Cutting the Cable: Pay TV Subscribers Turn to Internet

Cutting the Cable: Pay TV Subscribers Turn to Internet
Between 2008 and 2011, an estimated 2.65 million people, or 2.6 percent of U.S. pay TV subscribers, cut their TV subscriptions to rely solely on online content or watch broadcast television with the use of an antenna. (Shutterstock)

Courtney Baum of Bryant was tired of paying $89 a month for television shows she received through DirectTV.

So at the beginning of 2011, the 25-year-old canceled her satellite TV subscription and bought a Hulu Plus plan over the Internet for $7.99 a month that allowed her to watch most of the current television shows.

Baum already had a subscription to streaming Netflix for $7.99 a month that also gave her options to stream movies and television shows into her home through her Microsoft Xbox 360.

A year and a half later, Baum doesn't regret the decision, even though some TV shows aren't available, such as the ones involving the Kardashian clan or sporting events.

"I'm paying $20 [a month] instead of $90," she said.

Baum is part of a growing population who are canceling their cable or satellite TV service and opting to watch television shows online for free or through paid services such as Netflix.

Between 2008 and 2011, an estimated 2.65 million people, or 2.6 percent of U.S. pay TV subscribers, cut their TV subscriptions to rely solely on online content or watch broadcast television with the use of an antenna, according to an April report from the Convergence Consulting Group Ltd. of Toronto, which studies the trend. Of that number, 1.05 million did it in 2011, and it is projected that by the end of this year the number of cord cutters will reach 3.58 million, the study said.

The trend is noticeable in Arkansas too. Although the major providers don't release subscriber numbers for Arkansas, cable providers in Paragould and Conway, which are both owned by their cities and make their numbers available under the Freedom of Information Act, reported drops in cable subscribers since 2009.

While the number of cable cutters is relatively small compared with the approximately 100 million who pay for television through cable, satellite or services such as AT&T's U-verse, pay TV providers have been offering a variety of services to keep their customers while allowing them to watch their programs over the Internet. (See sidebar Pay TV Providers Expanding Beyond TV)

Still another troubling trend for pay TV providers is looming: About 5 percent of pay subscribers said they have downgraded their pay TV package and are watching more online videos, according to Brett Sappington, director of research for Parks Associates in Dallas, a market research and consulting firm.

And pay TV providers are finding more threats to their business as Internet providers are trying to capture customers who are interested in leaving their cable or satellite TV service.   

In March, Windstream Corp. of Little Rock unveiled its Merge product, a high-speed Internet and streaming entertainment service, a move that was sparked by the trend of people cutting the cable, said David Redmond, Windstream's vice president of consumer services.

Windstream offers customers a Roku streaming box to deliver the Internet entertainment services, such as Hulu or Netflix, directly into a television set.

"We want to offer customers the ability to get all the video content that they want to consume, but we want to give it to them in a different way than they're used to today," Redmond said. The Merge service, which is included in the monthly high-speed Internet fee, will give customers "the ability to select what they want to watch when they want to watch it and, frankly, where they want to watch it."

Rise of Netflix
One sign that people are moving away from pay TV service is the growth of Netflix. For the month of June, Netflix reported a milestone of 1 billion hours of streaming video content - all without commercials, according to Michael Pachter, an analyst who covers Netflix for Wedbush Securities of Los Angeles. For the quarter that ended in December, Netflix reported a total of 2 billion hours streamed.

Netflix's June numbers mean that its approximately 28 million subscribers spent about 35 hours watching streamed video content that month, which is about 25 percent of a person's overall television viewing, Pachter said in an email to Arkansas Business.

"This ABSOLUTELY cannibalizes conventional television viewing, as it is highly unlikely that Netflix customers are watching combined TV plus streaming for 188 hours per month," he wrote. "While it is true that we have not yet seen dramatic ‘cord-cutting' for cable TV subscriptions as a result of Netflix usage, cord cutting is likely going to grow in popularity as Netflix usage continues to grow."

With viewers watching Netflix instead of commercial-sponsored television, overall ratings for commercial television will - and likely have - suffered, Pachter said.

"This, in turn, will lower the advertising rates commercial advertisers are willing to pay to the television networks, cutting into their television profits," he wrote.

Between 2000 and 2009, the annual number of TV subscribers added was about 2 million a year, according to the report by the Convergence Consulting Group of Toronto.

But as the Great Recession dragged on, people started examining their bills and discovered they could live without their cable television subscription, said Brahm Eiley, the president of Convergence.

That's what happened to Zach Neel of Conway.

Neel, a 26-year-old agent with Sandstone Real Estate Group of Conway, said he wasn't a big television watcher in the first place, but he and his roommate, who is his brother, decided to cancel their cable bill around 2009 to save about $40 a month.

He already had the streaming Netflix service, which he continues to use. And if Neel wants to watch a show within hours of it being broadcast on television, he said, he can buy a season or the episode from Apple's iTunes store and watch it on his laptop. He's currently using iTunes to watch "Walking Dead," AMC's show about the zombie apocalypse.

Still, Neel said he might return to cable because the Conway Corp.'s cable isn't that expensive. "It's possible," he said.  

New Normal
Sappington, the director of research for Parks Associates, said the younger generation is comfortable watching shows online, which is becoming "the new normal."

"It's a world that pay TV providers have got to figure out how they're going to make a living in," he said.

Eiley, the president of Convergence, said it might take a generation before the majority of people watch shows online. "It's pretty obvious that there's a bit of a social change going on," Eiley said.

Now when young adults leave their parents' homes, they might not order a pay TV subscription from a cable or satellite provider for their apartment or house. "With the availability of Hulu, why do you need to sign up?" he said.

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