Depending on whom you believe and when you start counting, cord-cutting is either slowing down or it’s accelerating.
According to a new survey by TDG, the percentage of adult broadband users who are “moderately” or “highly likely ” to cancel their pay TV service in the next six months has dropped by 20 points since last year.
“Cord cutting proclivities have held steady for several years, with approximately 7% of [adult broadband users] pay-TV subscribers moderately or highly likely to cancel their service in the six months following the survey,” TDG director of research Michael Greeson said in a statement. “In early 
2015, however, the number declined to 5.7%. This is the first time in five years we’ve seen significant change in these metrics.”
According to MoffettNathanson analyst Craig Moffett, however, U.S. pay-TV providers lost 357,000 subscribers in the third quarter of 2015,. That was more than twice their losses in the same quarter last year, although it was down substantially from the 605,000 they lost in the second quarter of this year.
Take your pick.
One place where cord-cutting seems pretty clearly to be on the rise, though, is at Dish Network. According to Moffett’s calculations, Dish lost a brutal 178,000 satellite subscribers in Q3, marking its worst quarterly loss to date. “That’s dramatically worse than the 12K subscriber loss from a year ago, and leaves Dish’s traditional subscriber base shrinking at a shocking 3.7% annual rate,” Moffett wrote.
Some of those losses were made up by a gain of 155,000 subscribers to Dish’s over-the-top Sling TV service, by Moffett’s figuring, but it still left a net loss of 23,000.
Rather than fretting over those losses, however, Dish CEO Charlie Ergen told analysts on the Q3 earnings call that he’s happy to see some of those subscribers go.
[I]n terms of the overall trends…as I got back into looking at it, we were being overly aggressive to get subscribers that I didn’t feel the credit, I didn’t feel were going to make a long-term return for us… So we certainly got more conservative on the kind of subscribers that we want and in fact we don’t really take many subscribers now below at least $50 ARPU and below certain credit score [snip].
[O]ne of the other things that we’re looking at is that we do have customers that are unprofitable for us today, and they’re unprofitable because they call multiple times during the month, they are always asking for discounts. Even if you gave them the discount they asked for, they’d be an unprofitable customer. And I think it’s just smart business that over time that we wean those customers off of our service. And we’ve done some of that. So it doesn’t make sense for us. I would rather have 13 million customers that are profitable than 13 million customers that are profitable and a million customers that are unprofitable.
So for us, it’s all about economics and what kind of return we’re getting. And sometimes the best return you get is to let a customer go.
If Ergen really believes that, and isn’t just trying to put some lipstick on a pig for Wall Street, it represents a change in perspective almost as dramatic as the change in consumer behavior driving the decline in subscribers.
It wasn’t that long ago that pay-TV companies earned their valuations based in large part on the total number of subscribers they had, so any subscriber was a good subscriber. However, increased competition for subscribers, which is what much of cord-cutting amounts to, is driving down prices, and with them ARPU, making the valuation risk from losing at least the underperforming subs worth running, at least for Dish.
Moreover, the rising cost of content involved in providing linear programming is also contributing to the undesirable subscriber phenomenon. Here’s Sling TV CEO Roger Lynch from the same earnings call:
[W]e hope that an OTT customer today is as valuable or more than a linear TV subscriber we would get today, because the linear model is challenged… I look at this fact that you have for a linear subscriber, I look at all the free programming you give that subscriber, and I look at that as my total [subscriber acquisition cost], right? So our SAC is a lot more than $700, because we give discounts for a year or two years, right? And our competition gives discounts. So when you look at that, you get well over $1,000 today in terms of SAC. That’s point number one.
Point number two is that customer, he may be in a two-year contract, but in two years, he is going to have materially different options than he has today, right? So he’s going to have not only cable companies and phone companies and satellite companies as an option in two years, but he’s going to have multiple OTT providers, whether it be Apple or Sony or Amazon or Sling or whatever. He’s going to have multiple OTT opportunities to switch from linear television. So I think, logically, the lifecycle of a customer today in linear is less than it was three years ago or four years ago or five years ago. That lifecycle’s continued to decline.
Nor is Dish the only pay-TV operator discovering that some linear TV subscribers can be more trouble than they’re worth. Phoenix-based Cable One reported earlier this month that its pay-TV subscriber base has plummeted 36 percent over the last three years (h/t Steve Donohue). Yet the company managed to increase cash flow by 11 percent in the third quarter thanks to adding broadband subscribers.
According to CEO Tom Might, the company has shifted its strategy to focus on recruiting single-service broadband customers and to de-emphasize promoting TV-heavy triple-play packages.
“Bundle math is changing,” Might said on his Q3 earnings call. Triple-play customers are often attracted by steep discounts and it costs money to roll a truck to install expensive in-home equipment like high-def DVRs. And as Dish has discovered, discount shoppers often leave after the discount period ends.
“Without them we make more money,” Might said.
As the Donohue Report put it:
Cable One may be the portrait of the future cable MSO. It will grow cash flow by investing primarily on recruiting and retaining broadband subscribers. And with single-play broadband subscribers becoming its fastest growing segment, it will profit from building a better platform for over-the-top video providers ranging from Netflix to CBS All Access to deliver content to IP-connected TVs and mobile devices in subscriber homes.
Cable One will need fewer installers, fewer set-tops and eventually it won’t need personnel to negotiate contracts with programming suppliers.
Cord-cutting, in other words, may no longer be a purely consumer-driven phenomenon. The shifting economics of linear and over-the-top TV are starting to change the calculus for service providers over how, where and on whom to invest capital.
Media companies still tied to the cord could soon find their lifelines being cut from both ends.