Cord-Cutting Is Real, and the Cable Guys Are Still in Great Shape — For Now

Craig Moffett is one of Wall Street’s most respected cable-watchers. And for a long time, Moffett was skeptical about cord-cutting. Now he’s not.

Actually, he turned around sometime in the last year — in August, when he was at Bernstein Research, Moffett put out a note acknowledging that cord-cutting/cord-nevering was real, in some form. But now Moffett has his own research company, and he has put out his first mega-report on pay TV, and he has repeated the same conclusion, so it’s going to get a lot of attention.

In the past, Moffett and other analysts (along with most of the pay-TV business) had argued that the pay-TV business was drooping because of the recession and the real estate bust. But now the economy seems to be getting a bit better, and it looks like housing may have bottomed out as well, but pay-TV subscriptions are still dropping. Unlike other analysts, Moffett thinks the industry still grew — barely — last quarter, but he figures its growth rate still shrank 0.3 percent, its largest drop ever:

It’s important to note that Moffett still isn’t convinced that cord-cutting is all about people dropping cable for some combination of Netflix, Apple TV, YouTube, Amazon, etc. The TV Industrial Complex is still super-strong, and it’s hard for most people to imagine breaking free of it. He figures that most cord-cutters don’t have broadband at all, but are so cash-strapped they are simply making do with rabbit-ear TV, just like in prehistoric times.

But he does figure that the trend will accelerate, for whatever reason, over the next few years:

So, if cord-cutting does pick up, aren’t the cable guys screwed?

Not exactly, Moffett argues. Cord-cutters who are dropping their cable TV subscriptions in favor of the Internet still need to get the Internet, and they’re probably getting that from the cable guys. And the broadband business is a strong, high-margin business that makes up the biggest chunk of the cable guys’ revenue:

Moffett’s worry for the cable guys: If people really do move away from pay TV in significant numbers — or even pay less for TV, with some sort of smaller TV bundle or a la carte option — and shrink the video revenue the cable guys are getting, they’ll want to make it up with higher broadband fees.

If they can do it by moving to “usage-based pricing,” where your bill increases along with your Internet video consumption, then there’s no problem. It might even be a better outcome for the cable guys than the present.

But despite some chatter about this in the past few years (including efforts by Comcast and Time Warner Cable to introduce “caps” on broadband usage that they don’t expect most customers to exceed), the cable guys really haven’t moved to that model. Presumably, they still think they have time to do so. If they’re wrong, they may really have a problem.