5 Factors Accelerating Cord-Cutting

More and more people are cutting the cord every year. Over 2 million households said goodbye to their bloated bundles in the first half of 2019, settling on a slimmer package of streaming services. That puts the pace ahead of the 3.5 million households that cut the cord last year.

There are five key factors leading to an acceleration in cord-cutting, according to a recent study from Roku (NASDAQ: ROKU). The company predicts that if trends continue, the number of cord-cutters and cord-nevers in the United States will outnumber pay-TV households by 2024. About 60 million households will access video exclusively through streaming services that year, according to the study. Here's what's pushing the growth in that number.

A person using scissors to cut a cord

Image source: Getty Images.

1. Virtual multichannel video programming distributors (vMVPDs)

Roku's study talks about a "new generation of cord-cutters" who are more motivated by appointment viewing and social interaction around live TV. To that end, virtual MVPDs like Disney's (NYSE: DIS) Hulu + Live TV, Alphabet's (NASDAQ: GOOGL) (NASDAQ: GOOG) YouTube TV, and AT&T's (NYSE: T) AT&T TV Now (formerly DirecTV Now) offer the live TV viewing newer cord-cutters crave. They also offer programming guides and DVR capabilities to ease the transition to streaming video.

One might argue using a vMVPD isn't really cutting the cord. It's just changing how the traditional cable bundle is distributed (a line into the home versus over the internet). For a company like Roku, though, which offers a platform for users to stream their vMVPD services, the shift can play a significant role in acquiring more active users and increasing engagement in other streaming services.

The growth of vMVPDs represents a major threat to traditional pay-TV operators like AT&T and Comcast as they now face new competition. Conversely, it's a massive opportunity for companies like Disney and YouTube, as it opens up a way for them to move up the content distribution chain and cross-sell other products like other subscriptions or advertising.

2. High-quality content available on streaming

The amount of money being poured into content available on streaming platforms is mind-boggling. Netflix (NASDAQ: NFLX), Disney, WarnerMedia, NBCUniversal, Apple, Amazon, and even YouTube are collectively spending tens of billions of dollars on content for their respective subscription video on demand services every year.

Netflix, Hulu, and Amazon are winning Emmys and Oscars alongside old media stalwarts. In fact, Netflix has been neck-and-neck with HBO for Emmy nominations for the last several years. Amazon more than doubled its nominations this year.

It's increasingly easy for a consumer to find better content for their taste on a streaming service than it is to dig through the massive cable bundle for something to watch. What's more, they can usually watch commercial-free.

A person holding a tablet that's streaming a video

Image source: Getty Images.

3. Ad-supported video on demand is good value

Cord-cutters often find they can get all the value of watching old movies and reruns on cable without the cable bundle. Roku counts over 5,000 streaming channels on its platform, and most of them don't require a subscription. Instead, they show viewers interstitial ads or, as you might know them, commercials.

Roku found 73% of streamers watch ad-supported video on demand, and 45% view more ad-supported video than any other source. It also found that many viewers don't mind the ads, since they know they're getting good value. Conversely, pay-TV subscribers are often frustrated by the amount of ads. Not only do streaming services usually show fewer ads per hour, those ads are often more relevant thanks to digital ad targeting capabilities.

Roku generates the vast majority of its platform revenue from advertising. It controls 30% of ad inventory for most services on its platform. The growth in ad-supported video is a big opportunity for the company.

4. Streaming is more convenient

Using streaming services is far more convenient than traditional pay-TV. Streaming services don't require long-term contracts. You can stream from any device with an internet connection. You can usually stream content outside of your home. And finding something to watch is often easier on streaming services than cable.

Once a consumer makes the leap to streaming, they're very unlikely to go back to cable. 81% of cord-cutters have no intent of going back to pay-TV. Roku says that number jumps to 98% for cord-cutters using its platform.

5. Traditional cable companies don't want low-margin customers

AT&T's management has made it very clear that it'll happily let low-value customers leave its service. AT&T has steadily increased its prices across the board on its various television services, most notably with AT&T TV Now. 

AT&T TV Now is supposed to compete with other vMVPDs like Hulu and YouTube TV, but AT&T is charging a higher price for less content and fewer features. As a result, it's feeding budget-minded consumers directly to Hulu and YouTube.

As the average price of the cable bundle continues to climb and pay-TV companies do nothing to retain subscribers looking for less-expensive options, it'll only fuel cord-cutting.

Roku is the biggest beneficiary

The acceleration of cord-cutting should lead to an increase in active accounts for Roku as well as increased average engagement on the platform. The company is actively facilitating all the factors that are leading to an acceleration in cord-cutting. It's especially instrumental in improving ad-supported streaming services through its ad platform and The Roku Channel as well as making streaming more convenient through its discoverability features and inexpensive devices.

Roku is poised to be one of the biggest beneficiaries of accelerating cord-cutting.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Adam Levy owns shares of Alphabet (C shares), Amazon, Apple, and Walt Disney. The Motley Fool owns shares of and recommends Alphabet (A and C shares), Amazon, Apple, Netflix, Roku, and Walt Disney. The Motley Fool has the following options: long January 2021 $60 calls on Walt Disney, short October 2019 $125 calls on Walt Disney, short January 2020 $155 calls on Apple, long January 2020 $150 calls on Apple, short January 2020 $155 calls on Apple, and long January 2020 $150 calls on Apple. The Motley Fool recommends Comcast. The Motley Fool has a disclosure policy.

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