Verizon’s recent introduction of Go90, a mobile app offering live and on-demand video, has raised fresh doubts about the viability of cable TV’s traditional business model. Go90, which will be free to anyone with a mobile phone, joins a crowded landscape of streaming media services including Netflix, Hulu, Amazon, HBO, CBS, Sony PlayStation Vue, Dish Sling, and possibly Apple. These services make it easier for subscribers of cable TV programming bundles to “cut the cord” and still watch most of what they want.
It’s a trend that has led many credit investors to question whether streaming will do to cable what wireless did to the fixed-line telephone. While these are valid concerns, we don’t see cord-cutting displacing the cable model for the following reasons:
- Broadband hedge. The dominant cable companies are often the only ones that can provide high-speed broadband services to access streaming content. Cable broadband at 50 megabits/second is five times faster than typical DSL and wireless connections. In addition, most wireless plans are constrained by data caps. Fiber can be a viable option but is not available in most parts of the U.S. If video cord-cutting increases, cable companies would likely increase prices on their broadband services. This is known as the “broadband hedge.”
- The bundle won’t crumble quickly. The big channel bundle still resonates with more-diverse households (i.e., those including men, women and children). In addition, the cost savings for unbundling video services and going à la carte may not be enough for people who value flexibility and optionality in content choices – or don’t want to miss live events such as the Super Bowl, Academy Awards and the presidential debates. While not scientific, in an internal survey of nearly 800 employees of PIMCO in the U.S., more than two-thirds cited live sports as the key reason to keep tethered to cable. Among those who had cut the cord, a majority live in households of two or fewer people.
- Reinvention. The essence of cable is not the programming and data it distributes but its underground links to homes and businesses. Cable can reinvent itself to provide new products and services, including home security and automation (Internet of Things), cellular and enterprise communications.
While cord-cutting will continue, our base case is that the pace will be slow and the big video bundle will remain relevant to a majority of households. However, even if we are wrong, we remain constructive on cable fixed income securities because the industry not only has a broadband hedge but also adjacent markets and products.
From the introduction of VHS, satellite television, the Internet, DVDs, DVRs, TiVo, U-verse, Fios, Netflix and now Go90, pundits have been predicting the death of cable. It hasn’t happened and we don’t think it will: Through prudent investment in its physical network, cable has nine lives – and perhaps many more.