Much has been made in the media in the past year or two about "cord-cutters": People who are dropping their pay-TV service. The average cost of pay-TV service (including some premium channels) was recently quoted at $86 per month! That's pretty steep, and soaks up a significant chunk of a typical family's discretionary spending.
For a little over year, I've been a part of the cord-cutting movement. Like many Americans, I dropped my cable subscription primarily due to tight finances. However, I quickly discovered that the alternatives to cable (or satellite) TV are not very good: They may cost a fraction of the price, but they also have a fraction of the content.
That's why I finally gave in and called Comcast (NASDAQ:CMCSA) to order new service. As of Monday, I rejoined the ranks of pay-TV customers. So far, I'm relieved!
Content is king
My decision to rejoin Comcast could best be summed up by the phrase "Content is king." Internet video services like Netflix (NASDAQ:NFLX) and Amazon.com's (NASDAQ:AMZN)Prime Instant Video are "on-demand" and commercial free, both of which are good things. But neither of those advantages can outweigh the superior content of even a low-tier cable subscription.
For one thing, Netflix and Amazon -- with a few exceptions -- do not show current-season TV episodes. (If you're happy to watch last year's shows, these services are more appropriate.)
Netflix and Amazon are also starting to show their own original series, but these efforts are still in the early stages. For example, Twenty-First Century Fox spent $1.5 billion on original content last year. That's roughly comparable to Netflix's total domestic streaming content spending last year, including all of its old movies and TV shows. Amazon does not reveal its Prime content spending, but it appears to be somewhat below Netflix's.
Fox runs just one of the four major TV networks, and there are a growing number of cable networks with significant original content. Given the imbalance in content budgets between today's Internet video services and the networks available on cable, it's not surprising that there is a big content gap. (Moreover, there is a content "void" for things like live local sports, which are generally not available on the Internet at all.)
The decline of free TV
For many years I found that there was more and better content available for free (legally) on the Internet than could be accessed through pay services like Netflix or Amazon Prime. Hulu's free site is a big repository of current-season network TV shows. Moreover, most TV networks stream full episodes on their own websites.
However, a growing number of cable networks are starting to require a pay-TV subscription to view full episodes of their shows. Time Warner's (NYSE:TWX) TNT and TBS channels helped pioneer the concept of cable authentication several years ago. Disney (NYSE:DIS) has gone a similar route with ESPN: You can watch lots of additional content and extra "channels" online, but only after you prove that you are a pay-TV subscriber.
This trend should not be very surprising. Companies like Disney and Time Warner earn billions of dollars each year from affiliate fees -- the amounts pay-TV services pay to carry their cable channels. According to SNL Kagan, ESPN leads the industry with affiliate fees of around $5.54 per month per subscriber. If a cable network gives content away for free on the Internet, it will lose a lot of leverage with pay-TV services, and could thus undermine its business model.
Traditional broadcast TV is still a good free option for many people. The major broadcast networks carry many major sporting events, lots of hit shows, and local and national news. In my case, broadcast TV wasn't an option: Only one of the four major TV networks has a reliable signal in my area.
Moreover, broadcast TV may not be free much longer. Aereo has made huge waves in the TV industry by capturing broadcast signals for free with its proprietary antennas and then charging users to receive content over the Internet. Broadcast TV networks want to shut Aereo down in order to protect their own cable affiliate fees. If they fail to do so through the courts, several executives have threatened to upend Aereo by ending free broadcasts altogether!
Foolish bottom line
While I may be turning my cable service back on, that doesn't necessarily mean that cable and satellite operators like Comcast are out of the woods. For many people with different viewing habits than me, cutting the cord may make sense. Steadily increasing pay-TV fees will continue to fuel the cord-cutting movement for the foreseeable future.
That said, there are no comparable alternatives to a pay-TV subscription yet. While Netflix and Amazon are good at what they do, they provide very different services than a full cable package. Despite the expense, a cable TV subscription provides a lot more value for me today than any alternative.
Full Internet-based TV subscriptions may be coming soon, though, courtesy of Intel. When those services are up and running, they may present a more formidable threat to cable operators. So who knows: I may end up cutting the cord again in a few years!
Fool contributor Adam Levine-Weinberg is short shares of Netflix and Amazon.com and is long December 2013 $275 puts on Netflix. The Motley Fool recommends Amazon.com, Intel, Netflix, and Walt Disney. The Motley Fool owns shares of Amazon.com, Intel, Netflix, and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.