And like the worst sorts of horror movie boogiemen, cord-cutting has a subtly to it that keeps people guessing about its existence. It's real, but it's a slow-moving killer that covers its tracks pretty well. Still, the industry has seen enough -- about 125,000 subscribers lost in 2014 and another 650,000 through three quarters of 2015, according to Leichtman Research Group (LRG) -- to know the monster is real.
This has put big cable in an odd place. It needs to fight off something that might kill its industry in a way that does not hasten the decline. Because cord-cutting -- dropping traditional pay television in favor of streaming services -- is largely about money, cheaper choices can keep people from leaving. But, if Comcast, Time Warner Cable, Charter, and the rest start offering cheap, skinny bundles, many of their customers who were not necessarily about to cut the cord may still opt for a lower bill with fewer channels.
Big cable knows cord-cutting will accelerate, and one way to keep people on board is to give them cheaper, skinny bundle choices, but the companies involved also understand they have a difficult balancing act to pull off. When is the right time to accept less revenue from customers who might have hung around on full-priced tiers to stop them from getting fed up and leaving for good?
It's a question of choosing to ignore the issue and make as much money as they can now, or taking a hit today to maintain a user base. There's no simple answer, but skinny bundles will be part of cable's answer to cord-cutting, and new research suggests they will grow quickly.
How big will skinny be?
Most cable operators have dabbled with some sort of selectively available skinny bundle, and a recent research report from Evercore ISI Group forecasted that about 16% or 15 million cable households will go skinny by 2020, Multichannel.com reported.
"We believe most major distributors will regularly offer some form of a skinny bundle in the next 24 months," Evercore ISI said in the report, which defines skinny bundles as a cable package priced at less than $40 per month, or one that offers "substantial tiering flexibility," like Verizon's Custom TV offering, which lets users start with a particular base of channels, then add $10 packs of other stations.
Evercore ISI estimated that DISH Network (NASDAQ: DISH) (through its Sling streaming service) and AT&T's DirecTV have between 10% and 15% of their customer base on skinny packages, while Comcast and Time Warner Cable have less than 10% on one. The research company also noted that most of the other major and minor players in the industry have less than 5%.
Defense is the best offense?
Skinny bundles alone won't save the cable industry, but they will be a powerful tool in keeping customers on board. The ability to offer a "deal" on broadband service bundled with a skinny package of cable channels should help pay-TV providers hold onto users who otherwise would have gone Internet only. Basically, cable will be able to make a little more money from broadband customers by offering them cheap, limited cable.
Whichever way you look at it, cable is going to take a hit. Skinny bundles mean less revenue, and if they become prevalent, they will also shrink the cable universe, because some channels won't be able to survive the revenue hit from having less market penetration. That shakeout is probably inevitable, because a number of cable networks are propped up by being included in cable packages, and not enough people will choose to pay for them if given the choice,
Going skinny is a painful choice for cable, but it's one that pretty much has to happen, as Evercore ISI rightly points out. It's better for the industry to hold onto some revenue rather than see subscribers leave entirely. That at least provides a base for the future, and companies can try to build back to where they were. The other option -- call it simply putting your head under the covers and pretending nothing is happening -- did not work for the music business or the newspaper industry, and it seems like big cable has enough time to avoid that.
Daniel Kline has no position in any stocks mentioned. He has a Sling subscription provided by DISH to media members that he rarely uses. The Motley Fool has no position in any of the stocks mentioned. 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.