After years of debating whether cord-cutting was a fad or a trend with staying power, it appears there is starting to be definitive evidence of the latter. In November, television analytics firm Nielsen noted cable penetration fell below 80%, a 15-year low. Cord-cutting appears to be increasing in scope. In the third quarter of 2017, 1.2 million households cut the cord -- more than the total for 2015.
The biggest reason people cut the cord is cost. According to data from the Federal Communications Commission, the cost of basic expanded cable, the most popular television package, increased from $22.35 to $69.03 between 1995 and 2015, a rate of 5.8% per year versus inflation's annual 2.2% advance. Americans are still consuming content, they're just doing so using lower-cost substitutes. It appears Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) may be making a mistake with its YouTube TV by forgetting this fact.
Alphabet should be commended for its attempt
It was always going to be a difficult task to bring a streaming-based live-TV solution to market as all stakeholders have diametrically opposed desires. Potential consumers want a robust channel offering at the lowest price; programmers want additional revenue that doesn't conflict with traditional, large-channel packages; and the provider, Alphabet here, wants to make a profit. It's been difficult for providers to find the right balance.
So far, Alphabet's been the only major technology company to attempt to recreate streaming-based subscription television. Although it's been rumored that both Apple and Amazon.com were considering offering such a product, both companies ultimately opted to not pursue the project. Apple was tight-lipped on the reason for abandonment, while notoriously cutthroat Amazon surprisingly noted poor margins for its about-face.
YouTube TV is falling into the same trap as traditional cable
Unfortunately, it appears Alphabet is falling into the same mistakes of traditional cable television. A key reason why cable has increased at more than double the rate of inflation is programming costs. Nowhere is that more acute than in the cost of sports programming. As an example, the NBA re-signed with The Walt Disney Company's ESPN and Time Warner's Turner Sports for television rights. The $2.7 billion per year effective in the 2016-2017 season is an increase of nearly 200% from the prior contract.
To that end, it was surprising when Alphabet announced it was raising the cost of its YouTube TV service for new customers to add channels from Time Warner's Turner Sports network to bring NBA games to the service. While it's difficult to categorize an entire group of consumers, it's widely considered that current cord-cutters and cord-nevers are less motivated by watching live sports than traditional cable subscribers. What they are motivated by is price -- and in less than a year of YouTube TV's existence, the price has increased 14.3%, from $35 per month to $40.
An unclear value proposition
While there's evidence that adding sports could broaden the pool of new subscribers -- sports fans may be willing to look at a cable-substitute if it had a sports option. A PwC, also known as PricewaterhouseCoopers, survey found that 82% of subscribers would trim or cut cable packages if no longer needed to access live games. YouTube TV is unlikely to be able to recreate a substantive package to convince sports fans to abandon traditional cable without price increases.
Currently, YouTube TV is a service that isn't incredibly cheaper than a traditional cable package and has more limited sports options. With this value proposition, it's likely it will continue to receive lukewarm support. For cord-cutters and cord-nevers, YouTube TV will be a welcomed option, but it won't be the disruptive service many are looking for to leave traditional cable television.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Jamal Carnette, CFA owns shares of Alphabet (C shares). The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Walt Disney. The Motley Fool recommends Time Warner. The Motley Fool has a disclosure policy.