GO
Loading...

In the Living Room, Hooked on Pay TV

It is a fantasy shared by many Americans: dropping cable television and its fat monthly bills and turning instead to the wide-open frontier of Internet video.

Some are finding that the reality is not that simple.

CNBC.com

Just ask Bill Mitchell, a 40-year-old engineer in Winston-Salem, N.C. He canceled his Time Warner cable service and connected his flat-panel television to the Internet to watch sitcoms and his other favorite shows, using products from Apple and Boxee.

His experiment lasted 12 months. Recently, grudgingly, he returned to his $130-a-month cable subscription, partly because his family wanted programming that was not available online.

“The problem is, we’re hooked on shows on HBO and Showtime, like ‘True Blood’ and ‘Dexter,’ ” he said, adding that he wishes he could buy only the shows he wants instead of big bundles of channels he doesn’t. “It’s so frustrating.”

These are confusing times in the living room. The proliferation of Internet video has led to much talk of “cord-cutting” — a term that has come to mean canceling traditional pay TV and replacing it with programming from a grab bag of online sources.

But so far Americans are not doing this in any meaningful numbers. “Nor is there any evidence of it emerging in the near future,” said Bruce Leichtman, the president of Leichtman Research Group, which studies consumer media habits.

This is all the more remarkable, industry analysts say, because it seems to defy the way the Internet has disrupted and challenged virtually every other major form of media — from music to newspapers to books.

In part that is because the television business took action to avoid the same fate. Heavyweight distributors and producers have protected their business models by ensuring that some must-see shows and live sporting events cannot legally be seen online.

Technology companies are pushing alternatives like Web-connected set-top boxes. But these are still not as easy as signing up for cable or satellite service, particularly for those who want to watch on a big flat-screen TV and not a computer.

And so, in the battle for the living room, 2010 seems to be the year that the incumbent is strengthening its foothold.

A New York Times/CBS News poll this month found that 88 percent of respondents paid for traditional TV service. Just 15 percent of those subscribers had considered replacing it with Internet video services like Hulu and YouTube.

Younger people, though, are more intrigued by the possibility: respondents under the age of 45 were significantly more likely than older ones to say they had considered replacing their pay TV service. The poll was conducted Aug. 3-5 with 847 respondents and has a margin of sampling error of plus or minus three percentage points.

Who's stealing market share?

Even through the downturn, the number of people subscribing to pay TV continued to grow. Cable, satellite and fiber-optic providers added 677,000 customers in the first quarter of this year, according to the investment firm Sanford C. Bernstein.

The firm’s preliminary numbers for the second quarter, which is traditionally weak, show a slight drop in subscribers. Satellite providers and Verizon’s FiOS service have been stealing market share from cable.

The cable and satellite companies say that their customers are reluctant to pay more — the Comcast chief executive, Brian L. Roberts, described customers who paid only for video, without a bundle of other services, as “very price-sensitive” — but insist that cord-cutting has not been an especially disruptive trend.

To keep customers, especially the price-sensitive ones, the carriers are getting creative. They are trying to bring the living-room experience to every other screen in a customer’s home, including laptops and tablets. Last week Verizon became the latest carrier to announce plans for an app that puts live TV on the iPad, pushing out the walls of cable TV’s walled garden a bit.

Cablevision , in the New York City area, is running similar trials for tablets and smartphones, Tom Rutledge, the chief operating officer, said in an earnings call this month. “Our vision is that we will provide our full service, everything we offer in the home,” Mr. Rutledge said, “on any device that can display TV or act as a TV in the home.”

Craig Moffett, a cable industry analyst at Bernstein, says the fortunes of pay TV companies are nevertheless destined to flag, given customers’ dissatisfaction with prices, as well as the persistent efforts by technology companies to come up with alternatives.

Entrepreneurs will “keep storming the castle until somebody figures it out,” Mr. Moffett wrote in a recent note to investors. But he also called cord-cutting “perhaps the most overhyped and overanticipated phenomenon in tech history.”

Plenty of people say they have foresworn cable for good. They are largely young adults who know their way around the Internet and have grown accustomed to watching video on computers and other devices.

The Times/CBS News survey found that people under the age of 45 were about four times as likely as those 45 and over to say Internet video services could effectively replace cable.

“I pay for the Internet; why would I pay for cable?” said Breck Yunits, 26, who lives in the Mission neighborhood in San Francisco in a house he shares with four roommates. They regularly gather at night around the dinner table and use his Hewlett-Packard laptop to watch “The Office,” “Arrested Development” and other shows on sites like Hulu, NBC.com and MTV.com.

The roommates split a $40 Internet bill, and one roommate pays around $10 a month for a Netflix subscription. In the past they have also grabbed illegal copies of movies using BitTorrent, a file-sharing system. Mr. Yunits, a freelance computer programmer, said his girlfriend liked some of what was legally available only on pay TV, so he might eventually “be a candidate for it.”

“Personally I would never get cable because the shows online have gotten so good,” he said. “You get to watch what you want to watch, when you want to watch it.”

But people like Mr. Yunits are still few and far between, in part because it is simply too hard for most people to cobble together an alternative to pay TV’s offerings.

Take Hulu, which attracts tens of millions of users a month. People can watch most broadcast shows on Hulu, but few cable shows, because they are carefully protected by media companies that rely on subscriber revenue. “American Idol,” the biggest entertainment show in the country, cannot legally be watched online at all.

Meanwhile there has not been much traction for a host of services like Boxee, which aim to connect televisions to the Internet and help people find things to watch. There is, though, interest in the possibilities: a global survey by Nielsen published this month found that one in five people was eager to buy a Net-connected TV in the next year.

Another alternative comes from video game consoles, like the Xbox 360 from Microsoft, the Nintendo Wii and the Sony PlayStation 3. They are in millions of living rooms and are adding video programming, like Netflix’s streaming service. But to date, research shows, they are not undermining cable or satellite — merely complementing it with pay-per-view TV episodes and some movie streams.

Instead of cord-cutting, Mr. Leichtman said there was a greater potential for what he called cord-slicing, cutting back on one part of the monthly cable bill, like pay-per-view movies, while keeping the basic service.

Any relief would be welcome to John Akerson, 46, a friend of Mr. Mitchell’s in Winston-Salem, who pays $100 a month to Time Warner Cable so he and his wife, Jen, can spend two to three hours a night watching ESPN highlights, “The Real Housewives of Atlanta” and local newscasts.

Because of the cost and periodic service glitches, he says that he has “a deep resentment bordering on hate” for the cable company. But other options have not worked out, even though Mr. Mitchell gave him a tutorial on using an Apple TV device.

Mr. Akerson finds it almost laughable that he and his wife have not been able to figure out an alternative, given that both of them are technically adept.

“I guess it comes down to laziness on my part,” he said of his failure to find an alternative to Time Warner Cable. That and, if he switches, “I’m definitely not going to be able to get ‘True Blood.’ ”

Symbol
Price
 
Change
%Change
CVC
---
TWC
---

Featured

Contact Technology

  • CNBC NEWSLETTERS

    Get the best of CNBC in your inbox

    › Learn More

Squawk Alley