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The Kids Are Growing Up: Why It's Time for Cable Companies to Really Worry About Cord-Cutting

By Daniel B. Kline - Jan 23, 2016 at 12:33PM

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New research suggests that this often-talked-about phenomenon may finally get very real.

So far, cord-cutting has been the next 3D television. It exists, people talk about it, and some have even done it, but it's more hype than substance, more could-be than is-now.

For the past few years, the media has been buzzing with the idea that consumers would soon drop expensive cable television subscriptions in favor of much cheaper streaming options. In theory, it makes a lot of sense, because paying under $10 a month for Netflix (NFLX -1.52%), Hulu, or Amazon (AMZN -1.13%) Prime is much cheaper than paying the $123 a month the average American pays for cable, according to research from NPD Group.

That's up from $86 in 2011, and prices are expected to go even higher, perhaps topping $200 by 2020, according to the research company. Those fairly astounding numbers make it seem very logical that people would cut the cord with Comcast (CMCSA -1.11%)Time Warner Cable (NYSE: TWC)AT&T (T 0.56%), which now owns DirecTV, and the rest of big cable.

But the major cable companies, which account for about 95% of the market, lost around 125,000 subscribers in 2014, and another 650,000 in 2015, according to Leichtman Research Group (LRG), which is just a trickle in a nearly 94 million-home universe.

However, it represents acceleration, and a new study spells out why Comcast, TWC, AT&T, and the rest may really have a reason to worry.

What does the research say?
Part of the reason cord-cutting has not become more of a "thing" is that old habits die hard. Users who have had cable for many years have proven less likely to cut the cord. They may add Netflix, Hulu, or Amazon Prime to what they already have, but dropping cable is a more difficult choice when you've had it for such a long time.

Younger people, however, are less attached to traditional pay television, and a new report from Pew Research Center said many are giving it up, or never getting it in the first place.  

Image source: Pew

"Young adults are the most likely cord cutters; 19% of adults between the ages of 18 and 29 have severed the ties that they once had with cable or satellite service," said Pew's research. "Another 16% of young adults say they have never had pay TV in the first place."

When you look at all of the ages combined, about 15% have cut the cord, while 9% never had a cable subscription in the first place. Cord-cutting is clearly being driven by younger users, and that suggests that as time goes on, cable companies will suffer.

As more young people set up their homes, they will do so without even considering traditional pay television. Then, more kids will grow up never having a wired cable subscription and already relying on streaming services to meet their entertainment needs.

It's a cycle that simply takes time, but it could be accelerated if cable continues to raise its prices. If cable is slowly bleeding to death as its core audience dies off (which happens really slowly, though it does happen -- just look at the newspaper industry), it can accelerate the process by driving existing customers away. 

Can cable stop this?
It can, or at least it can try to, but doing so is going to hurt.

"Affordability is a main driver for those without cable or satellite, as is the ability to view the content they want to watch somewhere else," said the Pew report. "Some 71% of those without cable or satellite say they lack these services in part because the cost is too expensive, while 64% say they can access the content they want using an over-air antenna, on the Internet or using streaming services."

This suggests that the way for cable to stop cord-cutting is for the industry to cut prices. Comcast has dabbled with offering skinny bundles, mostly on college campuses, but all major cable providers aside from DISH Network (DISH -2.50%), with its $20 Sling TV service offering around 20 live-streaming channels, have declined to do that.

Cord-cutting is still in its infancy, but the Pew data suggests it's going to grow up fast. If cable wants to survive and not experience the same fate as newspapers and record stores, it has to acknowledge that it's better to change now than to squeeze the last drops of blood out of a dying industry.

Offering much cheaper cable packages would absolutely cause some major short-term revenue loss, but finding a way to hold onto customers seems a lot easier than losing them and having to win them back.

Daniel Kline has no position in any stocks mentioned. He still has a bloated, expensive cable subscription and he pays for Netflix and Amazon Prime. The Motley Fool owns shares of and recommends AMZN and NFLX. 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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