Miami-Dade County

Rising costs, ease of streaming are driving viewers away from pay TV

When Edward Gerety moved from Colorado to South Florida, he had every intention of hooking his TV up to cable service. But there was some kind of trouble with the installation, the cable company seemed in no hurry to clear it up, and the thoroughly irritated Gerety told them not to bother. Within a couple of weeks of his 2009 move, he realized what had started as a mild fit of temper had become a lifestyle choice — one that he liked.

“I don’t need cable,” he says. “I can find the television I need on the Internet. I don’t have a lot of time to watch TV, so when I had half an hour to kill, I used to turn the TV on and switch around channels until I saw something I wanted to watch. Now I just go to [the TV programming website] Hulu and do the same thing. I don’t spend a hundred bucks a month on a cable hookup I only watch four or five hours a month. I don’t even have a TV anymore, I just watch on the computer.”

Without knowing it, Gerety, the 67-year-old owner of a Miami exporting company, had joined the cutting edge of the television business’ most terrifying — or, depending on where your economic interest lies, exhilarating — trend: cord-cutting. America’s four-decadelong romance with cable television seems headed for the rocks, the victim of a sultry flirtation with an industrial homewrecker, the Internet.

And that will ripple through television in ways that executives are only beginning to imagine, from the way it’s made to the way you watch it. From cable companies’ take-it-or-leave-it bundling of hundreds of channels together whether you want them or not to the broadcast networks’ threats to stop broadcasting free over the air, practically everything seems to be on the table.

“The industry is at a crossroads,” says Virginia Lam, a vice president at Aereo, one of the new television services that’s knocking the old way of doing business cockeyed. “The current model is unsustainable.”

Predictions of a revolution in the cable business are nothing new. But for the first time, they seem to be based on actual evidence rather than blue-sky speculation

For the first time since the early 1970s, when courts and Congress rolled back rules that barred cable from being much more than a sort of community antenna system for remote towns without their own TV stations, the number of Americans who get their television from cable or satellite is falling. They’re cutting the cord in favor of new technologies that enable them to get TV programming over the Internet.

Before 2010, the pay-TV industry (cable, satellite, and phone companies that offer TV service) had never filed a quarterly report in which subscriptions dropped. Since then, there have been more quarters with drops than with increases. A report earlier this year from industry analysts at SNL Kagan said that cable had lost 1.8 million subscribers in the past 12 months — the first annual decline in history.

And another respected industry observer, Craig Moffett, issued a report arguing that the picture is even worse than it looks, that cable subscriptions generated by the end of the housing slump and the creation of new households are masking the increasing number of cancellations by old customers who’ve had enough.

Moffett’s report rocked the pay-TV industry, because for years he was its most famous skeptic about cord-cutting. But now he has relented. “Cord-cutting used to be an urban myth,” Moffett said in the report. “It isn’t anymore. No, the numbers aren’t huge, but they are statistically significant.”

Not everybody agrees. “We aren’t seeing cord-cutting happening in any meaningful way,” declares Mindy Kramer, a vice president of Comcast’s Florida operation. Investors seem to share her opinion: Comcast’s stock price hit an all-time high last month. Shares of major pay-TV companies Time Warner Cable, DirecTV and Dish Network are all up more than 20 percent this year.

But worried frowns seem to outnumber the smiles in the industry these days. “I have a lot of friends in their 20s who don’t own a television, and these are people who want to work in television,” says veteran TV publicist Gary Rosen. “When I ask them why they don’t have a set, they say, ‘Why do I need one? I have the Internet. I have Netflix. I have Why have a TV, why have the expense of cable?’ ”

Agrees Chris Sloan, owner of Miami’s 2C Media television studio and a former producer at NBC and CBS: “We’ve had all these technologies developing, while cable bills keep going up. This feels like the year all these chickens have finally come home to roost.”

The most visible sign of cord-cutting in South Florida is the presence of Aereo, the single biggest challenge to the existing pay-TV business. Aereo, which opened up shop here in September, uses large banks of tiny antennas to pull broadcast signals out of the air, then ships them via the Internet to customers who can watch or record them on televisions, computers or cellphones.

Because Aereo is pulling in the stations using antennas rather than cable feeds, it can only get local channels. But for the same reason, it doesn’t have to pay the huge retransmission fees that the law allows the local stations to charge cable companies. (Or so Aereo says, anyway; more on that in a minute.) The result: It only costs Aereo customers $8 a month to get 32 channels, many of them sub-channels created on the extra broadcast spectrum that became available when U.S. broadcasters switched to a digital signal in 2009.

Aereo’s argument that it’s entitled to use the signals without paying retransmission fees has enraged both the broadcast networks (who collect $3 billion a year from the fees, a figure that’s expected to double over the next five years) and cable companies, who would be at a huge disadvantage against a competitor that doesn’t have to pay the fees. Several lawsuits have been filed against Aereo, though so far the company is winning most of its legal battles.

Fox and CBS have threatened to take their networks off the broadcast airwaves and market their programming exclusively through cable if the courts end up siding with Aereo. David Cohen, the executive vice president of Comcast, is confident that Aereo’s argument that the broadcast airwaves are free won’t prevail. “The airwaves are free,” he agrees. “But that doesn’t matter. Television programming is copyrighted.”

Chet Kanojia, Aereo’s founder and CEO, is equally confident that he’ll win. And when that happens, he says, all the apocalyptic rhetoric about the future of television will vanish like a puff of smoke on a windy day. “The whole history of television is one of challenges from new technology that everybody predicts will be fatal. They used to say cable would kill TV, and then they said VCRs would kill TV. What happens is that when the industry sees that a technology is inevitable, they make accommodations with it and usually end up making more money — as television did with cable, as it did with VCRs.”

The battle triggered by Aereo over retransmission fees highlights the real issue underlying cord-cutting: cable bills, which have been driven sky-high by the growing monetary demands of the networks that provide cable with its content. The average customer’s monthly cable bill, according to some studies, has nearly tripled since 2001 and stands close to $130. Industry observers expect that figure to hit $200 in the near future.

Cable companies say they’re not the bad guys — that they’re just passing along the huge charges that the networks levy on them. Disney, for instance, makes cable companies pay about $5.50 per customer for ESPN, whether those customers watch sports programming or not. And big media conglomerates like Viacom often force cable systems to buy channels they don’t want (like the little-watched MTV Jams or Palladia) in order to get the ones they do (Nickelodeon and Comedy Central).

Cable companies, in turn, force their customers to take the channels, too. The result is a growing dissatisfaction about exorbitant cable bills for channels nobody wants to see. “The new technology for watching TV is part of the cord-cutting phenomenon,” says 2C Media’s Sloan. “But the technology wouldn’t be so attractive if not for the high cable bills. What cord-cutting really is is a revolt — people are tired of paying for things they don’t use. I’m not a sports guy. I pay $5.50 for ESPN and I don’t ever watch it and I don’t want it.”