Where Have All the Cable Cord Cutters Gone?

The Internet has plenty of options for social media, business, and streaming media. Netflix (NFLX -0.51%) and Hulu are usually in the list when thinking of companies that offer streaming services.

With the option to choose other providers, and even when to watch, it's no wonder the millennials are cutting the cord and choosing to stream, rather than bunking down with a cable company. Sean O'Reilly and Vincent Shen have the rundown on how those numbers are actually looking, on today's episode of Industry Focus.

A full transcript follows the video.

Sean O'Reilly: Where are all the cord cutters? On this consumer's edition of Industry Focus.

[INTRO]

Greetings, Fools! I am Sean O'Reilly joining you here from beautiful Alexandria, Virginia, just south of Washington D.C. I'm joined with the incomparable Vincent Shen today. How are you, sir?

Vincent Shen: How are you doing, Sean?

O'Reilly: Not too bad. Looking forward to the picnic that's going be outside in the PTO area later today.

Shen: Oh, yeah?

O'Reilly: You know about that?

Shen: No, I didn't know that.

O'Reilly: I'll show it to you. There's 20 vendors that are going to be hanging out in front of our building, basically.

Shen: Oh, wow. Very -- the weather is perfect outside.

O'Reilly: Absolutely awesome, because it's not quite humid yet. Which D.C. totally will be, in a month. Anyway. So, today we're talking about cord cutters and I actually should say 'the lack of them', because we always talk about "Oh, the death of cable and everybody's cutting their cord and watching Netflix" and all that stuff. But the data tells a different story. What's going on here?

Shen: Yeah. So, after our show last week talking about the fall of the Comcast (CMCSA 1.62%) / Time Warner (NYSE: TWC) deal I thought it would be interesting to look at these other options that people do have if they are unhappy with their service and just what the lay of the land looks like in the industry. In the media we've seen a lot of stories about how millennials in particularly younger consumers in general are moving away from traditional pay TV -- cable, satellite -- and they're moving on to these streaming services.

I think Netflix, Amazon (AMZN -1.14%) Prime, Hulu -- others. Way more than I even actually realized are out there. Some I've never tried before. The issue is that based on the numbers -- like you said, Sean -- we're not really seeing significant, substantial...

O'Reilly: There are 10s of millions of people that subscribe to cable and they lost, what? 100,000 subscribers last year?

Shen: Yeah.

O'Reilly: A fraction of 1%. It's not even...

Shen: So, there's some research from the Leichtman Research Group that said that for the 13 largest paid TV providers -- these guys cover 95 million subscribers. That's 95% of the entire market. For 2014 they only lost -- net -- about 125,000 subscribers. So, we're talking about a very small -- far less than 1%.

O'Reilly: Yeah, there's no way.

Shen: That's only a slight increase from the losses that they had in 2013, which amounted to -- again, a small number -- 95,000 in the context of their 95 million subscriber base. The thing is, of those 13 largest paid TV providers, they are segmented into different groups because you have 9 of them are traditional cable companies -- which are the biggest. They make up about 50 million subscribers.

You have the satellite guy -- and the cable TV guys admittedly...Comcast, Time Warner's, they did have the biggest losses. Where in 2014 they lost about 1.2 million subscribers.

O'Reilly: Okay.

Shen: The reason why the number's decreased -- or the overall decrease for the industry was less was because satellite added, and so did telephone providers...

O'Reilly: Got to have my NFL RedZone on DIRECTV (DTV.DL).

Shen: So, the telephone providers, which includes Verizon (VZ 0.88%) and AT&T (T 1.30%) -- they added 1 million subscribers last year. So, that offset a lot of the traditional cable losses.

O'Reilly: Right.

Shen: So, really what I took from this is there are not droves of people stepping away from these traditional paid TV providers and going to just streaming over broadband.

O'Reilly: So, in studio -- you and I, we're both millennials. We both moved to D.C., we work for The Fool; all this stuff. We are the ideal type of citizen that would be cutting the cord. Why aren't you cutting yours?

