Cord cutters rejoiced last week after HBO and CBS announced plans to sell stand-alone streaming services, a move that cable and satellite television providers have resisted for years. Customers tired of paying big fees for hundreds of channels they never watch just to have access to a few favorite shows might be expected to start cancelling cable service in droves. Get Netflix, throw in HBO, add a network here and there — why would anyone sign up now for cable?
Well, don't sound the death knell for cable companies yet.
Some would-be customers may balk when they see just how much paying a la carte actually costs. Stations that offer services a la carte will have to pay for marketing that the cable and satellite companies usually cover. Fewer eyeballs on live TV could mean less advertising revenue, since online ads are generally cheaper, and that will boost the network's cost of running the channel. And smooth streaming costs money: to avoid so-called "throttling" during peak evening viewing times, Netflix buckled to broadband distributors like Comcast and Verizon and paid up so that its streaming service would run at a higher bandwidth and work more smoothly. Those added costs might be passed on to customers.
And for all those cable haters out there, sorry: Cutting the cord won't mean cutting out your cable provider. They often own some of your favorite channels (Comcast owns NBC Universal, parent of Bravo and USA) and in most areas they are the gatekeepers to the Internet. Offering popular channels like HBO over streaming could actually help cable companies sell more expensive broadband services to customers.
"The cable business is evolving from mainly selling you a pay TV package to mainly selling you a broadband Internet service," says FBR Research analyst Barton Crockett. "Content companies and cable companies are evolving from being very worried about making their content available through Internet services to very excited about that. It's a way to sell their Internet and get people to pay for faster speeds."
The cable and satellite television industry is going through major consolidation, to mitigate the higher cost each year of carriage fees that the networks charge for their channels and boost pricing power. Comcast Corp. is in the process of buying Time Warner Cable Inc. for $45 billion, which would make it by far the largest TV and broadband provider. AT&T Inc. is planning to buy satellite service DirecTV for $48.5 billion. Both are under regulatory review; customers complain such deals would create monopolies that would hijack choice.
Meanwhile, pay-TV subscriptions have flatlined at about 101 million, according to data from research firm SNL Kagan. The number of high-speed Internet subscribers rose about 1 percent during the same period to 90.1 million. By comparison, pay-TV nemesis Netflix Inc. has about 37.2 million U.S. subscribers and expects to add 1.85 million during the final months of this year.
The growth in streaming services will appeal "to a segment of consumers that the traditional pay-TV providers have a harder and harder time communicating with: the millennials and so called 'cord-nevers'" who haven't viewed Pay TV as a compelling option until now," says MoffettNathanson partner Craig Moffett. In fact, HBO said its stand-alone HBO Go service is largely aimed at the 10 million U.S. households that have broadband Internet service but do not pay for TV.
So as more channels start to offer a la carte services, cable providers will shift to focus on their broadband services, Moffett thinks.
"Cable companies will become increasingly reliant on broadband, and gradually evolve their business models to be less and less video-centric and more broadband-centric over time," he said. That leaves satellite pay-TV companies like DirecTV and Dish Network Inc., which have no broadband capability, as the "odd man out," he said.
Cable companies say they want to offer customers more choice, and if customers want to go online, they plan to be a part of that transaction.
"The overwhelming majority of our customers prefer to access video content via digital cable bundles for convenience, service quality and value of the total package, but cable broadband provides the fastest and most reliable connection to online content for those who choose to access it," says Todd Smith, spokesman for Cox Communications, which offers cable and broadband to 6 million customers.
Other cable and satellite services did not respond to a request for comment or declined to comment.