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Why Americans Are Giving Up on Cable TV but Not Cutting the Cord

By Jeremy Bowman – Mar 21, 2015 at 4:09PM

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Americans are watching less cable, but they haven't stopped paying for it.

You've probably heard about the "cord-cutting revolution" by now. Supposedly, millions of Americans are ditching cable and satellite TV, and switching to less expensive streaming services like Netflix (NFLX -2.04%), Hulu, and Amazon.com (NASDAQ: AMZN) Instant Video for home entertainment.

However, the actual numbers show that if the cord-cutting revolution is happening, then someone must have hit the mute button. In 2014, the pay -TV industry lost 125,000 subscriptions, up from 2013, when 95,000 customers cut the cord, according to a post on telecompaper.com that cites a report from Leichtman Research Group. Yes, consumers are walking away from cable and satellite TV, but they are exiting one at a time, not in droves. The pay-TV industry still counts more than 95 million subscribers on its rolls, so last year's exodus marks a decline of barely over 0.1%, or essentially a rounding error.

What is happening in the industry, however, is that actual viewing of cable TV is plummeting. Total TV viewing fell by 10% in the third quarter of 2014 and 9% in the fourth quarter, according to Sanford & Bernstein analysis of Nielsen data. That decline has hastened in the new year as viewership has fallen 12% thus far in the first quarter. The Cabletelevision Advertising Bureau, which would seem to represent the constituency most threatened by the shift, reportedly estimates that 40% of the Q3 and Q4 decline owes to competition from streaming services like Netflix, according to a Wall Street Journal article [subscription required]. That should come as little surprise considering Netflix's domestic subscription base has grown by nearly 20% in the last year, but what is surprising is that this transition hasn't led to much cord-cutting. Let's take a look at a few reasons why.

Can't mess with the bundle
While the frivolous reality TV shows that have become a staple of the past decade seem to be losing their relevance as consumer tastes have moved to serialized scripted shows such as Netflix's House of Cards or Showtime's Homeland, the most popular programming on cable still requires a subscription. Disney's (NYSE: DIS) ESPN is far and away the leading cable network and, with the exception of Dish's (DISH 0.69%) Sling TV, there is no substitute for live sports without a pay-TV package. Sling TV, which offers ESPN, TNT, TBS, and a handful of other popular cable channels, seems like a good deal for $20/month, but initial sign-ups were reported to be only around 100,000 in the first month. At that level, Sling poses no serious threat to the cable giants.

Similarly, Time Warner's (TWX) HBO and CBS's (PARA 1.27%) Showtime currently require a pay-TV subscription, though that will soon change, but the need to have a cable or satellite subscription to enjoy premium channels has probably kept many Americans tied to their pay-TV providers. Even with the over-the-top subscriptions, consumers will not save money compared to adding them to their cable packages, and HBO's agreement to make the HBO Now debut exclusive to Apple (NASDAQ: AAPL) products shows that the rollout will be incremental, meaning the initial effect will be subdued.

Finally, there are still plenty of popular shows on cable news networks and other channels like Comedy Central that are best consumed with a traditional subscription package. For many Americans, being a regular viewer of one or two shows or channels is enough of a reason to keep the cord.

The other bundle
Cable services are also often tied to Internet and landline phones, which make cutting the cord more difficult. So-called Triple Play services keep customers locked in by providing a lower rate than the sum of its parts. Though customers are often dissatisfied with the lack of transparency in triple play rates, as stand-alone rates for the individual services are not often provided, most have stuck with the packages. Indeed, cable and Internet providers such as Comcast (CMCSA 0.34%) and Time Warner Cable (NYSE: TWC) regularly rank among the most-hated companies in the country. Yet, consumers seem to have a hard time breaking up with them despite the ever-improving options. 

Old habits die hard it's said, and research has shown that the average American spends at least five hours a day in front of the tube. Even Netflix's biggest hit will have trouble beating that. That dependency has allowed cable companies to consistently raise prices nearly four times above the inflation rate for the last 15 years without losing customers.  

Finally, the recent jolt to the economy in the form of a falling unemployment rate and lower gas prices may also be keeping more Americans glued to the cord despite consumption declines as money is not as tight for many American households as it was a few years earlier.

The true test for the pay-TV empire is likely to come this year when HBO, Showtime, and others launch stand-alone over-the-top streaming services. Alternative options to traditional pay TV are certainly becoming more appealing, but cable's decline is more likely to resemble that of cigarettes rather than VCRs as bundling a bunch of stand-alone services may present more of a hassle to consumers without saving them much money.

For forgotten channels on cable's second tier, like MTV, the verdict is in -- America doesn't need you. However, cable's ultimate stickiness means that the biggest losers in the cord-cutting revolution may be the networks themselves, like MTV-owned Viacom, and not the pay-TV providers. 

Jeremy Bowman owns shares of Apple and Netflix. The Motley Fool recommends Amazon.com, Apple, Netflix, and Walt Disney. The Motley Fool owns shares of Amazon.com, Apple, Netflix, and Walt Disney. 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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