Here's What Keeps Americans From Cutting the Cord

By Daniel B. KlineFool.com

Very slowly, Americans are cutting the cord with traditional pay-television providers.

It's not the mass exodus that has been predicted, even though the alternatives to cable and satellite are extensive, convenient, and inexpensive. It's easy to drop your old-fashioned service while retaining access to top programs through streaming services includingNetflix , Hulu, andAmazonPrime. It's even possible to get a fair amount of live television without paying for it with an HDTV antenna.

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Basically, the conditions appear right for people to shed the high cost of cable or satellite television without sacrificing very much, but there was no stampede in that direction. And there's a very good reason why. Even if you drop pay-television, you still need Internet access to use any of the streaming alternatives. In many markets, the only choice for broadband service is the very same cable company a customer wishes to cut the cord with. That gives the ISPs enormous pricing leverage, where they can use bundling to make the price of online access seem cost-prohibitive for people who want it without paying for TV.

How far along is cord cutting?Cable and satellite companies have been slowly shedding customers for the last two years. It's a relative trickle though -- a meaningful loss but not the massive downward spiral many expected.

In the second quarter of 2015, the 13 largest pay-TV providers in the United States -- representing about 95% of the market -- lost about 470,000 net video subscribers compared to a loss of about 305,000 video subscribers the same quarter the previous year, according to Leichtman Research Group. That left the top pay-TV providers with 94.9 million subscribers.

It's also worth noting that losses hit the satellite companies (which don't provide broadband Internet access) the hardest, according to LRG:

  • Satellite TV providers lost 214,000 subscribers during the quarter (including gains from DISH Network's Internet-delivered Sling TV), compared to a loss of 78,000 in the year-ago period
  • Losses for the top cable companies were the fewest in any second quarter since 2008
  • The top telephone providers added 4,000 video subscribers during the quarter -- compared to 284,000 net additions last year

This makes sense, because cable companies and telcos can bundle cable, Internet, and even phone service to make pay-TV look more attractive.

Source: LRG

How bundling stops cord cuttersUnder the recently revised Federal Communications Commission definition of broadband Internet access, nearly 20% of Americans have access to providers while 55% are served by a single company, according toThe New York Times. Even broadening the search to include slower, DSL service -- which, in most cases, does not meet the new broadband requirements -- still leaves 30% of U.S. homes with only one choice and another 52% with just two.

This incredible lack of choice and the fact that all the major ISPs are also pay-TV providers gives these companies incredible pricing leverage. Most cable companies take advantage of this by bundling services to make them more attractive. In exchange for signing up for multiple services, the subscriber pays less for broadband access paired with cable and/or phone service.

Bundling cable with other services does not make it cheaper than cutting the cord and opting for Netflix, Hulu, or Amazon Prime -- all of which cost under $10 a month (though Prime is sold at $99 per year). What it does is create a perception of value.

In a traditional cable/phone/Internet bundle, you may save as much as $10 per service for bundling -- even more on a one or two-year introductory plan. You're still paying well more than just Internet access, or even a couple of streaming options, but the "value" of getting 150 or so channels makes it seem like a deal.

It's a bit of a trapPaying for something, because it seems like a good deal even when it costs more money than the alternative has always been how cable works. You pay for a universe of channels you don't watch, but it's a value, because you might someday want them.

That's the logic behind bundling and how it keeps people from cutting the cord. It's essentially the same proposition that gets consumers buying bulk quantities of food they'll never eat from warehouse stores. That pallet of croissants is such a great deal, you simply can't pass it up, never mind that most of the pastries will get thrown out.

For some of us, bundling makes sense. In my house with my wife, myself, and my 11-year-old son having very different tastes in programming, we use quite a bit of the cable universe. Were it just me, or even just my wife and I, Netflix and an HDTV antenna would probably be fine.

Cutting the cord is not for everyone, but it's probably a better choice for many people who have yet to take the plunge.

The article Here's What Keeps Americans From Cutting the Cord originally appeared on Fool.com.

Daniel Kline has no position in any stocks mentioned. He is in the process of switching cable and Internet providers.The Motley Fool owns and recommends Amazon.com, Cable One, and Netflix. The Motley Fool recommends Verizon Communications. 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.

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