Cable Industry Slowly Realizes More Ads and Higher Prices Aren’t the Solution to Cord Cutting

Competing with Netflix and YouTube is turning out to be harder than cable companies thought.

Karl Bode

Image: Shutterstock

For much of the last decade the cable industry has been slowly but surely losing subscribers to streaming video competitors like Netflix. And for just as long, broadcast and cable executives have either ignored or downplayed this evolutionary threat, choosing to double down on many of the same behaviors that caused these defections in the first place.

The reason for sagging subscriber rolls isn’t rocket science: customers are tired of paying an arm and a leg for bloated bundles of channels they didn’t ask for. Many others are simply tired of paying for expensive sports programming they never watch. As such, the option to mix and match less expensive streaming alternatives is an alluring one.

For years the industry tried to deny that the cord cutting phenomenon was happening at all. Then it tried for a while to imply that the kind of folks that cut the cord weren’t worth keeping around anyway, and that this entire thing was just an annoying fad that would quickly stop once Millennials began procreating.

That didn’t happen. And contrary to industry claims, cord cutting is only accelerating. In fact, the trend set new records during the fourth quarter of last year.

Wall Street research firm MoffettNathanson Research recently noted that the pay TV sector saw a reduction of more than 500,000 traditional pay TV customers during the fourth quarter. Satellite TV providers have been particularly hard hit, with Dish and DirecTV losing a combined 268,000 satellite TV subscribers during the last three months of 2017 alone.

That 3.4 percent decline in total pay TV customers since last year was the highest rate of decline in traditional cable TV customers since the trend of cord cutting began truly accelerating in 2010. And that, in turn, was up notably from the 2 percent rate during in the fourth quarter of 2016 and a 1 percent rate of decline one year before that.

And the problem is actually worse than this data indicates.

Read more: 40 Percent of America Will Cut the Cord by 2030, New Report Predicts

The decline in pay TV subscribers doesn’t include a category of customers known as “cord nevers,” or people (predominantly Millennials) who grew up never having subscribed to cable TV and still don’t see the point as they grow older. Many of these users prefer Netflix and YouTube, and view traditional cable TV as archaic and irrelevant.

Many others only have cable because cable providers make buying stand alone broadband prohibitively expensive. They may show up on subscriber rolls as “subscribed to cable,” but their cable box often sits dusty and un-used in a bedroom closet, with cable TV only subscribed to in order to nab a promotional bundle discount.

There’s also a growing number of new homes now being built that aren’t subscribing to traditional cable TV each year, meaning that documented quarterly subscriber losses are only telling part of the story.

But with 83 million households still subscribing to traditional cable, many execs have a false sense of confidence that they can nurse the traditional cable TV cash cow forever. So when the industry wasn’t busy denying this obvious evolutionary threat, it was busy doubling down on many of the dumb ideas that caused the public to sour on their product in the first place.

For example, one of the biggest annoyances for cord cutters is the heavy ad load that supports traditional cable (in addition to the high prices and often bi-annual price increases consumers enjoy). Nielsen data suggests that since 2009, ad time per hour on has gone up from 14:27 to 15:38 minutes per hour on cable, and 13:25 to 14:15 minutes per hour on broadcast.

Instead of addressing this problem by airing fewer ads, cable operators spent the last few years trying to shove more ads into its programming lineups. Some broadcasters have gone so far as to edit or speed up programs so they can stuff more advertisements into each viewing hour. Others have tried to embrace in-show product placement in fairly tacky fashion.

Fortunately, there’s at least hints of a concerted effort to actually evolve. Fox for example this week signaled its intention to reduce ad time to two minutes per hour by 2020, finally acknowledging that more annoying ads isn’t the solution to increased streaming competition.

“The two minutes per hour is a real target for Fox, and also our challenge for the industry,” Fox executive Ed Davis told the Wall Street Journal. “Creating a sustainable model for ad-supported storytelling will require us all to move.”

Comcast NBC Universal has also finally come around on this subject, recently stating that it would be reducing advertisements in commercial breaks by as much as 20 percent, and decreasing advertising time by 10 percent during its original prime-time programming.

But this dedication to fewer ads isn’t consistent across broadcasters, and outdated advertising models are only one small part of the evolutionary challenges facing stodgy old cable companies in the cord cutting era.

The cable and broadcast industry has another problem: it’s utterly terrified of having to actually compete on price.

Despite streaming competition, most of the major cable operators (like Comcast) met the new year with a massive flurry of price increases. Programming costs were responsible for much of this, though cable operators also raised rates on everything from the fees incurred for paying your bill over the phone, to the cost you’ll pay to rent a DVR or cable box.

And while some cable companies have finally released streaming alternatives to their pricey traditional services (Dish’s Sling TV, AT&T’s DirecTV Now), these services generate far less income per month than traditional cable TV subscriptions. They also often come with fees and numerous caveats that make them intentionally less compelling than traditional cable TV.

Many industry executives struggle with the fact that traditional cable companies will be making less money in the cord cutting era than they’ve grown used to. That’s how competition works. Increased options means users no longer have to settle for massive, $130 per month bloated bundles packed with infomercials and an ocean of garbage reality TV programming.

That said, there are still anti-competitive tricks many cable operators plan to use to minimize the impact of streaming competition on their bottom lines.

Most cable executives realize that any money lost on the television side of the equation can simply be recovered by raising prices for broadband. A lack of competition in broadband has resulted in the rise of usage caps and overage fees, which not only let cable operators raise rates on broadband, but makes cutting the cord more expensive and confusing.

And with the looming death of net neutrality protections, there’s an ocean of “creative” tactics (from “zero rating” their own streaming services to interconnection shenanigans at peering points) cable and broadcast giants plan to utilize to avoid having to truly compete.

Even then, these tactics can only do so much to hamstring real video competition. The fact remains that companies can choose to either get out ahead of the cord cutting trend by offering a better and cheaper product, or continue to stand, arms outstretched, in the middle of a raging river, believing stubbornness and denial can somehow change the water’s course.

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