Shen: Well, this is actually something we'll have to touch on later in the show. The fact that I got roped in. I was fully prepared to just go with broadband -- to just go with my Internet package and I was happy with just having Netflix and then making due elsewhere with my friends who have HBO Now, or whatever. But it was maybe $5 or $10 more they were offering 30 or 40 channels and I said "All right. It's $5 or $10."

O'Reilly: Fine. Take my money.

Shen: Sometimes it's nice to just sit on the couch and flip through and see what's on.

O'Reilly: Typical man. Good stuff.

Shen: Yeah.

O'Reilly: So, what's going on with -- let's take a step back to offer the alternative, and then we'll bring it all home. There are a lot of alternatives on this list. Before the show you came up with this International Business Times list of cord cutting, and this is all the alternatives. There's probably 20 or 30 options on here. This includes CBS All Access for $5.99 a month where you can get the entire back catalog of all CBS classic shows and just stream them over your computer. NBC offers something similar for $3, Noggin for $5.99 a month -- your preschooler, which actually is going to be important to me real soon -- in your household, Nickelodeon's Noggin service provides ad free shows.

So, Blue's Clues and Little Bear -- $6? WWE, if you're a wrestling fan they're trying to ramp up their own version of Netflix and they'll have an entire catalog of every wrestling match in the history of mankind for $10 a month. Of course, HBO Now you do not have to be a cable subscriber at all. You can just stream it over your computer, $14.99 a month. So, you have alternatives. Obviously if you add all these up though you're going to be spending $200 or $300 a month if you want all these.

Shen: It ultimately depends on what you need in your package. You're right, if you need a more comprehensive set of channels it might make sense for you to go with a traditional package.

O'Reilly: Well, that's the darndest -- a couple of months ago one of our writers pointed out the fact that technically on a value basis, the current subscription cable model that we all live with and grumble about is still technically the best deal because for $70, $60, $80, $90 you're getting over 100 channels. If we did that a la carte -- and even if you paid $1.50 per channel, if you really wanted ESPN you'd be paying $6 -- it would get really pricey.

Shen: It's important that you mention ESPN because I think that's a huge sticking point, or a last line of defense that the cable industry still has.

O'Reilly: That's the word right there. Last line of defense.

Shen: Nielsen came out with some Data that basically said that consumers with both a cable television and streaming service subscription; they're more likely to drop the streaming service. Actually, it's like 93% of homes.

O'Reilly: In part because it's easier, mind you.

Shen: Yeah. It's also easier, but 93% of homes are more likely to keep their cable subscription than their streaming service. They're arguing that cord cutting's not really happening because it's true that younger people are dropping services at higher rates than other demographics, but the issue is -- for me personally -- I've moved three or four times in the past six years and I think every single time I'm cutting -- I might be cutting with Comcast, joining with Time Warner, cutting with Time Warner, joining back up with Comcast.

So, that can skew the numbers. We're very mobile at this age. So, going back to the ESPN though, the last line of defense is the issue that half of survey respondents will say "I want to drop my cable services. It's expensive, it has channels that I don't need, but I'm unwilling to do so, essentially, because I want to be able to watch football on Sunday." Or the playoffs for NBA. That is the issue they're having where Netflix, Amazon, and some of these other services just can't offer that.

O'Reilly: Yeah. So, bringing it back around here, we were talking about -- I took the liberty of just coming up with three of the major cable Internet providers, television providers. Time Warner, Comcast, and Verizon FiOS. I took a look at their three major packages. I have the basic 'just the Internet', literally just the Internet and you were to stream Netflix and CBS Go, or whatever.

Then Cable Plus, which is kind of what I'm going with right now, even though my wife grumbles about it. Love you, Natalie. It's Cable Plus, it's literally the bare bones cable. Like, 20, 25 channels. It's like ABC, CBS, and Bravo. That's...yeah.

Shen: That's what I have right now.

