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The past two years have put paid to a number of myths. Aside from
proving that "decoupling" -- the curious notion that the rest of
the world could somehow keep chugging along despite the unraveling
of the U.S. economy, representing a quarter of global gross domestic product
-- was a fraud dreamed up by highly-paid Wall Street "strategists"
who couldn't forecast their way out of a paper bag, events have also debunked
the popular belief that some sectors are recession-proof.
Among the sectors most often cited as being immune to the fallout from
a faltering economy is the entertainment industry. According to those who
allegedly know best, when people don't have money to spend, they will still
manage to keep themselves occupied with various forms of escapism, including
cable television. Unfortunately, what these experts failed to take into
account is the fact that no small number of individuals may decide that
paying nothing at all for a little less choice is a bargain worth
taking. In "Some Viewers Untying Themselves from
Cable," the Associated Press details the nascent trend.
Cost increases as free Internet options increase, and industry is
noticing
Porter McConnell gave up on pay TV last summer after noticing that
monthly rates kept creeping up.
Now with no satellite or cable TV, she watches her trusty old TV set
with an antenna or she goes online to catch her favorite
programs. Once in a while, she buys shows from Apple Inc.'s iTunes service.
McConnell also upped her subscription to Netflix Inc.'s movies-by-mail
service so she gets two DVDs at a time instead of one, for $15 a month.
"Part of it is, I've got to economize," said the 30-year-old
Washington, D.C., resident who works at a nonprofit.
McConnell is the kind of consumer who makes cable and satellite TV
operators lose sleep. While a weak economy invariably makes people pinch
pennies, this is the first time that viewing shows online has become a viable
competitor to pay TV, making cutting the cord easier.
Cable operators are starting to notice. Glenn Britt, chief executive
of Time Warner Cable Inc., voiced his concern Wednesday in a quarterly
earnings discussion with analysts.
"We are starting to see the beginning of cord cutting," he
said. "People will choose not to buy subscription video if they can get
the same stuff for free."
It's tough to pin down how many people actually have given up cable
— most of the evidence remains anecdotal — and which customers
moved to a competitor.
Still, Time Warner Cable, the nation's second-largest cable operator,
lost 119,000 basic video customers in the fourth quarter, even after
excluding subscribers it gave up from the sale of some cable systems. The
company also posted slower growth in new digital cable TV, Internet and phone
subscribers.
More details will emerge as other cable and satellite TV operators
report earnings in the coming weeks.
This is not to say that the cable business is in trouble. It's a mixed
picture in this economy. While there will be some people who will completely
give up their pay TV service, many folks will keep the subscription but cut
back instead on going out to the movies. They also might give up a movie
channel or two and buy fewer pay-per-view shows.
But pay TV providers are right to be alarmed. Not only has a flood of
TV shows and movies become available online, but the video quality has gotten
better. Netflix is expanding its service that lets subscribers
stream movies and shows from the Internet at no additional cost. And more and
more people have home broadband — 57 percent of American adults,
according to the Pew Internet and American Life Project.
Throw in the worst economic slowdown in nearly a century and people
question whether they still want to pay for cable or satellite. As of January
2008, the average monthly home cable bill was $84.59, up 21 percent from two
years earlier, according to the Federal Communications Commission.
"You've got these factors aligning at the right time," said Bobby
Tulsiani, senior analyst at Forrester Research.
"This time there is a real, viable alternative" to cable.
To be sure, there can be drawbacks to canceling
pay TV. Watching shows on a PC still isn't as comfortable as watching TV
while relaxing on a couch. The quality of Internet video, while improving,
still isn't as good, especially for live events, in which video and audio
might not be in sync. While some game consoles, Blu-ray
players and other devices enable video to be seamlessly delivered over the
Internet to a TV, hooking up a computer to the TV to watch the full gamut of
online shows on a big screen can take some technical savvy.
These downsides mattered to 36-year-old Peter Tierney, who lost his
job two weeks ago as a Web producer for a New York advertising agency.
With a wife and son to support, he called Time Warner Cable to cut his
premium Japanese channel and whittle down his $180 monthly cable bill.
Tierney ended up saving nearly $70 a month, after Time Warner Cable
gave him discounts good for two years and he canceled
the premium channel.
"It's hard for two people to watch shows on the computer at the
same time," Tierney said. "I can't sit on the comfy couch. I have
to go to my desk and sit on my chair."
Indeed, a Forrester survey to be released in about a month found out
that most people aren't planning to ditch their cable subscriptions soon.
But the Internet is coming on strong as a new way to watch video,
especially for the younger set.
Tulsiani noted
that the success of Hulu.com, a joint venture NBC and Fox that officially
launched last year and offers free TV shows and movies, has attracted other
entrants. Perhaps to hedge its bets, Philadelphia-based Comcast Corp. —
the nation's largest cable company — runs a similar site called
Fancast.com, while full TV episodes now are available through the networks'
Web sites. YouTube made deals last November to carry full shows in an
alliance with CBS and MGM.
(Msnbc.com is a joint venture of Microsoft and NBC Universal.)
This is what worries Time Warner Cable's Britt. He warned that if
cable networks keep moving content online for free, it would hurt them and
cable operators like Time Warner. Because with fewer subscribers, cable
operators will pay less money to programmers for the right to air their
content.
But the networks' hands largely are tied. People are illegally
swapping files of shows and movies over the Internet already, so the networks
might as well make money off it with advertising and take some control over
their content.
While cable and satellite TV companies worry about any consumers
cutting service, it would appear younger people pose the biggest threat,
given the wide generation gap in online TV viewing. About 72 percent of
people ages 18 to 29 have watched a video online, compared to 34 percent of
people ages 50 to 64, according to Pew.
Consider Thomas Senger and his family.
The 23-year-old security officer decided not to get cable recently
after moving out of his parents' house and into his own apartment in Bayonne, N.J.
He doesn't watch that much TV anyway and prefers playing video games or
viewing DVDs with friends.
"It's pointless to pay for something that I watch over the
Internet," he said.
But that's not an option for his grandparents, who don't know how to
use a computer and watch a lot of TV. His parents are more
savvy about the Internet, but not enough to change their viewing
habits. Senger said his mother likes to watch the
QVC shopping channel live. She and his stepfather also watch TV while eating
dinner — a tough proposition over a PC screen.
"Both of them will still need TV," Senger
said.
Michael J. Panzner
Editor, Financialarmageddon.com
Michael
J. Panzner is a 25-year veteran of the global
stock, bond, and currency markets and the author of Financial Armageddon:
Protecting Your Future from Four Impending Catastrophes, published by Kaplan
Publishing.
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