CNBC Explains

Cord-cutters: Why it's Apple's new key demographic

Tim Mullaney, special to

Apple is reportedly planning to launch a streaming-video TV service, with 25 channels in all, anchored by major broadcasters, including Disney's ABC, CBS and New Corp.'s Fox.

The move is a huge shot across the bow of cable TV operators, since the service would be a big boost to a fast-growing but poorly understood industry phenomenon—cord-cutting.

Cord-cutting is when a household decides to get its video, including TV, over the Internet rather than from traditional cable or satellite TV providers. As it becomes more common, it stands to reshuffle household video budgets and viewing patterns and remake the power relationships between companies that make programming and those that distribute it. And with the power goes the money, in the form of fees paid by consumers or the money that distributors pay to programmers.

What will all this mean? Will consumers save money? And why is the change accelerating now?

Here are answers to 8 key questions.

Donald Iain Smith | Flickr | Getty Images

1. How much do people pay for cable?

Market researchers at NPD Group estimate that the average cable bill, now about $123 a month, will reach $200 by 2020.

A separate study by the Federal Communications Commission found that so-called "expanded basic" cable, excluding premium sports tiers and pay-movie services, like Time Warner's Home Box Office, costs about $64 a month.

But what raises consumers' ire is this: The FCC found that the price of cable has risen an average of 6.1 percent a year since 1995, compared with general inflation of 2.4 percent a year.

Pricing also shows how programmers have been gaining power over distributors in recent years, a trend that cord-cutting will accelerate. The price paid per channel rose 2.1 percent in 2012, the FCC said last summer, versus 1.6 percent inflation. That diverged from the longer-term power balance—in which prices per channel had fallen as overall cable bills rose—as distributors offered more channels and paid less for many new ones.

2. How many people are cutting the cord?

About 8.6 million U.S. households have broadband Internet but no pay-TV subscription, said a report last month by Experian Marketing Services. That's 7.3 percent of households, up from 4.2 percent in 2010.

Cord-cutting is concentrated among young people—13.5 percent of broadband households with an adult under 35 have no pay TV. It is concentrated further among people who own smartphones and especially iPhones, Experian said. Millennials are almost four times more likely than other adults to watch streaming video on a TV.

The key thing determining whether a household cancels its cable is whether its members like to watch streaming video on their TV rather than on a handheld device or computer, Experian said. Netflix or Hulu Plus (which is owned by a consortium, including Disney, 21st Century Fox and CNBC parent NBC Universal) subscribers are almost 25 percent more likely to cut the cord, since they can get most of their TV from those subscription services, which are cheaper than a full cable package. More than a third of U.S. households now own an Internet-connected TV, the report added.

3. Who else is pushing cord-cutting?

Most companies are wary of actively promoting cord-cutting, because they have incentives to cooperate with pay-TV companies. That said, companies like Netflix, Google (Chromecast) and Amazon (Fire TV) offer services that make cord-cutting easier. And content providers are sticking their toes into the water.

Media companies that have announced some form of streaming-video experiments in the last few months include Time Warner's HBO, CBS, ESPN, DISH Networks and others.

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4. What are cable companies doing about it?

Cable companies aren't sure programmers will really make more on streaming deals, since they may have to assume customer-service chores that cable distributors handle now. They also are moving to participate in streaming video themselves. DISH has announced its SlingTV package, while Comcast has 70 channels available for live streaming on its Xfinity TV Go App, the company said last month.

5. Does cord-cutting save consumers money?

It can, depending on viewing patterns.

The key here is that pay-TV companies offer their services in bundles, essentially using more-watched, must-have services for many subscribers, like ESPN, to stabilize demand for less-watched channels. Netflix can be had for as little as $8.99 a month, with a Hulu Plus subscription adding another $7.99. HBO and Apple recently announced a deal to distribute HBO via an Apple streaming service for $14.99 monthly, while ESPN made a deal with DISH's SlingTV service to add a sports pack to that streaming service for $5 a month. The Wall Street Journal reported on Monday that Apple may be looking to charge $30 to $40 monthly for its service, which would include about 25 channels.

If you're not careful, it can add back up to the cable bill quickly. But customers who have specific preferences and buy only the programming they watch most often can save cash.

6. How many more people are likely to cut the cord soon?

Another 5.6 million households "are prime to be among the next wave of cord-cutters," said Experian, estimating that half of those are millennials. That ultimately leads to the rise of the "cord nevers"—those born in and raised in households where streaming TV is TV.

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7. What's the future of my TV?

Your TV itself is probably secure. Cord-cutting becomes much more common once a household figures out how to stream its content to the big box in the family room. "TV will move from being a separate medium to just another device—albeit an often-beautiful one—for consuming video," Experian stated.

8. How would this service impact profits in the technology and media business?

The impact would be incremental, at least initially, according to Sanford C. Bernstein analyst Toni Sacconaghi. Apple, for example, is too large for revenue from the streaming service to change its overall prospects, especially since cord-cutters are still less than 10 percent of U.S. households. Every 10 million subscribers would boost Apple's revenue by about 2 percent but reduce its profit margins, Sacconaghi said.

The real impact would be that an Apple-based TV service would give people more reason to buy Apple devices like the iPhone and iPad, he wrote in a March 17 note to clients. That would give Apple a new weapon in its battle against phones using Google's Android operating system.

But cable companies and content providers are likely to seek agreements that keep Apple from having many exclusive or preferred rights to content, for fear of handing control of their customer relationships to Cupertino.

Widespread cord-cutting would eat into revenues at companies like DirecTV and DISH Networks and may hurt companies like Comcast and Verizon, which distribute video. According to a Wall Street Journal report published late Monday, the Apple streaming service will not offer NBC broadcast network and cable channels, such as USA and Bravo, after a fallout between Apple and Comcast, the parent of NBC and CNBC. (Comcast owns CNBC parent NBC Universal).

If consumers use services where bills vary based on how much data they consume, which is especially common for mobile data plans, that will be good news for mobile carriers like Verizon and AT&T. That's a big deal, because Experian estimates that 57 percent of smartphone users watch video on their phone each week, representing a third of all adults. That's almost five times as many people as those who stream Web video to their TVs weekly.

But cable companies also have options and power of their own—they also sell the broadband access that makes new services like Apple's go. They can boost the price of simply connecting to retain a share of any money they lose from people dropping their video service, and charge customers fees if they exceed stated data limits.

Disclosure: Comcast is the owner of NBCUniversal, the parent company of CNBC and

By Tim Mullaney, special to