Millennials, those young folks who began reaching adulthood in the year 2000, have a different opinion of paying for television than previous generations do.
While they consume plenty of content, they're more digitally savvy than most older viewers, allowing them to find content in ways other than the traditional cable television pipeline. As this generation leaves the nest and starts their own households, many are choosing to cut the cord, dropping cable in favor of a cheaper mix of both free and paid services, including options like Google's YouTube, Hulu, and Netflix.
Cord cutting led to the loss of another 150,000 subscribers in the third quarter, according to a report from Leichtman Research Group, which also shows that this trend may be accelerating. As a result, cable companies are scrambling for ways to protect their bottom lines, and both Comcast (NASDAQ:CMCSA), which lost 81,000 subscribers during the quarter, and Verizon (NYSE:VZ), which actually gained 114,000 according to LRG, are testing cheaper cable packages designed to keep Millenials in the fold.
How bad is it for cable?
In 2013, the cable industry lost subscribers -- about 250,000 -- for the year, the first time ever according to data from SNL Kagan. The LRG report suggests the drop was not an anomaly but the first sign of an industry in decline.
The LRG data also suggests that pricing has become the key factor in cable, as the biggest drops in subscribers were posted by the traditional cable companies. Satellite, which is generally marketed as a lower-priced alternative to traditional cable, saw smaller drops, and phone company pay television, which is often sold at cut-rate promotional prices, saw gains.
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The major cable players all shared the pain. Besides Comcast, Time Warner Cable lost 182,000 customers and Cablevision shed 56,000.
In addition to losing subscribers to cord cutting, the LRG data suggests that the cable companies are falling victim to price shoppers -- something they had not previously encountered when competition was minimal. Now, cable companies specifically, and pay-TV providers in general, need to prepare for a newly competitive world in which consumers can choose cheaper cable or no cable at all.
What are Comcast and Verizon doing?
Cable companies do still have one major advantage: cord cutters need Internet service if they want access to online and digital content. In some cases, companies are looking to make up for declining cable revenue by raising broadband prices, but current and future competition makes that a short-sighted strategy.
Instead of letting cord cutters go, Comcast and Verizon are trying to entice them into staying by offering a better content package bundled with Internet for a cheaper price than they could put together on their own.
For Verizon, these offers include broadband service, local TV stations, HBO or Showtime, and a free year of Netflix for $59.99 a month, plus taxes and fees, Philly.com reported.
"What we saw was a need for people who valued the Internet and wanted some TV but did not value the entire video proposition," said John Harrobin, chief marketing officer for Verizon's wireline and consumer mass business unit, according to the paper.
Comcast has a special service only offered to college students -- Xfinity on Campus -- as well as a stripped down package available to all subscribers, Internet Plus. That deal costs $44.99 a month and comes with Internet access, HBO, Streampix (a Comcast-owned video streaming service), and 10 TV channels.
Both offerings present a good value. It's hard to argue with $44.99, or even $59.99 a month, for Internet plus limited cable, HBO, and other goodies, given that cable alone can cost that much.
Will it work?
Millenials prioritize Internet access first and specific content second, but the idea of getting access to some local channels and premium content free-of-charge should be appealing. This type of deal could slow down or even stop the exodus of subscribers, but it comes at a cost. For Comcast and Verizon, these subscribers will be contributing less than ever before to their top lines.
Still, keeping customers and figuring out how to generate more revenue from them is a better plan than letting people leave and trying to win them back. The fact that most markets only feature two or three choices for Internet access -- usually a cable company and a phone company -- means that these types of skinny cable deals will have high exposure and should grow in popularity.
It's much easier to market to an audience that needs at least part of your product, but for Comcast, Verizon, and the others to grow revenue, they need to do more than just stem the tide of cord cutters. They need to find a way to keep Millenials on board and eventually get them to spend more money.
Daniel Kline has no position in any stocks mentioned. The Motley Fool recommends Google (A shares), Google (C shares), Netflix, and Verizon Communications, Inc.. The Motley Fool owns shares of Google (A shares), Google (C shares), and 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.
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