The Death of Cable TV? "Cord Cutters" are Not the Threat.

We might be further from mainstream cord cutting than some people would like.

With Apple TV, Google TV, Boxee and a host of other streaming video services launching, there’s a ton of talk in the connected TV space about “cord cutting,” or dropping your TV subscription and getting all your TV programming over an IP data connection.

According to a report in Engadget over 20% of peak internet downstream bandwidth is Netflix streaming. Let me start out by saying I am somewhat skeptical of this data and they don’t publish the research methodology. But for the sake of discussion let’s take it at face value and extrapolate a bit.

Netflix recently published their Q3 numbers. They have 16 million total subscribers. 11 million of them use streaming for at least 15 minutes a month. Now 15 minutes a month is a pretty low threshold. For the sake of argument, assume 6 million of these people are getting most of their video programming though Netflix On Demand and using most of that bandwidth. I consider myself a pretty heavy Netflix On Demand user and I use it maybe 20 hours a month, and that is well under half of our TV viewing. In the average American household, the TV is on for ~250 hours/month. So 6 million people getting most of their programming via streaming is almost certainly an overestimate.

There are 300 million people in the US, and the market penetration of TV is effectively 100%. Therefore using the 6 million number, roughly 2% of Americans are getting their programming via Netflix on demand. The 115 million TV household number is not really that relevant as most houses have multiple TVs. When little Sally turns on the TV in her bedroom while mom watches in the living room, the household bandwidth doubles.

These 2% are using up 20% of the available downstream bandwidth.

Netflix streaming grew 145% in the last year. If it does that again in the next 12 months Netflix will use 50% of the available downstream bandwidth.

What happens when video streaming goes really mainstream and 50% of Americans start becoming heavy streamers via Netflix? Assuming there is no other growth in bandwidth demand (very unlikely) it will be necessary to have a nearly sixfold (580% increase) increase in downstream bandwidth to keep the same level of service we have now (500% of current bandwidth to support video streaming and 80% of current bandwidth for everything else).

So what does this all mean?

It means that the mainstream adoption of streaming will require massive capital expenditures in infrastructure to support, and it’s not Netflix’s infrastructure that will need most of the upgrades. It’s the local MSO, the one who is getting less revenue from cable TV subscriptions. How will this get paid for? Higher fees for data. Unlimited data will go away. Metered data will become the norm.

At the end of the day, there’s no free lunch.