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Originally published September 22, 2013 at 8:05 PM | Page modified September 23, 2013 at 7:02 AM

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Generation of ‘cord nevers’ worries pay-TV industry

Pay-TV providers recognize that existing and prospective customers are watching more video online and that many don’t, or can’t, pay for a full package.

Bloomberg News

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SAN FRANCISCO — Miranda Henely spends four hours in front of the television every day — yet she doesn’t spend a dime on cable or satellite programming.

Henely, 23, instead watches shows and movies streamed from Netflix, Amazon.com or directly from broadcasters’ websites, using a computer hooked up to the TV in her home. She’s known in industry parlance as a “cord never,” meaning she’s never subscribed to pay TV — channels from a cable company, such as Comcast; a satellite provider like DirecTV; or phone companies — and she doesn’t ever intend to.

“Most people I know are either not watching TV or they’re doing it this way,” said the marketing-account manager, who lives in Mountain View, Calif. “I think I’m very typical.”

Henely is part of a generation of technology-savvy, budget-conscious consumers taking advantage of the availability of high-speed Internet connections and the proliferation of smartphones, tablets, lower-cost TVs and other gadgets that make it easy to consume downloadable shows in a snap.

The shift in viewing habits is putting pressure on cable, satellite and phone companies by pinching subscriber numbers, which may have an effect on revenue growth. The impact on the $80 billion pay-TV industry is already being felt, with 2013 on pace to be the first year ever that total U.S. pay-TV subscriptions will decline, falling to 100.8 million from 100.9 million last year, according to researcher IHS.

And while 3.2 million new U.S. households were set up in the last three years, the paid-TV industry added only 250,000 subscriptions in that same period, according to market-researcher SNL Kagan.

“It’s hard not to be concerned that there’s a growing population growing up not using” pay TV, said Rich Greenfield an analyst at BTIG in New York. “Alternatives are growing by the day.”

Cord nevers are set to accelerate the erosion that cable- and satellite-TV providers are already suffering at the hands of phone companies. AT&T and Verizon have taken 11 percent of the market for paid-TV subscriptions after introducing competing services in the past decade. Cable commands 55 percent of the market, while satellite TV has 34 percent, according to IHS.

And consumer choices are broadening. Netflix has attracted 29.8 million subscribers since it was founded in 1997, while Amazon sells streaming shows through its e-commerce storefront. Then there’s Hulu and the wide range of programming available for download or streaming through Apple and Google websites. Silicon Valley technology companies such as Intel are also planning Internet-based TV services.

Henely and other cord nevers are compounding the challenges to pay TV posed by another group known as cord cutters. Those customers once bought traditional cable- or satellite-TV subscriptions, yet have since cut the cord, as it were, and now rely mainly on the programming they can access over the Internet.

Both groups affect the cable industry, which is unlikely to return to the growth in customer numbers it once enjoyed, said SNL Kagan analyst Ian Olgeirson.

“We think this trend probably amplifies a little over time,” he said. “That comes from people who have either had a service and discontinued, or never came into the fold.”

None of this means paid TV will disappear. Paid-TV subscribers in the U.S., including those buying programming from phone companies, remain prevalent, having reached 86 percent of households in 2009, according to IHS. Increases in advertising, per-subscriber fees and bundling telephone and Internet services will also help make up for customer declines, said Erik Brannon, an analyst at IHS.

Even so, pay-TV providers themselves recognize that existing and prospective customers, especially younger ones, are watching more video online and that many don’t, or can’t, pay for a full package.

Dish, the second-largest U.S. satellite TV provider, said it has tried creating a bundle of programming targeted to 18- to 28-year-olds for less than $30 a month. The company hasn’t been able to persuade programmers to sell them appealing content to make a product viable, Dish Chairman Charlie Ergen said on an Aug. 6 conference call.

Satellite providers DirecTV and Dish are even more vulnerable than the cable industry, which benefits from demand for Internet services delivered over its networks.

Charging customers more for broadband if they stop paying for a TV server is a fallback for cable, said Craig Moffett, an analyst at Moffett Research in New York.

Cord nevers are a “legitimate concern,” 21st Century Fox President Chase Carey said at a company meeting on Aug. 8. “It remains to be seen what happens as this generation ages, but what is clear is that this is an issue that will play out over the next 10-plus years, not the next three.”

The bundling approach, combining more than 100 channels that cover everything from home improvement to the Military Channel, may contribute to the growth of cord nevers, since some viewers aren’t prepared to shell out for content they have no interest in.

David Heasty, a 34-year-old graphic designer, gets older episodes of shows like “Breaking Bad” over the Internet and watches them on his computer screen.

He’s never had a TV subscription and pays Time Warner Cable about $50 a month for broadband only — though he said he would spend more if he were allowed to pay for only the channels or shows he wants.

“It’s not a money thing, it never was,” said the Brooklyn, N.Y., resident, who runs his own business. “It’s a good thing for the companies to ponder. They’re missing out on an audience.”

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