Can HBO Now topple cable's Great Houses?

The network's new standalone service arms consumers with another reason to rise up the Big Five providers

When "Game of Thrones"’ fifth season launched on Sunday, the world once again got a glimpse of an outrageously wealthy group of combatants whose every move keeps viewers riveted.

We’re talking, of course, about Comcast.

This time, however, there was a new wrinkle in the long-running saga of Comcast v. the Cord-Cutters: HBO Now. While in the past, HBO might have been the only reason to keep paying those monthly three-figure cable bills, now looming on the horizon is HBO Now, a $14.99-a-month standalone app that — unlike HBO's older streaming service, HBO Go — doesn’t require proof of a cable subscription.

Those expecting to see the House of Comcast defeated will have to wait, though, analysts say. Though consumer enmity toward Comcast and the other four major cable companies is through the roof, habits are slow to change and the power of inertia can’t be underestimated. (Remember: Millions of people are still paying AOL for dial-up Internet in 2015.) The long-term future for cable peddlers is bleak, but analysts say they still have a few years until change really takes root.

"In the short term, I would not call this the nail in the coffin," says Stephen Beck, managing partner of cg42, a consulting firm that recently released a report looking at the brand vulnerability of the Big Five cable firms. Beck points out that even those celebrated cord-cutters are still connected umbilically to the cable providers they profess to hate. "The cable companies by virtue of their oligopoly positions in many geographies are the only game in town."

About 70% of U.S. homes had broadband in 2013, according to researcher IHS. More than 50% of those homes got their broadband via cable. Telco-based DSL service had 34% of the market and was shrinking. Fiber-to-the-premises offerings, most notably Verizon’s FIOS, claimed 8% but was growing quickly. Google Fiber, the search giant’s foray into broadband, may monopolize headlines in the tech world, but it’s not a real competitor – yet.

Even if viewers are merely downshifting from TV to broadband, that’s still bad news for the Big Five. A 2014 study by cg42, for instance, found that before cord cutting customers spent an average of $113.92 per month on cable. Afterwards, the figure dropped 60%, to $46.29.

Still, few are predicting doom for Comcast. The company’s stock price is up more than 200% since 2010 and jumped more than 20% in the past year. (By post time, Comcast did not respond to requests for comment.)

In part, that’s because cord-cutters are still a small percentage of the overall market. About 7.3% of U.S. households have broadband Internet but no pay-TV subscription, according to Experian Marketing Services. That’s up from 4.2% in 2010, but it’s still relatively piddling.

Not everyone is sanguine. Craig Moffett, a one-time cord-cutting skeptic, cut his rating for Comcast and other cable operators from "buy" to "neutral" in February because of the increased risk of cord-cutting.  "Worsening viewership and advertising trends are driving programmers to break ranks both with each other and with their legacy distributors," Moffett wrote at the time.

Another recent cg42 study also provides fodder for those who believe that we’re in the midst of a key inflection point The "brand vulnerability" report found that 73% of respondents agreed with the statement "I feel that cable companies are predatory in their practices and take advantage of consumers’ lack of choice."

Beck said that consumer sentiment he’s seeing is worse than the ire against banks in 2011 when the Occupy Wall Street movement was at its peak. "The frustrations that exist with the Big Five cable providers are at all-time high levels," he says. "They are the highest levels of customer frustration that we’ve ever seen."

Jeff Kagan, a telecom analyst based in Atlanta, agrees that the cable television model is changing. "It has only lasted this long in its current form because it was protected by the government and the new technology wasn’t ready yet," he says.

That said, the advertising industry has seen this movie before. In the early 2000s, analysts fretted about TiVo and other digital video recorders, which, they feared, would lead to rampant ad-skipping. Despite their worries the TV advertising business didn’t fall off a cliff. In fact, PwC predicts that U.S. ad revenue will grow from $69 billion in 2014 to $83.6 billion in 2018. "Despite the growth in digital media, TV advertising remains the place to be," the report stated.

The reason? As ad execs will tell you, getting just a few million viewers for a TV show may be a far cry from the 1970s, when CBS’ "All In the Family" could get 40% of U.S. households to tune in. However, in today’s fractured media environment, getting a few million people to watch one program at once is worth a lot to advertisers.

That’s why revenues for cable TV advertising, where ratings are often lower than broadcast, are still rising.

Younger viewers are a wild card, though. "If you’re targeting 18-34 [year-old consumers], it’s a little more involved because they tend to be lighter viewers of television," says Brad Adgate, research director at media-buying firm Horizon Media. Hence advertisers’ obsession with Snapchat, which provides a mechanism to reach such elusive viewers. Adgate believes that 35- to 49-year-olds are starting to exhibit the same tendency to choose streaming over broadcast and cable TV.

"These people are agents of change. These are the people who bring in these new technologies to the house, and these are the ones who consume content in different places," he says. "It’s always been a challenge — it’s just more challenging."

There are a couple of reasons why analysts like Adgate aren’t predicting the immediate demise of the cable TV ad model. One, again, is the lessons learned from TiVo. Predictions that DVRs would kill TV advertising never came to fruition in part because adoption of the devices never took off as expected.

Currently, fewer than 50% of U.S. households have DVRs, and most of the time they don’t use them to time-shift their viewing. In addition, those viewers only zap through half the ads they watch during recorded programming. Doing the same math, even Beck doesn’t think that streaming will upend the cable TV business for a few years at least.

The other reason that streaming won’t kill the cable business is – HBO and Netflix aside – most legal streaming contains advertising anyway. Such streamed ads are also more lucrative. CBS Chief Research Officer David Poltrack recently claimed that the network generates 10% to 20% more revenue per viewer when an ad is streamed than when it runs on TV.

For now, the cable industry seems to just barely be holding change at bay. In a report entitled "Cable TV’s Ratings Collapse" last year, MoffettNathanson analyst Michael Nathanson pointed out that ratings among 18- to 49-year-old viewers fell 9%, but the cable companies still increased their revenues by 1%.

Looking at the trend, it’s clear that a day of reckoning is coming ... But for now, the Big Five will live to fight another day.

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