Cord-cutting? Hold the Phone

Researchers at Nielsen rekindled the debate over cable TV cord-cutting last week, issuing a report that called the much-hyped phenomenon “a myth.” According to the media research company, the percentage of U.S. households subscribing to both cable TV and broadband service continues to grow rapidly, having risen from 54.8 percent in January 2008 to 66.3 percent by January 2010. Over that same period, the percentage of households subscribing to broadband, but not cable, rose from 3.2 percent to 3.9 percent, a much slower growth rate confined largely to “a younger population of college graduates and lower to middle income consumers who may not be fully convinced of the need to pay for digital cable.”

post on that report by my colleagues at NewTeeVee touched off a spirited comment exchange, particularly over the suggestion that, while cord-cutting may be a small issue today, it could become much larger in five years as those young households mature and more TV content becomes available on broadband platforms. The NewTeeVee post cited the history of the telephony business as a possible model, noting that mobile-only households initially were concentrated among the same demographic Nielsen identifies as cord-cutters, but that the number and types of households that rely primarily or exclusively on mobile service has grown dramatically since.

But for all the debate cord-cutting generates, the fate of the cord, per se, is not really the central issue at stake. For programmers, service providers and consumers alike, it’s whether households will continue to buy bundled programming packages.

While consumers (and policymakers) often complain about the high cost of bundled pay-TV service and pine for the “freedom” to pay only for those channels they want, bundling is a central economic pillar of the TV business. Without the carriage fees they get from bundlers, most networks couldn’t survive because they don’t attract large enough audiences to get by on advertising sales alone. Even the broadcast networks, which once thrived on advertising and syndication sales, are growing ever-more dependent on retransmission fees from bundlers as their advertising revenue plateaus. If a significant segment of consumers were to stop subscribing to bundled services in favor of a la carte, on-demand access to video content, it would shake the TV business to its economic foundation.

But on that note, (and at the risk of starting a family feud here at GigaOm), the history of the telephony industry may not indicate very much after all. When mobile phone service achieved minimum acceptable quality, it became a near-perfect substitute for land-line service, and consumers were able to drop those land-lines with minimal inconvenience.

Not so with cutting the cable cord. Getting video content on-demand is a very different consumption model from buying bundled service, involving many more trade-offs than mobile phone customers faced, from program availability to selection and price. It’s not really a substitute product in the classical economic sense. It’s a different product, with different attributes and different consumer benefits.

If a significant number of consumers cut the cord, it will likely happen more gradually than the shift to mobile-only telephone households did. The cost savings from buying pay-TV channels a la carte, even if that were an option, are not likely to be as great as consumers and policymakers believe. Without the bundler’s ability to amortize the cost of a channel across its entire footprint, the fees individual pay-TV networks would have to charge a la carte consumers to maintain current revenue levels will be far higher than what currently appears on their cable bill.

Moreover, programmers are too invested in the economics of bundling to allow a la carte access — whether online or via service provider —  become an effective substitute for bundled service to the degree mobile phone service can substitute for land-lines, unless compelled to by regulators.

The most likely scenario is that a portion of new households that have never had bundled service will opt to do without it. That population may grow over time, but never even having a cord is different from cutting it.

Question of the week

What would it take to trigger a significant wave of cord-cutting?