Time to Wake Up and Smell the Revolution

It's not really a surprise, but the numbers are eye-catching regardless: According to a recent survey, around 17% of people who subscribe to premium cable networks would consider defecting to Netflix (NAS: NFLX) . As if that weren't scary enough for cable operators and their satellite brethren, an almost equal percentage prefer getting video-on-demand services from the Netflixes of the world rather than them.

The Time Warners, they ain't a-changin'
This is further evidence that the cable/satellite industry is clinging to a business model that will rapidly become obsolete. How can their offerings beat the services of a Netflix, which allows users to select from a big menu of movies/TV/Web series/etc. for much less money? Sure, cable and satellite broadcasters beam out thousands of channels, but the average person can only consume so much. The great majority of such broadcasting goes unwatched by individual households.

Throughout the growth and increasing popularity of on-demand services, cable and satellite providers have stubbornly held on to their pricey subscription plans. These days, for example, a "basic" cable subscription (i.e., one without premium channels like HBO or Showtime), in combination with Internet service, can cost in excess of $120 per month for a Time WarnerCable (NYS: TWC) customer.

Contrast that with the small sums the on-demand crowd pays for even the highest levels of service from their providers. Hulu, the popular joint venture among entertainment heavyweights NBCUniversal, Fox Entertainment Group, and Disney's (NYS: DIS) media networks arm, has a wide sampling of TV shows and movies that are completely free to watch. If a user wants to view shows from early in a series' run, or check out a hard-to-find old movie, he can pony up for a Hulu Plus subscription, which costs a budget-friendly $7.99 per month.

That's the same price as Netflix's streaming service. Although its slate of TV and movies is a bit different, with a much stronger emphasis on the latter, and a lot of its titles aren't yet streamed, it's still got a massive library to choose from. Completists and the old-fashioned can augment this by opting for the company's onetime bread and butter, the DVD delivery service, for an extra $7.99. Put another way, a one-year subscription to both of Netflix's services costs less than two months of Time Warner basic cable.

Hanging in there
What probably keeps the cable and satellite providers from adjusting their rates closer to realistic market prices is that they still have plenty of customers willing to pay those $100-plus fees. That clientele hasn't grown very much, though. In Q1 of this year, Time Warner Cable had 12.4 million video subscribers, which was only 150,000 more than the number at the end of 2010. This meant growth of about 1%, for you percentage fans.

Even the satellite providers, with their broader wireless reach, aren't posting spectacular growth numbers. In the same time frame (the end of 2010 to Q1 2012), DIRECTV (NAS: DTV) , the most popular satellite broadcaster, saw a 16% boost in subscriber numbers (to 32.7 million). Pretty good, huh? But a peek behind the numbers reveals that the major part of that growth was due to an increase in Latin America, where Internet access is not as widespread and robust as it is here. The service's U.S. operations only increased their subscriber rolls by 4% over that time.

By contrast, Netflix's Q1 2012 subscriptions tally was approximately 36.5 million, way up from slightly more than 20 million at the end of 2010. That's far in the double digits in terms of growth, at a powerful 82%. The company's legion of subscribers trumps DIRECTV's 32.7 million and is nearly triple the figure for TWC.

If the figures from the survey are indicative of the broader population, before long, any cable/satellite subscriber growth will probably taper off and reverse direction. This is a nasty land mine waiting to explode for those providers.

Verizon (NYS: VZ) is one company that could catch a lot of shrapnel. Unusual for operators in this space, its cable operations are only one part of a bigger whole. But that part is considerable: In its most recent quarter, the firm's FiOS service was responsible for a full 63% of its consumer revenue. FiOS is the company's fiber-optic cable-to-the-home service and as such encompasses more than just TV channel and pay-per-view delivery; its customers also get Internet service and home telephony, if they like.

But FiOS' big draw has always been the gazillions of channels it offers. If it can't give its customers enough reason to keep paying for those channels, those revenues are going to slide.

At least Verizon has other business units that are reasonably healthy. The same can't be said for the purer plays of Time Warner, DIRECTV, and their ilk. They're exposed to a market that's developing too quickly, to the sharply increasing advantage of the on-demand providers. At some point, much sooner rather than a bit later, they're going to need to close that chasm-like gap in pricing. Otherwise, they won't only slumber through this period, they'll risk never being able to wake up at all.

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The article Time to Wake Up and Smell the Revolution originally appeared on Fool.com.

Fool contributor Eric Volkman owns shares of Facebook. The Motley Fool owns shares of Facebook, Walt Disney, and Netflix. Motley Fool newsletter services have recommended buying shares of Netflix and Walt Disney. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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