For many pay-television customers the idea of cutting the cord holds appeal, but the reality proves financially disappointing.
Blame the problem on bundling and the savings associated with bundling: the so-called triple- and even quadruple-play deals offered by companies like Comcast (NASDAQ: CMCSA), AT&T (NYSE: T) and Charter Communications (NASDAQ: CHTR). Under these deals consumers pay less for each service by bundling more of them together. If they then decide to get rid of cable, and lose their landlines -- leaving them with just Internet service -- the cost goes up, forcing them to redo the math on cord-cutting.
Why is bundling stopping cord-cutting?
In theory, dropping cable or satellite in favor of streaming services should save consumers a lot of money. Given that the average consumer in the United States paid $123 a month for pay television in 2015, according to NPD Group statistics, cutting the cord should result in a lot more money in his or her pocket each month.
That sounds right, but it's not what's actually happening. Cord-cutters still need broadband access, and the limited amount of choice in that space forces many to continue buying Internet access from the company which previously sold them cable.
"Anyone who has eyed many of the Over-the-Top (OTT) video on-demand services from Netflix, Amazon, Hulu, and many others has thought about saving money by eliminating their pay-TV subscription and subscribing to OTT platforms," Limelight Networks' (NASDAQ:LLNW) Senior Product Marketing Manager Charlie Kraus told The Motley Fool via email. "The problem is, doing this doesn't save much money because then the triple-play service is unbundled."
Basically, by giving up the discounts associated with bundling and triple-play offers (or quadruple-play deals from AT&T and Verizon (NYSE:VZ)), consumers lose a big portion of the savings cutting the cord would bring.
"The Internet service alone can cost up to 70% of the triple-play service," Kraus explained. "Add in the cost of a few OTT services and you are back to what you were paying before, and now with multiple monthly bills, user interfaces, and search menus to contend with."
Consumers who want to cut the cord but still watch sports also face further added costs. That could mean adding a HDTV antenna, or paying for various streaming services offering some sporting events, which can get expensive fast.
"Suddenly those hundreds of channels with a single monthly bill and search capability may not look so bad," Kraus added.
Of course, there's another wrinkle which might keep consumers from cutting the cord. Comcast has begun capping data in some of its markets, a practice which could lead to big overage bills for cord-cutters (a practice AT&T and Verizon know a little something about from their wireless business).
"Bundling and 'triple-play' package discounts could very well play a role, but the two biggest issues of people not completely cutting the cord is that they still need Internet, and, companies like Comcast are beginning to implement cap," wrote Plex Chief Product Officer Scott Olechowski in an email to the Fool. "They are charging consumers fees for going over their data limit. So for some streamers, that is an impediment in itself to cutting the cord."
Better choices may be coming
The traditional cable companies have every reason to keep people 'on the cord'. Comcast has the most incentive because not only does it sell pay television, it also owns NBC, various national cable networks (MSNBC, Bravo, CNBC, USA, etc.), and multiple regional sports networks. It makes sense for these providers to lower the price on buying a bundle of services in order to keep people using pay-TV.
This may well be keeping consumers from cutting the cord; the only things that will change that are alternative broadband Internet options. Until products like Google Fiber or other similar non-traditional Internet services have much greater penetrations, the cable industry still holds most of the cards.
Streaming services offer great programming, but users need good Internet access to use them properly. That may change over the next few years, but for now Big Cable can use creative bundle deals and the threat of overage charges to keep consumers in the fold.
Daniel Kline has no position in any stocks mentioned. He wants to have every channel even if he does not watch most of them. The Motley Fool owns shares of and recommends Amazon.com, Netflix, and 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.