This article was updated on Jan. 13, 2016.
Very slowly, Americans are cutting the cord with traditional pay-television providers.
It's not the mass exodus that has been predicted, even though the alternatives to cable and satellite are extensive, convenient, and inexpensive. It's easy to drop your old-fashioned service while retaining access to top programs through streaming services including Netflix (NASDAQ:NFLX), Hulu, and Amazon Prime. It's even possible to get a fair amount of live television without paying for it with an HDTV antenna.
Basically, the conditions appear right for people to shed the high cost of cable or satellite television without sacrificing very much, but there was no stampede in that direction. And there's a very good reason why. Even if you drop pay-television, you still need Internet access to use any of the streaming alternatives. In many markets, the only choice for broadband service is the very same cable company a customer wishes to cut the cord with. That gives the ISPs enormous pricing leverage, where they can use bundling to make the price of online access seem cost-prohibitive for people who want it without paying for TV.
How far along is cord cutting?
Cable and satellite companies have been slowly shedding customers for the last two years. It's a relative trickle though -- a meaningful loss but not the massive downward spiral many expected.
In the second quarter of 2015, the 13 largest pay-TV providers in the United States -- representing about 95% of the market -- lost about 470,000 net video subscribers compared to a loss of about 305,000 video subscribers the same quarter the previous year, according to Leichtman Research Group (LRG). That left the top pay-TV providers with 94.9 million subscribers and it followed a first quarter where the industry actually gained 10,000 customers.
In Q3 the slow trickle continued with another 190,00 people abandoning traditional pay television. It's still a tiny number which suggests that cord cutting might be a concern, but it's not happening quickly. Losing 650,000 customers over nine months may not be ideal, but it's hard a mass exodus for an industry which still has nearly 94 million paying subscribers.
As you can see above, some companies even gained cable customers during the quarter. That was likely due to offering attractive packages along with broadband access which simply make cord cutting less attractive.
How bundling stops cord cutters
Under the recently revised Federal Communications Commission definition of broadband Internet access, nearly 20% of Americans have no access to providers, while 55% are served by a single company, according to The New York Times. Even broadening the search to include slower, DSL service -- which, in most cases, does not meet the new broadband requirements -- still leaves 30% of U.S. homes with only one choice and another 52% with just two.
This incredible lack of choice and the fact that all the major ISPs are also pay-TV providers gives these companies incredible pricing leverage. Most cable companies take advantage of this by bundling services to make them more attractive. In exchange for signing up for multiple services, the subscriber pays less for broadband access paired with cable and/or phone service.
Bundling cable with other services does not make it cheaper than cutting the cord and opting for Netflix, Hulu, or Amazon Prime -- all of which cost under $10 a month (though Prime is sold at $99 per year). But what it does is create a perception of value.
In a traditional cable/phone/Internet bundle, you may save as much as $10 per service for bundling -- even more on a one- or two-year introductory plan. You're still paying well more than just Internet access, or even a couple of streaming options, but the "value" of getting 150 or so channels makes it seem like a deal.
It's a bit of a trap
Paying for something because it seems like a good deal even when it costs more money than the alternative has always been how cable works. You pay for a universe of channels you don't watch, but it's a value, because you might someday want them.
That's the logic behind bundling and how it keeps people from cutting the cord. It's essentially the same proposition that gets consumers buying bulk quantities of food they'll never eat from warehouse stores. That pallet of croissants is such a great deal, you simply can't pass it up, never mind that most of the pastries will get thrown out.
For some of us, bundling makes sense. In my house, with my wife, myself, and my 11-year-old son having very different tastes in programming, we use quite a bit of the cable universe. Were it just me, or even just my wife and I, Netflix and an HDTV antenna would probably be fine.
Cutting the cord is not for everyone, but it's probably a better choice for many people who have yet to take the plunge.