Cutting Cable: Companies Losing Customers

Porter McConnell gave up on pay TV last summer after noticing that monthly rates kept creeping up.

Now with no satellite or cable TV, she watches her trusty old TV set with an antenna or she goes online to catch her favorite programs. Once in a while, she buys shows from Apple Inc.'s iTunes service. McConnell also upped her subscription to Netflix Inc.'s movies-by-mail service so she gets two DVDs at a time instead of one, for $15 a month.

"Part of it is, I've got to economize," said the 30-year-old Washington, D.C., resident who works at a nonprofit.

McConnell is the kind of consumer who makes cable and satellite TV operators lose sleep. While a weak economy invariably makes people pinch pennies, this is the first time that viewing shows online has become a viable competitor to pay TV, making cutting the cord easier.

Cable operators are starting to notice. Glenn Britt, chief executive of Time Warner Cable Inc., voiced his concern Wednesday in a quarterly earnings discussion with analysts.

"We are starting to see the beginning of cord cutting," he said. "People will choose not to buy subscription video if they can get the same stuff for free."

It's tough to pin down how many people actually have given up cable - most of the evidence remains anecdotal - and which customers moved to a competitor.

Still, Time Warner Cable, the nation's second-largest cable operator, lost 119,000 basic video customers in the fourth quarter, even after excluding subscribers it gave up from the sale of some cable systems. The company also posted slower growth in new digital cable TV, Internet and phone subscribers.

More details will emerge as other cable and satellite TV operators report earnings in the coming weeks.

This is not to say that the cable business is in trouble. It's a mixed picture in this economy. While there will be some people who will completely give up their pay TV service, many folks will keep the subscription but cut back instead on going out to the movies. They also might give up a movie channel or two and buy fewer pay-per-view shows.

But pay TV providers are right to be alarmed. Not only has a flood of TV shows and movies become available online, but the video quality has gotten better. Netflix is expanding its service that lets subscribers stream movies and shows from the Internet at no additional cost. And more and more people have home broadband - 57 percent of American adults, according to the Pew Internet and American Life Project.

Throw in the worst economic slowdown in nearly a century and people question whether they still want to pay for cable or satellite. As of January 2008, the average monthly home cable bill was $84.59, up 21 percent from two years earlier, according to the Federal Communications Commission.

"You've got these factors aligning at the right time," said Bobby Tulsiani, senior analyst at Forrester Research. "This time there is a real, viable alternative" to cable.

To be sure, there can be drawbacks to canceling pay TV. Watching shows on a PC still isn't as comfortable as watching TV while relaxing on a couch. The quality of Internet video, while improving, still isn't as good, especially for live events, in which video and audio might not be in sync. While some game consoles, Blu-ray players and other devices enable video to be seamlessly delivered over the Internet to a TV, hooking up a computer to the TV to watch the full gamut of online shows on a big screen can take some technical savvy.

These downsides mattered to 36-year-old Peter Tierney, who lost his job two weeks ago as a Web producer for a New York advertising agency.

With a wife and son to support, he called Time Warner Cable to cut his premium Japanese channel and whittle down his $180 monthly cable bill.

Tierney ended up saving nearly $70 a month, after Time Warner Cable gave him discounts good for two years and he canceled the premium channel.

"It's hard for two people to watch shows on the computer at the same time," Tierney said. "I can't sit on the comfy couch. I have to go to my desk and sit on my chair."

Indeed, a Forrester survey to be released in about a month found out that most people aren't planning to ditch their cable subscriptions soon.

But the Internet is coming on strong as a new way to watch video, especially for the younger set.

Tulsiani noted that the success of Hulu.com, a joint venture NBC and Fox that officially launched last year and offers free TV shows and movies, has attracted other entrants. Perhaps to hedge its bets, Philadelphia-based Comcast Corp. - the nation's largest cable company - runs a similar site called Fancast.com, while full TV episodes now are available through the networks' Web sites. YouTube made deals last November to carry full shows in an alliance with CBS and MGM.

This is what worries Time Warner Cable's Britt. He warned that if cable networks keep moving content online for free, it would hurt them and cable operators like Time Warner. Because with fewer subscribers, cable operators will pay less money to programmers for the right to air their content.

But the networks' hands largely are tied. People are illegally swapping files of shows and movies over the Internet already, so the networks might as well make money off it with advertising and take some control over their content.

While cable and satellite TV companies worry about any consumers cutting service, it would appear younger people pose the biggest threat, given the wide generation gap in online TV viewing. About 72 percent of people ages 18 to 29 have watched a video online, compared to 34 percent of people ages 50 to 64, according to Pew.

Consider Thomas Senger and his family.

The 23-year-old security officer decided not to get cable recently after moving out of his parents' house and into his own apartment in Bayonne, N.J. He doesn't watch that much TV anyway and prefers playing video games or viewing DVDs with friends.

"It's pointless to pay for something that I watch over the Internet," he said.

But that's not an option for his grandparents, who don't know how to use a computer and watch a lot of TV. His parents are more savvy about the Internet, but not enough to change their viewing habits. Senger said his mother likes to watch the QVC shopping channel live. She and his stepfather also watch TV while eating dinner - a tough proposition over a PC screen.

"Both of them will still need TV," Senger said.