Source: AT&T.
So called cord cutting, the term for going without pay-TV, is a real threat to pay-TV providers. Experian Marketing Services has found that the trend is not only real, but accelerating: The report said the percentage of U.S. households without pay-TV jumped from 4.5% in 2010 to 6.5% last year.
Pay-TV providers have gotten the memo; after originally resisting any changes, these providers are slowly adjusting to this new paradigm. The latest company to acknowledge the current model is unsustainable is AT&T (T -1.37%). A recent deal of $39 per month for broadband Internet, basic channels, Amazon.com Prime, and Time Warner's HBO appears to be an implicit admission that providers need to present better value to compete with Hulu- and Netflix-only households.
It's safe to assume that we can consider pay TV a mature market. Since mature markets are characterized by intense competition among large companies until most drop out in what's termed a "shakeout," should Verizon (VZ -0.68%) and Comcast (CMCSA -5.82%) fear AT&T's recent moves?
Let's put this in perspective
Unfortunately, this appears not to be the game changer that cable haters believe. First is an issue of reach, as AT&T is seemingly offering this deal through its limited-reach U-verse brand. Although the company boasts of marketing U-verse to 27 million customer locations, the company only currently has 10.4 million total subscribers, with 5.3 million pay-TV subscribers as of its 2013 annual report. And although that's similar to Verizon's FiOS subscriber numbers -- which come in at 9 million total and 5.2 million -- both are dwarfed by Comcast with 22 million subscribers and Time Warner Cable at 12.2 million.
Obviously we're looking at growth and potential market share acquisition, but right now AT&T only provides television service in 22 states, locking out vast numbers of individuals out of this deal. AT&T's coverage chart provides detail on its availability:
Source: AT&T U-verse.
But that doesn't mean Time Warner Cable and Comcast should rest on their laurels
AT&T is only one of a host of companies that are adapting their business models to steal market share away from entrenched cable companies. Call it death by a thousand cuts for these large, legacy cable providers. Time Warner CEO Jeff Bewkes outright admitted he was looking toward an Internet-only subscription for HBO Go by stating at a Goldman Sachs investor conference, "[n]ow, the broadband opportunity is quite a bit bigger."
While Bewkes was rather silent about the path forward, it seems as if he considers the AT&T U-verse partnership a part of that broadband-focused strategy. For HBO, it is the best of both worlds: It keeps the existing affiliate system that has been good to the pay-TV channel, but the company has a chance to profit from those cord cutters who might be lured back by a low per-month charge.
While AT&T is now in the spotlight, Verizon is also exploring modifications to its pay-TV strategy. At the same Goldman Sachs investor conference, Verizon CEO Lowell McAdam also discussed an Internet-based TV service, but emphasized an a la carte subscription service rather than AT&T's mini-bundle model.
It's worth noting that Time Warner Cable and Comcast are more dependent on pay-TV dollars than both AT&T and Verizon, which are hungry for growth amid intense wireless competition.
Final thoughts
It is apparent that the cable business model is broken. Personally, I applaud AT&T and Verizon for trying to take advantage of this shift in sentiment. Investors of Time Warner Cable and Comcast would be wise to follow these trends, which present headwinds to those investments. All investors should think like AT&T and Verizon by looking for smart, targeted ways to make money from the death of cable.
