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Friday, August 29, 2014

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  • Why Has the Definition of "Cord-Cutting" Become So Squishy?

    Since Q2 '11, when the pay-TV industry lost video subscribers for the first time, there has been a debate raging over the impact of "cord-cutting." Flash forward a year, and anyone hoping for some clarity on this critical question would arguably be even more confused. Read certain media coverage of the pay-TV industry's Q2 '12 results and you'd conclude cord-cutting was gaining traction; read others and you'd conclude it wasn't. A key reason for the murkiness: somehow over the past year the definition of "cord-cutting" has become very squishy.

    Call me a purist, but I've always thought of cord-cutting as an existing pay-TV subscriber dropping their pay-TV subscription in favor of one or more online video alternatives (e.g. Netflix, Hulu, YouTube, etc.). This has been the crux of the industry's worry about online video; that cheaper, though inferior, services would slice off some percentage of subscribers, unraveling its core multichannel business model. A year ago, when Netflix was flying high, it was viewed as a main cord-cutting driver.

    Though everyone seems to have a friend, cousin or neighbor who's dropped pay-TV for online options, there's no conclusive data (at least that I've seen) on just how pervasive it actually is. For their part, pay-TV industry leaders have argued vehemently that cord-cutting is not happening to any great extent. They frequently reference their own data, culled from actual subscribers who have dropped their service, as substantiating the lack of cord-cutting. But when pressed, they never provide any specific evidence to back their claims. Still, their argument is bolstered by the fact that the industry as a whole continues to gain a small number of subscribers on an annual basis (despite the Q2 losses).

    It seems as though the combination of the industry not putting forth its evidence, the persistent anecdotes of cord-cutting and the media's hunger to promote a juicy story, have all contributed to an expanded, though more ambiguous, definition of cord-cutting. Instead of just those who dropped their pay-TV service for online video alternatives, for some in the media, cord-cutting now refers to ALL subscribers who dropped their pay-TV service - regardless of the reason.

    Of course anyone who's spent any time around the pay-TV business knows it's highly transactional - people drop their current service frequently and for all kinds of reasons (e.g. moving residence, affordability, switching providers, etc.). This has been true since the industry's birth, long before Netflix, Hulu or YouTube existed, or even the Internet or personal computers for that matter.

    But expanding the definition means publicly available subscriber losses can be cited as evidence of cord-cutting. And indeed, in Q2 '12, by industry analyst Sanford Bernstein's calculations, pay-TV providers lost 418K video subscribers. Regardless of the fact that it was a small improvement over the 440K subscribers lost in Q2 '11, and that Q2 is historically the industry's weakest quarter (mainly due to seasonal factors like college students' transience) it was all some media needed to throw fuel on the cord-cutting fire. Illustrative of this was the headline of a Wall Street Journal article last week, "Evidence Grows on TV Cord-Cutting" (which oddly popped into my Twitter feed within minutes of Variety's article titled "Q2 figures don't support cord-cutting fears").

    Complicating matters further is the related concept of "cord-nevers." These are mainly young adults who are not subscribing to pay-TV at all, which is another big industry concern. Since by definition you can't really be considered a "cord-cutter" if you never had the cord in the first place, it seems appropriate to somehow separately quantify cord-nevers' impact as well. Remember, if only the net change in subscribers is going to be the focus, then a person who chose not to subscribe means just as much as one who did, but dropped the service. In fact, "cord-nevers" may be the reason that, as Bernstein also pointed out, Q2 pay-TV subscriber growth fell below the rate of household formations.

    Confusing stuff, right? Unfortunately I don't see any clarity emerging any time soon. Unless the industry reveals actual data on online video as the source of some subscribers dropping their pay-TV service (and don't expect that to happen any time soon), or sustained, not sporadic quarterly subscriber losses occur, there will be a continued tug-and-pull in the media over cord-cutting's real impact. And as long as we can't all even agree on what cord-cutting should be defined as, confusion will only deepen.