Cord Cut: Cable Losing Subscribers in Record Numbers

Cable networks lost 130,000 subscribers in the third quarter, the industry’s second straight quarter of sequential declines, estimates Credit Suisse. The pay TV industry, which up until the until the second quarter of this year had never in history posted a decline in customers from one period to the next, could end up losing 1.5 percent subscribers annually if the shift to Internet providers continues, the research firm said.

Netflix , Apple TV, Google TV, Microsoft’s X-Box, and other broadband-based systems are already causing many customers, especially younger viewers, to drop cable. Netflix added 4.1 million subscribers in the third quarter.

“While we may be early, in a nutshell, we remain concerned that the emergence of Internet delivered video and low-cost subscription streaming services like Netflix could result in cord-cutting,” said Credit Suisse Analyst Spencer Wang, in a note. “Cable networks could also potentially become marginalized over the long run should Netflix acquire content direct from studios.”

Increasing advertising rates from a recovering economy have boosted cable company shares this year. Comcast’s stock has added 22 percent so far in 2010, while Time Warner Cable shares are up more than 50 percent. Still, Netflix shares have more than tripled.

“Eventually just as mobile phones eroded the need for a land line, the mix of Internet TV choices will cause the cable subscribers to depart their cable providers,” said Simon Baker of Baker Avenue Asset Management. The money manager is looking to buy companies that help speed up the delivery of content over broadband networks.

Cisco’s earnings last week may have given investors some early insight into declining demand for cable TV. John Chambers, CEO of the maker of network routers and cable set-top boxes, said on the earnings conference call with analysts that its US cable business “is under pressure as new housing and consumer spending slows and as lower-cost competitors begin to enter the market.” North American orders were down 40 percent year over year in the latest quarter, he said.

Where did cable companies go wrong? Credit Suisse’s analysis suggests your parents’ complaints may have been right all along: there are just too many channels. Instead of focusing on tiered offerings for customers with different viewing habits, they just kept on loading on content.

From 1995 to 2009, the average number of TV channels in US homes increased to 128 from 41, according to data in the Credit Suisse report via Nielsen and TV Dimensions. But the average number of channels viewed per week per adult increased to just 15 from ten over that very same period.

“Over the past 30 years, pay TV incumbents have focused on sustaining technologies — digital, VOD, high def, etc. — that enhance performance along historic value parameters — more channels and content choices,” wrote Wang, who rates the whole entertainment sector ‘underweight’. “We are now at the point where the pay TV bundle exceeds what the market needs.”

There’s still hope, but it will come at a price. Cable companies have the cash to adapt to the ever-changing needs of their customers. Comcast on Tuesday released its Xfinity TV app, which will allow its digital subscribers to watch TV shows and movies directly on the iPad. Comcast is also attempting to merge with NBC Universal — a $30 billion deal — in order to increase its footprint in the content arena.

NBC Universal is the parent company of CNBC.

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