Cord Cutters: Small Numbers Matter

One of the more-recent terms being tossed about in the telecom trade press is that of cord cutters. It is being applied in particular to cable customers that terminate their cable service, including TV and broadband, in preference for some alternative. There are not many alternatives. For TV it is OTA (over the air) broadcast, satellite and, in a minority of cases, telco fibre such as Verizon FiOS.

The questions are whether the phenomenon is real and, if it is real, is it significant? To date the number of these cord cutters is deemed to be small since the quarter-to-quarter downward move is vanishingly small. Yet it is not this small drop that is the question, since it could be a statistical blip or a temporary impact of the recession, but rather that the growth has vanished. Growth matters since that is what investors want, generally preferring that (if the choice must be made) over flat but reliable dividends.

Cable TV has certainly reached market saturation years ago, so that it can only move higher as the population grows; it can also rise if service were to be extended to more rural areas, but this is unlikely to ever occur. In other words, it is the cable companies' business to lose, just as telephony has played the same role for the telephone companies. With growth in raw subscriber numbers stalled, cable growth must come from increased ARPU (average revenue per user). The required growth has at different times in the past been satisfied with incremental channel tiers, PPV (pay per view), broadband and telephony. PPV is under threat from the likes of Netflix streaming entertainment, telephony continues to grow a slow place, while fibre, DSL and especially wireless are increasingly meeting the needs of bandwidth-hungry consumers. It appears that this is one of Comcast's motivations in their current dispute with Level 3, even as it pushing to consummate the deal to purchase NBC Universal to gain control over the content their competitors need.

Unfortunately for them, simply raising rates, either directly or by usage-based billing, only makes competitive alternatives look more attractive. Although the alternatives are not many and not particularly cheaper, every upward tick in the price does drive a small percentage of subscribers to defect. This is an important signal for a couple of reasons. First, every dollar of revenue lost falls almost immediately to the bottom line -- profit -- since many of their costs are not elastic, or at least cannot be reduced quickly.

Second, and perhaps more importantly, demand can fall far more precipitously than it rises. That is, like an avalanche, one modest snowfall or a quick thaw can trigger a sudden dislocation of the snow cover. The cable companies are treating their customers like the proverbial frog in a pot of heating water, except that people are (usually) smarter than frogs and will jump out when the heat becomes uncomfortable. This is more likely to occur when the market, like theirs, is saturated. For a comparable situation you should read this nicely done analysis of RIM's woes.

To conclude, it is not the small number of cord cutters that matter but the trend and the increasing motivation of their customers to defect en masse. We can only know that this is truly occurring after the fact in a retrospective analysis. Nevertheless, whether we are cable company investors or customers it is a situation that could reward close attention over the coming year.