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The Biggest Reason People Cut the Cord Is Getting Bigger

By Adam Levy – Mar 19, 2018 at 11:31AM

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And as more subscribers dump pay TV over the price, the more expensive it gets.

More people than ever are cutting the cord on pay TV and using an antenna, streaming services, or other entertainment sources for their couch-potato time. When asked their reasons for cord-cutting, more respondents said price was the No. 1 factor, according to TiVO's fourth-quarter Online Video and Pay-TV Trends report.

In fact, price was the only reason for cord-cutting that saw an increase from last year, up 6.6% to 86.7%. Fewer people are cutting the cord to watch streaming services (39.7%, down 8.6% from last year) or broadcast television over an antenna (23%, down 4.2% from last year), and more people are doing it just to save money, according to the survey.

That response is indicative of a vicious cycle facing the television industry. As subscribers cut the cord, pay-TV operators have been raising their prices to offset the subscriber losses, which, in turn, have been leading to a cycle of further customer defections and higher subscription costs.

A pair of scissors about to cut a cable wire.

Image source: Getty Images.

The price of cable keeps going up

Over the last couple of years, the price of pay TV has increased across the industry.

Comcast's (CMCSA -0.68%) monthly price increased about 3.5% on average from 2015 to 2017. Charter (CHTR -3.29%) and AT&T (T 1.36%) were worse, after benefiting from huge acquisitions of Time Warner Cable and DirecTV, respectively. Charter's average price in the fourth quarter was about 6.4% higher than in the fourth quarter of 2015. AT&T's average price was 5% higher than two years ago.

TiVO's survey found nearly 60% of pay-TV subscribers pay over $75 per month for service, and the percentage paying $76 or more increased 3.4% over last year. The vast majority of that migration came from subscribers who had been paying less than $50 for pay TV.

TV distributors are still feeling the pain

The increase in pricing is in part due to the increase in content expenses. Media companies typically increase the price of programming every year with built-in escalators in their contracts with distributors. But pay-TV companies ultimately set their own prices, and could further sacrifice margins in an effort to keep more subscribers.

Comcast, Charter, and AT&T have all seen an increase in total video revenue since 2015 despite falling subscribers. But programming expenses have climbed even faster. Comcast's programming expense was up nearly 23% last year compared to 2015. Charter's programming expense climbed over 18% in the same period even after gaining leverage with the Time Warner Cable deal. Meanwhile, video revenue is up in the mid single digits during the same period.

So, cable companies are already squeezing their margins on video subscribers. At some point, the sacrifices may have to come from the media companies themselves, which also feel the pain of each subscriber loss, but have been able to raise affiliate fees much more quickly.

But with the consolidation in the industry and the increasing ease of going direct-to-consumer, media companies have a growing amount of leverage in their negotiations with distributors. That could force cable companies to keep raising prices, which will result in a continued acceleration in cord-cutting.

Pay-TV companies are caught in a vicious cycle, and there's not much they can do about it. The effects of cord-cutting are only going to get worse, and revenue growth from video will soon trend toward revenue declines as it becomes harder to increase prices enough to offset subscriber losses.

Adam Levy has no position in any of the stocks mentioned. The Motley Fool recommends Comcast. The Motley Fool has a disclosure policy.

Stocks Mentioned

Comcast Stock Quote
$34.91 (-0.68%) $0.24
AT&T Stock Quote
$19.00 (1.36%) $0.26
Charter Communications Stock Quote
Charter Communications
$375.02 (-3.29%) $-12.77

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