Miranda Henely spends four hours in front of the television every day -- yet she doesn’t spend a dime on cable or satellite programming.
Henely, 23, instead watches shows and movies streamed from Netflix Inc. (NFLX:US), Amazon.com Inc. (AMZN:US) or directly from broadcasters’ websites, using a computer hooked up to the TV in her home. She’s known in industry parlance as a cord never, meaning she hasn’t ever subscribed to pay TV: channels from a cable company, such as Comcast Corp. (CMCSA:US), or a satellite provider like DirecTV, or phone companies -- and she doesn’t ever intend to.
“Most people I know are either not watching TV or they’re doing it this way,” said the marketing-account manager, who lives in Mountain View, California. “I think I’m very typical.”
Henely is part of a generation of technology-savvy, budget-conscious consumers who are taking advantage of the availability of high-speed Internet connections and the proliferation of smartphones, tablets, lower-cost TVs and other gadgets that make it easy to consume downloadable shows in a snap.
FULL COVERAGE: Pay TV Under Pressure
The shift in viewing habits is putting pressure on cable, satellite and phone companies by pinching subscriber numbers, which may have a knock-on effect on revenue growth. The impact on the $80 billion pay-TV industry is already being felt, with 2013 on pace to be the first year ever that total U.S. pay-TV subscriptions will decline, falling to 100.8 million from 100.9 million last year, according to researcher IHS.
And while 3.2 million new U.S. households were set up in the last three years, the paid-TV industry only added 250,000 subscriptions in that same period, according to market-researcher SNL Kagan.
“It’s hard not to be concerned that there’s a growing population growing up not using” pay TV, said Rich Greenfield an analyst at BTIG LLC in New York. “Alternatives are growing by the day.”
Cord nevers are set to accelerate the erosion that cable and satellite TV providers are already suffering at the hands of phone companies. AT&T Inc. (T:US) and Verizon Communications Inc. have taken 11 percent of the market for paid-TV subscriptions after introducing competing services in the past decade. Cable commands 55 percent of the market, while satellite TV has 34 percent, according to IHS.
And consumer choices are broadening. Netflix has attracted 29.8 million subscribers since it was founded in 1997, while Amazon sells streaming shows through its e-commerce storefront. Then there’s Hulu LLC and the wide range of programming available for download or streaming through Apple Inc. and Google Inc. websites. Silicon Valley technology companies such as Intel Corp. (INTC:US) are also planning Internet-based TV services.
Henely and other cord nevers are compounding the challenges to pay TV posed by another group known as cord cutters. Those customers once bought traditional cable or satellite-TV subscriptions, yet have since cut the cord, as it were, and now rely mainly on the programming they can access over the Internet.
Both groups affect the cable industry, which is unlikely to return to the growth in customer numbers it once enjoyed, said SNL Kagan analyst Ian Olgeirson.
“We think this trend probably amplifies a little over time,” he said. “That comes from people who have either had a service and discontinued, or never came into the fold.”
None of this means paid TV will disappear. Paid TV subscribers in the U.S., including those buying programming from phone companies, remain prevalent, reaching 86 percent of households in 2009, according to IHS. Increases in advertising, per-subscriber fees and bundling telephone and Internet services will also help make up for customer declines, said Erik Brannon, an analyst at IHS.
“The pay-TV business is fundamentally sound,” he said.
Even so, pay-TV providers themselves recognize that existing and prospective customers, especially younger ones, are watching more video online and that many don’t, or can’t, pay for a full package.
“DirectTV targets its service to higher income and family households, so we believe that as these individuals get older and more established, they’ll be more inclined to upgrade to our premium offering,” said Darris Gringeri, a spokesman for El Segundo, California-based DirecTV.
Dish, the second-largest U.S. satellite TV provider, said it has tried creating a bundle of programming targeted to 18-to-28-year-olds for less than $30 a month. The Englewood, Colorado-based company hasn’t been able to convince programmers to sell them appealing content to make a product viable, Dish Chairman Charlie Ergen said on an Aug. 6 conference call.
Satellite providers DirecTV and Dish are even more vulnerable than the cable industry, which benefits from rising demand for Internet services delivered over its networks. Charging customers more for broadband if they stop paying for a TV server is a fallback for cable, said Craig Moffett, an analyst at Moffett Research LLC in New York.
Contributing to the pressure on cable and satellite is the entertainment industry, which is charging ever higher fees for the shows and movies it licenses. CBS Corp. (CBS:US) was able to extract higher fees from Time Warner Cable Inc. (TWC:US) after a monthlong blackout of such shows as “60 Minutes.”
Time Warner Cable Chief Operating Officer Rob Marcus, who will move up to chief executive officer at the second-largest cable TV operator in 2014, said increasing programming fees charged by content companies, which rise more than 10 percent a year, are rapidly making the cable bundle unappealing.
“Programming costs continue to escalate at a rate that far exceeds the rate at which customers will bear that cost,” Marcus said on an interview on Bloomberg TV. “That’s not a healthy dynamic.”
Even content owners won’t be immune to cord nevers, since they rely on cable and satellite providers for revenue.
Cord nevers are a “legitimate concern,” 21st Century Fox Inc. (FOXA:US) President Chase Carey said at a company meeting on Aug. 8. “It remains to be seen what happens as this generation ages, but, what is clear is that this is an issue that will play out over the next 10-plus years, not the next three.”
The bundling approach, combining more than 100 channels that cover everything from home improvement to the Military Channel, may contribute to the growth of cord nevers as some viewers aren’t prepared to shell out for content they have no interest in.
David Heasty, a 34-year-old graphic designer, gets older episodes of shows like “Breaking Bad” over the Internet and watches them on his computer screen. He’s never had a TV subscription and pays Time Warner Cable about $50 a month for broadband only -- though he said he would spend more if he was allowed to pay for only the channels or shows he wants.
“It’s not a money thing, it never was,” said the Brooklyn, New York, resident, who runs his own business. “It’s a good thing for the companies to ponder. They’re missing out on an audience.”
Some cord nevers adopted TV watching over the Internet because they got their first taste of economic independence in the 2008 recession, forcing them to consider cheaper alternatives to the average $80 monthly pay-TV bill, said IHS’s Brannon.
“We as a society learned lower-priced behavior about entertainment,” said Brannon.
Hurdles remain to the growth of Internet TV. Among the biggest is the availability of programming, as Comcast and its rivals can pay more for shows than Netflix or any online service, said Brahm Eiley, an analyst at the Convergence Consulting Group.
He estimates the paid-TV industry -- cable, satellite and telecommunications companies -- will spend $45 billion this year to secure the most attractive programming. That compares to a projected $2.4 billion to be spent by Netflix, which accounts for the majority of online services purchasing content.
“The revolution will take a long time,” he said.
Henely’s current favorite show may be an example of how that timeline may speed up. She’s enjoying “Orange is the New Black,” produced for Netflix and offered first to its subscribers. If such programs lure more consumers, content owners may increasingly consider breaking from their traditional distributors.
“If the model breaks down, it will start from the outside,” said Kagan’s Olgeirson. “It could be that we start to see some hit content generated outside of the model and that starts to make the content owners get antsy and break ranks.”
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