O'Reilly: Yeah. So, you and me both. Then you got the mid-range. This is pretty much what the average person in America probably picks. They don't want to spend $200 a month. The basic Internet is $35 to $40, just for the Internet. Some of these packages aren't even that good because, like, the Comcast one here in Alexandria, Virginia; that's 3MBPS for $35 a month, and that's just for the first 12 months with Comcast. For $35 with Time Warner and Verizon FiOS you're getting 15 to 25MBPS.

So, you kind of need a faster Internet speed. So, that kind of trapped me. So, then I had to go up because I have Comcast. Then you go up to the Cable Plus -- the basic -- and for $15 more I get these TV channels, and I'll have to buy an antenna and all this stuff. You're kind of -- it's like "Okay, fine. Take my extra $15."

Shen: Well, that's how they get you, too. Well, at least specifically that Comcast package that you mentioned. The 3MBPS...

O'Reilly: That's awful.

Shen: You might run into issues. If you have more than a few devices going in your house at one time, you're trying to stream some House of Cards on Netflix -- on your television -- you're going to be already bottle necking your connection a little bit.

O'Reilly: It'll be a problem, yeah. Then the mid-range you're getting 200 channels and 30MBPS of Internet. You're talking $80, $90, but if you're already spending $40 or $50, you could get an extra 160, 180 channels for an extra $30, $40.

Shen: Yeah.

O'Reilly: It seems to me there are no cord cutters just yet because all 100 million households in America are between a rock and a hard place. They want to get rid of them, they really don't like them, but they can't because they're not...

Shen: There's nothing quite out there yet that provides the value and the selection that's going to be like "You know what? That's going to be an absolute winner. I'm making the change tomorrow."

O'Reilly: Right.

Shen: Last week we mentioned the new package from Verizon that they're getting into.

O'Reilly: Yeah. I saw that. I'm sad I moved out of Verizon's territory now.

Shen: That package -- in my opinion it's a little on the pricier end for the number of channels you're getting, but that does have that sports package, which I think a lot of people find valuable. Another competitor -- Cablevision -- not long after Verizon made their announcement for their new service, they came out with...

O'Reilly: They're big in New York, right?

Shen: Yes. So, Cablevision is targeting cord cutters with something that is just Internet and then the kicker is they give you a free TV antennae. So, that's going to catch all your...

O'Reilly: That'll get all the millennials moving to New York.

Shen: CBS, ABC, NBC. My personal experience with the antennae -- and HD antenna -- it worked beautifully.

O'Reilly: The picture's great.

Shen: I used it for the super bowl. I got 30 channels where I am in the city and I was very, very impressed with what that was picking up. So, that is an interesting option where some people who only need those major networks and are happy with just the Internet; it's another alternative. It's just another way that the industry's changing, innovating a little bit, offering these new options to get people to stay on and do business with them.

O'Reilly: Yeah. It seems like the bottom line here is we keep talking about all these options like CBS Go where you pay $6 a month and you're able to stream their whole library, but you still need to stream. You still need the Internet. So, it seems like the bottom line is, the Comcasts of the world don't actually need to worry because they own the cables to everybody's home still, and they're still going to have to pay for the Internet. So, they still have that toll bridge there.

Shen: Exactly.

O'Reilly: So, very good. Well, thanks for your thoughts, Vince. Have a good one.

Shen: Cool. Thank you, Sean.

O'Reilly: Before we go I want to make our listeners aware of a very special offer for all of our Industry Focus listeners. If you're looking for more Foolish stock ideas, Stock Advisor may be the service for you. It is our flagship newsletter started more than 10 years ago by Motley Fool co-founders Tom and David Gardner. We're offering the lowest price out there for our Industry Focus listeners. It is $98 for two a two year subscription to Stock Advisor.

You'll get two stock recommendations every single month with insight from our team of analysts. You can go to focus.fool.com to take advantage of this offer. Once again that is focus.fool.com. As always, people on this program may have interests in the stocks that they talk about, and the Motley Fool may have formal recommendations for or against those stocks. So, don't buy or sell anything based solely on what you hear on this program. For Vincent Shen, I'm Sean O'Reilly. Thanks for listening, and Fool on!