Report suggests cord-cutting may be occurring

It’s the economy, stupid.

That was the retort recently from media executives facing a barrage of questions about whether the drop in pay TV subscriptions was due to consumers cutting the cord, opting instead to watch TV shows and movies for free online.

During third-quarter earnings calls, CEO after CEO denied cord-cutting was real, blaming the drop in subscriptions on weak economic conditions.

But a report Wednesday suggests cord-cutting may be happening. For only the second time, the number of pay TV subscriptions (across cable, satellite and telcos) fell in the quarter ended Sept. 30 — by 119,000. This follows declines of 216,000 in the second quarter, according to research firm SNL Kagan. Combined, that equals a .23% drop to about 100 million pay TV subscriptions.

“It is becoming increasingly difficult to dismiss the impact of over-the-top substitution on video subscriber performance,” said Ian Olgeirson, a senior analyst at SNL Kagan, “particularly after seeing declines during the period of the year that tends to produce the largest subscriber gains due to seasonal shifts back to television viewing and subscription packages.”

According to SNL Kagan, cable’s subscription losses are driving the decline. Cable operators lost 741,000 subs in the third quarter, compared to gains of 476,000 for telco providers and 145,000 for satcasters.

Media brass say they are seeing no evidence of cord-cutting, believing instead that unemployment, fewer housing starts and the expiration of special discount packages offered a year ago at the time of the digital TV transition are to blame. Viacom CEO Philippe Dauman called cord-cutting “much ado about very little.”

Still, execs say they are not ignoring the possibility of cord-cutting. No. 2 operator Time Warner Cable said it is monitoring TV subscription declines closely. Chief operating officer Landel Hobbs said college towns are a good litmus test for cord-cutting. He said that in Austin, Texas, and Columbus, Ohio, Time Warner Cable’s subscriptions were flat, as were college enrollments. He said that would be two places you might see early indications of the phenomenon.

Another argument for why cord-cutting may not be happening is that the number of broadband subscriptions, without being bundled to a TV service, is shrinking, too, said Sanford Bernstein analyst Craig Moffett, suggesting that if Internet video substitution was happening, broadband subs would rise.

Moffett believes poverty may be the cause for the decline in subscriptions, which are mostly analog-only plans at the low end of the operator’s offerings. Those subscribers, he said, may be opting not for services like Netflix and Hulu but for just free over-the-air TV.

Just the same, some cable operators are talking about offering a “budget plan” for consumers feeling the pinch of the economy. It’s not clear how programmers locked into complicated carriage agreements would respond to a lower-priced offering, particularly when they so vehemently opposed unbundling channels several years ago when it was proposed that cablers offer consumers a la carte pricing.

Still, Moffett believes the absence of a consensus on cord-cutting hurts TV distributors.

“Cord-cutting is arguably the central bear thesis for the pay TV sector,” Moffett said.

“Whatever one believes, or doesn’t believe, about cord-cutting, these results will fan the flames of the debate, increasing headline risk for the group.”

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