Cord-cutting gets a lot of headlines. Indeed, the number of people ditching their pay-TV subscriptions continues to grow. But the early success of virtual MVPDs (over-the-top linear TV services) should terrify traditional pay-TV providers.

Hulu's (soon to be majority controlled by Walt Disney (NYSE:DIS)) Live TV service launched last May, and it's already attracted 955,000 subscribers, according to estimates from Strategy Analytics. Alphabet's (NASDAQ:GOOG) (NASDAQ:GOOGL) YouTube TV launched around the same time and it has an estimated 410,000 subscribers. All told, five companies with practically no presence in pay TV just a couple of years ago have a total of 2.6 million subscribers. And that number is growing quickly.

Hulu's live tv service on a TV.

Image source: Hulu.

Taking on big cable

Improvements in internet connectivity have lowered the barrier to entry for companies looking to establish themselves in pay TV.

Cable companies like Comcast (NASDAQ:CMCSA) used to benefit from de facto monopolies due to physical infrastructure restrictions. When AT&T (NYSE:T) and other telecom companies built out their own pay-TV services, it took years to expand geographic coverage. Getting nationwide coverage used to require launching expensive satellites into orbit like DISH Network (NASDAQ:DISH) and organizing a team of workers to install equipment.

But vMVPDs can have nationwide coverage with a few signed contracts and the click of a button, no extra equipment or installation necessary.

Premium television is no longer the domain of a select few gatekeepers. Where consumers used to have just one or two options, they now have five or six. So, not only do legacy pay-TV operators like Comcast have to compete with the growing trend of cord-cutting, they face increased competition for the premium customers who are willing to pay more for the kind of service they provide.

What's more, vMVPDs are generally digital and mobile natives. They launch with the features consumers demand in the mobile age. Customers want to be able to stream their TV channels from their phone no matter where they are. They want to be able to watch recorded TV on the go, and switch devices mid-episode. These are features companies that started in mobile video a decade ago, like YouTube and Hulu, are much more adept at offering than legacy pay-TV providers.

So it should be no surprise that customers have been very taken with vMVPDs. While new entrants have added around 1.9 million new subscribers over the past year, legacy pay-TV providers have lost 3.2 million.

Virtual MVPD insanity

Most traditional pay-TV operators aren't just standing idly by as they lose subscribers and vMVPDs gain them. DISH Network was one of the first companies to launch a vMVPD, Sling TV. It's grown to become the most popular service of its kind with 2.3 million subscribers.

Sling TV may soon be overtaken by AT&T's DirecTV Now, which launched at the end of 2016 and has managed to attract 1.8 million subscribers. DirecTV Now's subscriber growth seems strongly tied to bundling promotions AT&T runs with its mobile phone service, which has had a big negative impact on its entertainment group profit margin.

Companies that already have big businesses distributing media over the internet -- for example, YouTube and Hulu -- have a significant advantage. Companies like YouTube, which is owned by the largest digital advertising company in the world, can benefit from offsetting low consumer prices with better advertising during commercial breaks. Hulu, likewise, has grown to become a significant player in digital video advertising.

So, where legacy players like AT&T and DISH are struggling to maintain profit margins like they're used to, new entrants are capable of using their competitive advantages to put pressure on older companies' pricing. Even Comcast has experimented with offering digital products that allow customers to stream certain channels to any device for extremely low prices.

As vMVPDs continue to rack up customers, they're stealing them away from traditional pay-TV operators. AT&T and DISH are only offsetting subscriber losses of their legacy products with their own vMVPD products, and at little to no profits at this point. The fact that the barriers to entry are down and consumers are flocking to these kinds of products means the trend is only going to get worse for traditional pay-TV operators.