Cutting the Cable

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The beginning of 2013 marks an opportunity to make changes in hopes of creating a new year that's better than the last. While I tend to not be a person who makes a large number of resolutions, I have made one decision that will hopefully improve my finances for the year. I'm ditching cable, and from what I understand I'm not the only one.

The truth is, my family doesn't watch shows on cable often enough to make it a worthwhile expense. I believe that the last time we had the TV on for an extended period of time was on election night; most of our TV time is spent watching movies on disc or streaming TV episodes on Netflix (NASDAQ: NFLX). Our cable usage has dropped significantly over the course of the last year, and the notice we recently got from our cable company stating that rates were going up was the last straw.

The problem with cable comes down to two things: cable companies are providing less, while digital alternatives are providing more. Time Warner Cable Inc. (NYSE: TWC), for example, recently announced that it might drop certain stations such as Lifetime and E! when their contracts with the cable company expire. Similar station drops have occurred with other providers due to increased broadcast costs or an inability to negotiate new station contracts without raising rates for customers.

What the cable companies are losing, digital providers are doing their best to make up for in additional content. Netflix recently signed contracts with both Disney and Warner Brothers to increase the TV shows, movies, and animated films that are available on the service, providing fans with an easy way to view some of their favorite shows and a number of Disney animated classics. Similar services, such as Hulu and Amazon.com's (NASDAQ: AMZN) Amazon Prime help to fill in the gaps of what isn't available on Netflix. And even if you subscribe to multiple streaming services you're still likely to pay less than you would for a cable subscription.

The problem for the cable industry is that the world has changed, and they haven't figured out how to change with it. Remember when I said that I wasn't the only person ditching cable? Comcast Corporation (NASDAQ: CMCSA) lost over 117,000 subscribers in the third quarter of 2012 alone. Those numbers need to be weighed against the fact that Comcast is the country's largest cable provider with approximately 22 million subscribers, but a loss that size is still significant even with that large of a customer base. Time Warner and other cable providers are feeling the pinch as well, and if customers continue to find their favorite channels dropped as a result of contract disputes then these losses are likely to continue. There are still around 58.8 million households that subscribe to cable in the US, but given that the number was over 60 million in 2010 there's been a definite downturn in subscriptions across the nation.

To expand this a little further, Netflix picked up over 2 million new subscribers during that same quarter when Comcast saw such sharp losses. That brought the company's subscriber base up to 29 million, with 25.1 million of those subscribers based in the US. The company's expected to add to that in its Q4 earnings report on Jan. 23 as well, especially in regard to streaming-only subscriptions. With an estimated 25.2 million users that have streaming access, Netflix could potentially have half as many subscribers accessing digital content in the US as there are watching cable by the end of 2013. Amazon and Hulu Plus are both experiencing growth as well; Hulu doubled its customer base in 2012 to cross the 3 million customer mark, and Amazon is doing well enough that it has begun expanding its instant video service for use by its 3 to 5 million Prime members on video game consoles such as the Nintendo Wii.

In the end, the cable companies need to adapt to the changing ways that people get their entertainment. Trying to keep up the current system will result in increased costs, decreased profits, and a dwindling subscription base as more people choose cheaper alternatives that stream movies and TV shows via high-speed Internet connections. Netflix and Amazon are both positioned with strong market share in the digital streaming business, and as more individual stations begin putting their content on existing services or streaming the content themselves, the cable companies will find competition not only from the the big names in streaming but from the very content providers that they're trying to carry the content of.


Croaxleigh has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and Netflix. The Motley Fool owns shares of Amazon.com and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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