Netflix, younger audience keeps cord-cutting debate hot

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Jim O'Neil

editor's corner

The reports of the death of cord cutting, it seems, are a tad premature. The cable industry, at its annual tradeshow in Chicago, is finally acknowledging they're losing subscribers, but they still maintain it's from the effects of a lukewarm housing market and an employment market that just can't seem to get started.

"There clearly is a growing underclass of people who can't afford the services they want," said Time Warner Cable CEO Glenn Britt, during a panel discussion at the Cable Show Tuesday. "It would behoove all of us to work together to meet the needs of that population. Most of the people want everything, but not everyone can afford it."

Cox Communications President Patrick Esser, meanwhile, cited Sanford C. Bernstein analyst Craig Moffett's contention that poverty, not product, is the reason American's are cutting their cable cords.

"Craig's been warning us for the last year... that while costs have increased, there are segments of the population where disposable income has stayed flat or possibly declined," Esser said. "We have to be very sensitive that, at the end of the day, we serve customers. They either have disposable income or don't."

Fine. Pull the covers over your heads a little higher and, perhaps, the cord-cutting Boogeyman won't get you. At least, not right away.

The real deal?

Your dyed-in-the-wool, has-always-been-there audience is slowly dying. Literally. And, in its place, is an audience of younger Americans who are as comfortable getting their entertainment online, a day, or even a month, after it airs, as they are watching it now on a traditional TV channel.

A recent study from The Diffusion Group reports that two times as many Netflix Streamers--those who stream Netflix content to connected devices--are inclined to downgrade pay-TV services as they were a year ago.

The March survey asked a random sample of adult broadband users that subscribe to a pay-TV service if, in the next six months, they would "move from a higher service tier to a lower one, or cancel a premium service of some kind."

Thirty-two percent, to some degree, said they would, doubling the findings of a year ago.

TDG's conclusion? The "Netflix Effect" is gaining momentum, leading to cord shaving and cutting.

"Despite its rhetorical positioning, both Netflix and pay-TV operators have long been aware that there will come a point at which its services are not only dilutive to regular TV viewing, but antithetical to pay-TV subscription levels," said Michael Greeson, TDG founding partner and director of research. "The question for realistic observers has been not if this will occur but when. According to our latest research, that time is upon us."

And while the survey found many respondents cited economic reasons, 34 percent said increased use of online video--particularly Netflix--pushed them toward the abyss. The numbers were far more convincing among heavy Netflix streamers (see the release).

TDG isn't alone in its dire warnings for pay TV.

Pay-TV industry ally Epix--the premium movie channel joint venture between Viacom (NYSE:VIA), its Paramount Pictures unit, Metro-Goldwyn-Mayer Studios and Lionsgate (NYSE:LGF)--points out that PCs have become nearly as popular among users as TV when it comes to watching movies, especially among younger users.

The content owner said viewers between the ages of 25 to 34 are significantly more likely to use video-capable iPods (24 percent), iPads and tablet computers (21 percent), smartphones (21 percent) and netbooks (15 percent) to watch movies than viewers between 35 to 64 years old.

"The results of this study illustrate the fact that consumers are increasingly accessing entertainment content wherever and whenever it is available and underscore the growing opportunities in cable to adapt to these changing viewing habits by providing movies and other content on every platform," said Mark Greenberg, president and CEO of Epix.

During a conversation with me last week, Steve McKay, CEO of Entone, a company that specializes in Hybrid TV and connected home solutions for pay-TV operators-, called over-the-top delivery "the enemy of the operator." But he offers a different take on cord cutting, predicting more Americans will subscribe to pay TV five years from now, not less.

"Even though we're at 90 percent of Americans subscribing to pay TV today, that number goes up not down," McKay said. "The reason? I put Netflix clearly in the category of pay-TV service. That number goes from 90 to 95 before it goes from 90 to 85." He also said Hulu Plus, MLB.com and the like contribute to that connected hybrid model.

And of course, there's that need for an Internet connection, one cord that isn't likely to be cut anytime soon, and one that increasingly is being looked at as a very, very stable revenue stream.--Jim