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Does More Cord-Cutting Mean Higher Broadband Prices?

It seems like every quarter more cable customers are cutting the cord. AT&T (NYSE: T) recently reported it lost 390,000 linear video subscribers in the third quarter. Last month, Comcast (NASDAQ: CMCSA) warned that it expects to lose between 100,000 and 150,000 subscribers, partly due to competition and partly due to the hurricanes that hit the southern United States. UBS analyst John Hodulik estimates the pay-TV industry lost over 1 million subscribers in the third quarter, compared with just 325,000 in the same quarter last year.

Even as more consumers cut the cord, they're still reliant on AT&T, Comcast, or their local provider for broadband internet. How else are they going to stream all that video content to replace their cable subscription? But Jefferies analyst Mike McCormack estimates the average customer moving from a triple-play bundle to broadband-only costs each service operator $32 in EBITDA. As such, they need to raise their broadband-only service to $80 per month on average to make up for earnings lost from cord-cutting.

Image source: Getty Images.

Aggressive bundling

Before cable companies go about raising their prices, it seems they'd rather get subscribers to bundle video service with one of their other services. They're offering big discounts to subscribers to add a television package of some sort.

AT&T has been the most aggressive. It's offering $25 off any of its television services (DirecTV, U-Verse, DirecTV Now) for subscribers to its high-end unlimited wireless data plan. Lower-end unlimited subscribers can still get $25 off DirecTV Now, and any unlimited plan qualifies for free HBO. AT&T's position in wireless allows it to be more aggressive with its bundling, as it benefits from a lower churn rate for its wireless subscribers.

Comcast and Charter (NASDAQ: CHTR) have been aggressive as well. Both are offering some broadband-only subscribers a low-priced streaming video option to compete with skinny bundles and other over-the-top streaming services like AT&T's DIRECTV Now. Consumers are only eligible to sign up for those streaming services if they already subscribe to broadband service from the respective cable company.

Comcast is also going after customers with its new wireless service. It launched Xfinity Mobile this spring exclusively for its cable and internet customers. Customers that subscribe to one of Comcast's top-tier video bundles receive a $20 per month per line discount on its unlimited data plan. Charter is expected to follow Comcast into the space with similar plans.

Increasing prices

Aggressive bundling could put a damper on profit margins at big service providers, but could still result in greater earnings due to higher revenue and greater customer retention. Combining aggressive bundles with increased broadband-only prices, though, offers the best of both worlds (for cable companies, not consumers).

Price elasticity for broadband internet is relatively low. Most markets don't have very many competitors, so substitutes for the service are hard to find. So, if cable providers increase their pricing, consumers will probably pay it, especially if they're reliant on streaming video for entertainment.

Operators can justify higher prices to consumers by providing faster connection speeds and phasing out lower-speed options.

Increasing broadband-only prices should offset the margin pressure from aggressive bundling. It should also help offset the lost revenue from cord-cutting. While consumers might not be happy about it, investors can benefit if they see their monthly internet bill increase.

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Adam Levy has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.