While lots of media attention has focused on cord-cutters -- people who completely drop cable -- the real threat to pay television may be cord-shavers, customers who opt for cheap, limited channel packages.
This has led to some of the most popular networks, including Walt Disney's (NYSE:DIS) ESPN, Time Warner's (NYSE:TWX) TNT and TBS, and Comcast's (NASDAQ:CMCSA) USA Network losing viewers at a far greater rate than the overall slight decline in homes with cable. Over the past four years, the 40 most widely distributed channels in 2010 lost an average of 3.2 million subscribers, The Wall Street Journal reported earlier this month.
A small percentage of that is due to cord-cutting, but the number of homes that have cable did not drop in 2011 or 2012. That total fell for the first time ever in 2013, according to research firm SNL Kagan. The loss, however, was only around 250,000, according to Bloomberg so it's only a drop in the bucket of the 3.2 million subscribers lost on average by each of the top channels. The real issue is customers who keep a basic cable package -- one that offers little more than the broadcast networks, public access channels, and a smattering of other choices -- and turn to digital services as a substitute for pricey higher-end pay TV offerings.
With basic cable a person would still get some live sports, first-run network shows, and major events like the Academy Awards and the Super Bowl, but would miss out -- at least in the short term -- on popular cable shows. It seems that a growing percentage of people are willing to wait for their favorite shows to come to services like Netflix (NASDAQ:NFLX) or Hulu, or are willing to give them up in favor of the growing amount of original programming offered by streaming services.
How much money are we talking?
Figuring out how much cable costs can be a challenge because the providers generally offer lower-cost introductory rates then raise prices after that period expires. In general, the advertised price excludes various taxes and fees as well. Even with that major caveat, cord-shaving can be a huge savings for subscribers. Comcast, which serves the Middletown, Conn., area where this story was written, lists prices for the area on its website. (Prices vary by geography, so the numbers shared here may not be the ones you see).
When I took a look, the lowest priced package offered by Comcast, which it has given the off-putting name "Limited Basic," costs $14.25 a month. That's not a teaser rate, that's the actual pre-fees and taxes price for the service that offers 10 channels, including ABC, CBS, NBC, FOX, local "government and education networks," as well as shopping and religious channels.
The next tier up, "Digital Economy," starts at $29.99 a month for the first 12 months before jumping to between $34.95-$39.95 in year two (depending upon geography, with all prices subject to change). That package includes 45 stations including what Comcast calls "the top networks and popular channels" but the actual lineup is not listed.
To actually get the full selection of what used to be called basic cable, you'd need to pony up for "Digital Starter." That package offers 80 channels. That offering costs $49.99 for the first 12 months, then rises to $69.95 in the second year.
So, given the prices I was seeing, once the promo period is over, a person with Limited Basic would pay between $20.70-$25.70 less per month than someone with Digital Economy, and a whopping $55.70 less than someone with Digital Starter -- the lowest tier which actually gives you the vast majority of the most popular cable channels.
This problem is going to get bigger
Cable has priced itself out of the market for what will be a growing number of people. A sports fan may really want to watch ESPN, but with the extra $668.40 per year from my example that he would have by keeping the lowest-price package, he could afford more than a few trips to the local sports bar.
The problem for cable is only going to get worse as more popular channels offer alternative means to watch their programming.HBO is planning to launch an over-the-top streaming service next year. Major League Baseball already offers a streaming service, as does the National Hockey League and the National Basketball Association. The National Football League remains a holdout, but aside from ESPN's Monday Night Football all of its games could be seen on the broadcast networks with the cheapest cable package.
Cable is a legacy business that people are clinging to out of habit. Nearly everything pay TV offers can be viewed with the combination of very basic cable and live streaming services for far less money.
Cord-shaving will grow in popularity and even if cable changes its ways and moves to true a la carte pricing, it may already have lost customers who once thought they needed certain channels but realized that life was just fine without them.
Daniel Kline has no position in any stocks mentioned. The Motley Fool recommends Netflix and Walt Disney. The Motley Fool owns shares of 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.