Cable companies have been battling consumers' urges to cut the cord for several years now, and as a whole, they have staved off significant declines in video subscribers. Telecom companies AT&T (NYSE:T) and Verizon (NYSE:VZ) have certainly caused problems for traditional cable operators like Comcast (NASDAQ:CMCSA) and Time Warner Cable (UNKNOWN:TWC.DL), but cord cutting hasn't left much of a mark.
While much is made of broadband-only households, the most recent numbers from Nielsen indicate that those households make up just 2.7% of the homes the TV ratings company surveys. That translates into just 3.5 million households when applied to the entire U.S. population.
While that might seem like good news for cable company investors, remember that these numbers are in the past. What matters is what will happen going forward. That 2.7% could grow significantly as more over-the-top services come to market.
More options than ever before
In 2015, consumers will get the long-awaited a la carte HBO, as well as CBS's Showtime, CBSN, and its flagship network, all offered without a cable subscription. Dish Network just unveiled Sling TV at CES, which delivers ESPN and 11 other high-value channels over the top for just $20 a month.
The number of over-the-top services continues to climb, and they're all becoming more and more attractive, not just as supplements to cable, but as replacements. While subscriptions to Netflix continue to climb, they've done so at a significantly faster rate than even the most bearish estimates for cable disconnects. That trend indicates that most television watchers view Netflix as a complement to cable rather than a substitute.
But with more over-the-top options, some consumers may choose to piece together their own bundle of a-la-carte channels that sufficiently replace their cable packages. That's when cord-cutting becomes a real problem, and that 2.7% number starts to climb.
What's a cable company to do?
During the last year, Time Warner Cable has lost nearly 600,000 subscribers. Comcast, the company looking to acquire Time Warner, has fared only slightly better, losing just more than 150,000 video subscribers.
Those losses aren't necessarily from cord cutters, but from AT&T and Verizon encroaching on the territory those cable companies once monopolized. Combined, the two phone companies added more than 1.1 million net new subscribers to their video services during the last 12 months, and they increased their number of addressable households by 5 million.
But over-the-top services aren't limited by geographical bounds; they go wherever subscribers can get high-speed Internet. As such, subscribers may move away from traditional cable even faster as the a-la-carte options become more plentiful.
Luckily, the cable companies also provide Internet access. But with the recent initiative by President Obama to oppose laws that limit competition for Internet service, the cable operators may have trouble increasing their prices on that front.
The impact of cord cutters
Comcast and Time Warner cable are already feeling the impact of cord cutters, at least effectively. Instead of cutting the cord for over-the-top services, though, customers are often leaving for better value offered by AT&T and Verizon and their promotional offers. This is evidenced by the number of broadband-only households staying in the low millions. In other words, most broadband customers still have a television service of some sort.
As over-the-top services proliferate in 2015, customers leaving Comcast's and Time Warner's video service should accelerate, and the increase in AT&T and Verizon video subscribers should slow as more people decide to completely do without video service. Meanwhile, local competition for Internet service will prevent the companies from making up for lost video service revenue by increasing broadband prices.
As such, revenue growth at Comcast and Time Warner Cable, in particular, should slow significantly. Analysts currently see Comcast's revenue growth slowing in 2015 to just 3.8%, but see the more pay-TV-concentrated Time Warner Cable actually accelerating growth to 4.6%. With the pressures both companies are facing from over-the-top services, and the significant potential for unforeseen cord-cutting rates in 2015, those estimates seem high.
Adam Levy owns shares of Apple. The Motley Fool recommends Apple, Google (A shares), Google (C shares), Netflix, and Verizon Communications. The Motley Fool owns shares of Apple, 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.