Cord cutting is on the rise. According to a recent survey from DigitalSmiths, the percentage of consumers who cut ties with traditional pay-TV was 1.5% over the past 12 months. If people stick to their word (which, we must acknowledge, is highly unlikely), another 4.8% will cut the cord over the next six months.
Of course, cord cutting isn't the only way for consumers to save money on their cable bill -- which the same survey says is over $100 per month for nearly 60% of consumers. Some consumers are switching to a different pay-TV provider to take advantage of promotional sign-up offers. Others are simply cutting some services, such as DVR and premium networks. Let's look at the trends and see what they mean for pay-TV providers.
Switching providers is by far the most widely used strategy among consumers. The expansion of AT&T (NYSE:T) and Verizon (NYSE:VZ) into pay-TV has done wonders to combat the natural monopoly of cable-TV providers. It also keeps the satellite providers accountable. As a result, promotional offers from every pay-TV provider have gotten better and better.
Last year, DirecTV (NASDAQ:DTV) CEO Mike White said that aggressive promotions -- not cord cutting -- were the biggest reason for customer churn. Indeed, 7.7% of survey respondents reported switching providers in the past three months, an annual run rate of over 30% of subscribers. That's up from 5.7% of respondents a year ago.
More and more consumers are starting to take advantage of these heavy promotions, which could mean that every pay-TV provider will generate lower margins on its video service business. For most pay-TV providers, that's not a huge issue, since they also provide Internet service, which helps boost margins. The satellite companies, however, are missing out on the Internet service opportunity, which has led both to pursue mergers.
Many consumers have found ways to reduce their cable bills without completely abandoning their pay-TV providers. These customers are called cord shavers, and they come in a variety of flavors. The DigitalSmiths survey found that 18.2% of customers reduced their cable bill (including Internet and phone service) over the past 12 months. That number includes the 1.5% of respondents who said they cut the cord entirely.
Among the cord shavers, 44.1% said they dropped premium networks and 17.2% said they dropped premium sports packages. These numbers are aligned with the idea that people are taking advantage of promotional offers, which often include premium channels. DirecTV bundles a free year of its NFL Sunday Ticket but requires subscribers to pay for it in the second year of their contract.
More interesting is the number of consumers getting rid of bundled phone service (13.6%), cutting down on their Internet service (7.5%), and getting rid of DVRs (10.7%) and upgraded hardware (3.8%). Those are the areas where cable companies are able to make up for the lost margin from their promotional video services.
Keeping customers around
The biggest complaint from consumers unsatisfied with their cable service is that it's too difficult to find something to watch on TV. Of the 32.4% of respondents who said they're on the fence about switching, cutting, or shaving, 44% said they'd stick around if their provider would make it easier to find content. Several companies have revamped their set-top box and channel guide in recent years, but those are exactly the kinds of services customers are eschewing.
A huge number of customers are interested in building their own bundles. Consider that 81.6% of customers said they'd be interested in an a la carte offering, but the average amount they'd be willing to pay for a custom package was just $38 -- probably not enough to cover the cost of content. Besides, there are hurdles to overcome with content companies before a pick-and-pay or a la carte option is viable. Just ask Verizon.
While the looming threat of people cutting the cord is significant -- with 4.8% of consumers saying they plan to do so in the next six months -- it seems more difficult for consumers to follow through. After all, just 1.5% cut the cord over the previous 12 months. The real battle is with other pay-TV providers.
Adam Levy has no position in any stocks mentioned. The Motley Fool recommends Verizon Communications. 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.