The Internet Crossover Gets Serious

Includes: CHTR, CMCSA, GOOG, T, VZ
by: Dana Blankenhorn

For years we've been warned about the coming Internet crossover, the time when people would switch from TV to the Internet for their entertainment, and the risk this would entail to TV business models.

Well, it's happening. The quarterly reports now coming in make that unmistakable:

  • DirecTv (NYSE:DTV) lost 52,000 subscribers, the first time that's happened over a quarter. The company said it was tightening its credit policies and focusing on up-selling bigger packages of programming to existing customers. Oh, and Latin America is growing like gangbusters, it said.

  • Time Warner Cable (TWC) said it lost 169,000 residential video customers during the quarter, which it blamed on college students leaving dorm rooms.

Actually TWC and Comcast (CMCSA) are finding a way to benefit from the boom. They're adding Internet broadband customers, and picking up phone service for some of those folks as well.

But consider -- A cable television bill, for television, is about $100/month, with 40% of that going for sports. An Internet broadband bill is roughly $50/month, and the vast majority of customers don't get close to monthly data caps. In other words, you're not gaining from this transfer, you're losing.

The cable people must be watching anxiously as Google (GOOG) begins the process of offering 1 GBPS service to Kansas City, Kansas for as little as $70/month. Sure, it will take months to service those customers, but current cable Internet designs have that kind of bandwidth shared by whole neighborhoods, and still delivered via coaxial cable. If Google can deliver its upgrade for any kind of reasonable cost, there's some serious trouble brewing for even cable operators.

Notice I haven't mentioned the phone companies yet. Let's just say there's a reason AT&T (T) no longer focuses on wireline subscriber counts in its quarterly reports. But it's now starting to lose business customers as well. And Verizon (VZ), which advertised its FiOS service as the "cable killer," has hit a broadband wall.

In short, what consumers increasingly want are bits. The more bits they can get, the less they have to pay for them, the less restrictions there are on their use of them, the more customers like it. They don't want bits defined as "services" - they want to define those themselves. This increasingly includes TV bits.

Can phone, cable and satellite grow in a world that cares only for bits, and that's increasingly price-sensitive? There's a reason T and VZ have yields of 4.7% and 4.4%, respectively. They have to in order to attract capital. Expect some dividend increases from the cable operators, too.

Disclosure: I am long GOOG.