When 24m US viewers tuned in to watch Donald Trump slug it out with his rivals for the Republican presidential nomination, Fox News made television history, recording record ratings for a non-sports cable broadcast.
However, those who followed the political jousting on social networks had a common complaint: despite partnering with Facebook to host the debate, Fox News had made it virtually impossible to watch the event online.
Twitter users traded links with illicit livestreams and lambasted the network’s failure to cater for “cord-cutters” or “cord-nevers” — people who have either ditched their pay-TV subscription or have never signed up for one.
The disconnect between the knockout ratings and the incredulity of young, media-savvy viewers appeared to support the central thesis of broadcasters and pay-TV providers: cord-cutting might be fashionable for trendy elites, but it has yet to make a dent in “real” America’s love affair with television.
That theory is coming under attack like never before. The second quarter is always tough for the pay-TV industry, as families move home and college students disconnect, but this time it was the worst on record for net customer losses: an estimated 566,000 people cut the cord. With the exception of Verizon, which is still rolling out its video service, all pay-TV companies lost subscribers during the quarter.
Worse still, the poor performance comes against the backdrop of improving macro trends that are usually positive for the industry, including a rise in new household formation following several years of stagnation.
With roughly 100m US pay-TV subscribers, the loss of half a million customers does not equal Armageddon. The subscriber base shrunk 0.7 per cent year-on-year in the second quarter, its sharpest contraction on record, but nowhere near as precipitous as the declines seen in other media businesses such as newspapers and recorded music.
But after a decade of fretting about cord-cutting, investors think it has finally arrived.
Concerns over younger customers’ changing viewing habits led to a sharp sell-off in media stocks earlier this month. More than $50bn was wiped from the market value of the S&P 500 Media Index, after Walt Disney cut growth estimates for its cable networks and companies including Viacom, Fox and CBS reported declining advertising revenue.
Among the companies who pipe pay-TV into customers’ homes, satellite groups have emerged as the biggest casualties of cord-cutting. These groups amassed a huge subscriber base when they entered the market in the 1990s, with deep discounts to cable products and technology that could reach rural homes — but now the disrupters are being disrupted.
Unlike cable operators, satellite companies cannot offer a high-speed broadband connection — an essential for anyone wanting to watch streaming services like Netflix or Hulu.
“We are witnessing the rapid erosion of satellite’s competitiveness,” says Craig Moffett, an analyst at MoffettNathanson. “The industry is no longer growing in the US and the dynamics have shifted in favour of cable, and in favour of broadband.”
Analysts estimate Dish, one of the two big US satellite groups, lost 151,000 subscribers in the second quarter, versus a loss of 44,000 a year ago. It reported narrower net customer losses of 85,000, but that figure lumped in sales of Sling TV — a new slimmed-down streaming TV service for cord-cutters that is delivered via an internet connection or “over-the-top”.
Charlie Ergen, Dish chief executive, has said he expects its pay-TV business to come under pressure, and has tried to diversify by launching Sling TV and by acquiring tens of billions of dollars of spectrum — the airwaves needed to deliver wireless telecoms services.
Never one to shy away from rubbing salt into the wounds of struggling broadcasters, Mr Ergen had a sharp message for content owners earlier this month: “The biggest problem in the linear [TV] business today is that viewership is going down. Advertising rates are going down. And everybody wants to go to the street and say they’re still making the same amount of money.”
DirecTV, the satellite group recently acquired by AT&T for $49bn, also had its worst quarter ever, posting net customer losses of 133,000, versus 34,000 in the same period of 2014. Investors in AT&T appear to be nervous about the prospects for the new company, sending its shares down as much as 3 per cent on Wednesday after an analyst day where executives outlined their long-term strategy.
For cable operators, the picture is much better. As owner of NBC, the broadcaster, Comcast got burnt in the recent media sell-off, but its cable subscription business performed quite well, shedding 69,000 subscribers versus a loss of 144,000 a year ago. Time Warner Cable lost 43,000, compared with a loss of 147,000 in the second quarter of 2014.
Analysts say cable companies are faring better because those customers who still want pay-TV services also want high-speed broadband, which can be delivered by a cable but not by a satellite dish.
And even if the cable industry experiences some immediate pain from cord-cutting, some predict a win-win situation in the long term. When customers ditch their pay-TV subscriptions and flock to Netflix, HBO Now and other online services, they will still need a high-speed internet connection.
“As subscribers cut the cord they are more reliant on faster broadband, which favours cable,” says Jonathan Chaplin, an analyst at New Street Research, who points out that many smaller cable companies make no profit from video services, while larger groups, like Comcast, make very little.
Cable One, a small Arizona-based operator, has lost 20 per cent of its video subscriber base in a year, while increasing earnings and cash flow. “Smaller operators have already crossed the Rubicon,” says Mr Moffett. “Eventually it will come to that for all.”
In the second quarter, Comcast crossed a Rubicon of its own: it now has more broadband subscribers than video ones.
Still, Rich Greenfield, an analyst at BTIG Research, thinks the likes of Comcast and Time Warner Cable will be less sanguine about losing video customers. “They still make money in video, which makes it harder to abandon. They charge more than it costs them [to pay affiliate fees to broadcasters]. If they are only in broadband, they have to accept lower revenues or raise their prices.”
Perhaps the biggest risk for cable companies is that regulators block them from hiking broadband prices to account for lost pay-TV profits. Currently, the economics of pay-TV are quite simple: a customer pays, for argument’s sake, $80 a month. Roughly half goes to the broadcasters for content, while the other $40 goes to the pay-TV company transporting the content.
In the Netflix world, Comcast et al still deliver the content, but they need to find a new way of getting paid. The Federal Communication Commission’s recent net neutrality ruling closed down at least one avenue, banning cable operators and telecoms groups from charging Netflix and others for a “fast lane” to access their viewers.
That means sharp price increases for consumers, though that too could face opposition. In vast swaths of the US, customers have only one choice of cable provider. If companies were to start using their monopolies to extract more cash from customers, regulators could step in with utility-style price caps.
“The real question is whether they can charge for delivery when the same video is delivered over the same network, but is being sent by Netflix,” says Mr Moffett.
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