parents longer, and choose to live with roommates, more people are watching cable with fewer subscriptions.

Cable viewers may very well be at an all-time high. Even if there are fewer subscribers.

The question investors have to ask, then, is whether this trend is a permanent change, or whether these millennials will leave the nest, get married, and pick up a cable bill of their own. My money's on the latter.