The myth of TV cord-cutting
You’ve heard the rumors, maybe even felt the temptation. Everybody else is doing it, right? Cutting the cord and watching TV over the Internet.
Except it’s not true. Cord-cutters are rare beasts, like white rhinos or Beyonce-haters.
And there are good reasons for that. To begin with, even if you drop pay TV, you still need an Internet connection — generally provided by the very same companies, folks like Comcast and Verizon Fios. And their subscription packages are hedged to ensure that if your TV bill goes down, your Internet bill will go up.
At the same time, cord-cutters often lose out on a huge swath of content that’s available only through pay TV, including a lot of high-demand sports.
To achieve true TV freedom — and real cost savings — would require a much more thorough reorganization of the market. Here’s why.
Are people really still paying for TV?
The thin trickle of households that have dropped pay TV in recent years is barely enough to make a dent in the industry.
Just under 100 million households have some form of pay TV according to Nielsen surveys, whether it comes via cable, satellite, or alternatives like Verizon Fios and AT&T U-Verse. That’s lower than it was a few years ago, when 105 million households had pay TV, but it’s hardly a revolution and there’s no sign of an accelerating trend.
A separate survey by the Leichtman Research Group found that about 83 percent of households had pay TV subscriptions in 2015. That’s down from the 87 percent with pay TV in 2010, but actually higher than the 81 percent in 2005.
Bottom line, pay TV remains a staple of the American diet.
Aren’t people watching Netflix and other Internet programming?
Absolutely. There’s been an explosion in demand for Internet streaming services like Netflix, Hulu, and Amazon Prime.
Netflix is the biggest player in this world, and its subscription numbers tell the fast-growing story. In 2011, when the company started keeping track of streaming subscriptions (as opposed to the old “send-me-a-DVD” service), they counted about 20 million paid-up users. Today it’s more than double that.
The catch, though, is that lots of Netflix families are also pay TV families. It’s not either-or. In fact, Leichtman research found that roughly 83 percent of households with an Internet-connected TV also have a pay TV package.
Compare that with the number of “broadband-only” households, which have high-speed Internet but no pay TV. Estimates from Nielsen suggest they make up between 4 and 8 percent of American households.
Why aren’t people cutting their cords?
Given the expanding universe of high-quality programming available through the Internet, it may seem surprising that people are sticking with pay TV, but it’s all about costs and benefits. Perhaps the biggest issue is this: Cutting the cord doesn’t save that much money.
Even if you drop pay TV, you still need Internet. And guess who provides high-speed Internet? The very same companies offering pay TV subscriptions. That gives them incredible market power, allowing them to adjust prices in a way that limits the benefits of cord-cutting.
Just look at the packages available in Greater Boston.
Comcast will sell you a bundle that includes 140+ channels, high-speed Internet, and telephone service for $89.99 per month for two years. Getting just the Internet — at the same 75Mbps speed — costs $79.95. Opting for slower Internet can bring the cost down to $40 or $45 per month, but with uncertain consequences for your ability to stream video to multiple devices.
With Verizon, the savings are similarly small. A bundle costs as little as $70, while purchasing Internet alone — at identical speed — is $60.
And these calculations don’t even account for the fact that if you choose the Internet-only approach, you’re likely to want additional, sometimes-costly streaming subscriptions — like HBO Now or Hulu Plus.
You can’t save $100 each month by dropping your cable account — unless you drop Internet, too. Instead, you have to ask yourself: “Should I spend an extra $10 to $40 dollar per month — the cost of a single family meal — to get a range of pay TV channels, including lots of popular sports channels, that I can’t get otherwise.”
Given that choice, most households opt to keep their cords.
Does password-sharing change the economics?
Password-borrowers (or password-stealers) do get a real benefit, accessing subscription services on someone else’s dime. But they still have to pay for Internet — which is often a far bigger expense. So overall it doesn’t seem like password-sharing changes the unfavorable economics of cord-cutting.
In fact, there are real benefits for streaming companies. Say your 20-something daughter insists on using your Netflix information in her new apartment. That makes it harder to cancel your account, even if you discover you’re no longer using it. And Netflix is happy about that. Because the alternative is worse for them, a world where you drop your account for lack of interest and your daughter never opens one because she can’t afford it.
At some point, password-sharing may become so rampant that it necessitates a crackdown. But for now, it’s considered either a tolerable nuisance or a long-term growth strategy.
Will cord-cutting ever take off?
For cord-cutting to really take off, the economics of the industry would have to change. And that means greater regulation, greater competition, or both.
Those looking for reliable, high-speed Internet usually have just a couple of choices: perhaps a lone cable company and a satellite or telephone competitor. And with so few choices, there’s little pressure for companies to aggressively compete on price.
Stricter regulation could force down costs by dictating rates — possibly also requiring companies to establish clear, separate prices for Internet, TV, and phone. The trick would be to find the right price structure, something that keeps the companies sufficiently profitable that they can continue to invest in new lines and new technology, but no more than that.
Another option is competition, but again you have to be careful about implementation. Companies like Time Warner and Verizon don’t just sell TV and broadband packages, they run the physical lines and manage the complex networks necessary to deliver those services.
For a new competitor to build its own, equivalent networks from scratch would be costly and redundant. Yet they’d have a huge competitive advantage if they could simply piggyback on existing infrastructure — without any obligation to help with maintenance or expansion. These problems aren’t insoluble — other countries have ways to address them — but they show competition won’t come easily.
Absent some big change to the structure of the industry, costs are likely to remain high. And with the big players controlling both pay TV and Internet access, they can keep adjusting their prices to ensure that cord-cutting just doesn’t pay.