The recently completed third calendar quarter bought more bad news to pay-TV providers. The industry reported its first full-year loss of subscribers in 2013, and the trend is accelerating this year. Research firm MoffettNathanson, by way of The Wall Street Journal, reported that pay-TV lost 179,000 subscribers, more than 100% higher than last year's corresponding quarterly loss of 83,000.
Perhaps the most interesting takeaway from the report was a quote from James Dolan : "Ultimately cord-cutting and going to over the top is something we do believe is going to happen and we are preparing ourselves for it." And while that sounds like a quote that should come from a network, an investor, or a consumer, it didn't. In fact, Dolan is the CEO of Cablevision (UNKNOWN:CVC.DL), the seventh-largest cable company in the United States by subscriber count.
How does a cable company prepare for a post-cable world?
It wasn't all bad news for Cablevision; the company reported a 3.7% year-over-year increase in revenue this quarter, which softened the blow of losing 56,000 video customers. Offsetting the cable cutters were increases in advertising rates. In the short term those are fine, but that's not a long-term strategy to deal with losing subscribers. Higher cable bills and more advertisements can actually backfire by inducing more subscribers to cut the cord.
Dolan noted his company's investments in broadband as a possible path forward. That makes sense: While pay-TV providers compete with over-the-top and streaming services, those services cannot reach the home without Internet service providers. As Netflix and other streaming services become more popular, and steal more pay-TV market share, pay-TV providers appear to want to capture that value by adding broadband subscribers and pricing accordingly.
Enter Net Neutrality
In an interesting turn, the hastened demise of pay-TV might dim the chances for Net Neutrality. Considering that many pay-TV providers also act as Internet service providers, Dolan's plans are probably being echoed at fellow cable operators Verizon (NYSE:VZ), Time Warner Cable, and Comcast (NASDAQ:CMCSA). In the end, shareholders don't particularly like to hear the words "secular decline"; nor will they tolerate CEO's who use it to explain poor fiscal quarters.
President Barack Obama recently took a pro-Net Neutrality stance when he mentioned Title II. Essentially, Title II seeks to regulate the Internet much like public utilities, mandating they act "in the public interest" and provide the same service, at the same rate, to everybody. You can see how this could seriously put a crimp in what is becoming a cash cow for ISPs who would prefer no regulation on pricing.
As one can imagine, the response from ISPs was swift. Verizon appears to have threatened a lawsuit in its policy blog, stating "[t]hat course would likely also face strong legal challenges," while AT&T "paused" its fiber service build out amid what it calls "regulatory uncertainty." Comcast took a different route and agreed on many points of Net Neutrality: a free and open Internet, no blocking or throttling of content providers, increased transparency, and no paid prioritization.
Netflix would probably disagree on Net Neutrality
Many considered Comcast's peering deal with Netflix as essentially putting the video streamer in a "fast lane," or at least treating content different. For an undisclosed sum, Comcast allowed a more direct route through its network that improved performance for Netflix videos. Netflix followed that up with a similar agreement with Verizon. Netflix continues to champion Net Neutrality, but considering that it has paid major ISPs for faster delivery, it appears to believe this is a lost fight. These costs will ultimately have to be recouped from Netflix subscribers -- whether it be higher fees, fewer shows added, or less original content -- or from shareholders receiving lower earnings.
It's not just Netflix, Amazon.com found that a mere 100 milliseconds of latency (slow websites) cost it 1% in sales, and Google found an extra half second dropped traffic by 20% -- and that was in 2008! If Net Neutrality is rejected, eventually struggling pay-TV providers will look to monetize the Internet by charging websites more for delivery. In the end, users will be stuck with the bill.
Jamal Carnette owns shares of Verizon Communications. The Motley Fool recommends Netflix. The Motley Fool owns shares of Netflix. 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.