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One Big Reason to Not Cut the Pay-TV Cord

Big cable has learned a lesson from the fast-food industry.

Burger places realized a long time ago that making a meal deal with a sandwich, fries, a drink, and maybe even a dessert a better value than ordering those items individually could push customers to spend more. Maybe a combo meal costs $5.99 while just a cheeseburger and fries costs that, or nearly that, on their own. That makes getting the full meal a more cost-effective choice even if you end up with more than you wanted.

The cable industry has moved in the same direction. Big players like Comcast (NASDAQ: CMCSA), AT&T (NYSE: T)Charter Communications (NASDAQ: CHTR), and even rising alternatives including Frontier Communications (NASDAQ: FTR) have used bundling -- cable's version of a combo meal -- to force people into getting cable, internet, and even home phone rather than just a single service.

It's a smart play that makes cord cutting-much harder because it's not simple math. Dropping cable does not, in most cases, simply mean lopping that portion off your bill. Instead cutting the cord also causes you to lose your bundling savings. In some cases that could push the cost of internet service -- which most cord-cutters still need -- to higher than (or at least close to) what the full package including cable cost anyway.

It's a smart play by Comcast, AT&T, Charter, Frontier, and most of the rest of the industry that makes it much harder for consumers to leave.

How does it work?

Last year, Consumerist examined a typical Comcast customer's bill. The person had the $99 Triple Play -- which with taxes, fees and surcharges, gave him or her cable, internet, and phone for about $140 a month. The website then examined what that person would pay if he or she just wanted internet at the same speed (75 Mbps) with cable.

It turns out that Comcast has priced its offerings to make that a sucker play (even a bigger one than paying for a landline). The cable giant offers 75 Mbps internet service for $80 as a stand-alone option. It also sells a $55 package including the same broadband speed plus a 45-channel cable package which includes HBO.

Of course, when it comes to pay TV no list price is true, but Consumerist found that the $55 package with cable basically thrown in costs about $73 a month, still less than $80 for just internet. Why would Comcast do this? Aside from the fact that it owns cable channels, so keeping eyeballs on those stations helps the company, it's mostly for the same reason a drug dealer would offer a free sample.

Give people a taste and they may get hooked. Consider the average family where an adult might pass up some of his or her favorite channels in order to save money, but it's harder to explain that logic to a child. You can't miss what you never had, so Comcast makes sure people know full what they are missing.

That makes it easier to either raise prices down the road (once people are hooked) or continue to keep them on board by making cutting the cord a bad deal.

Is it working?

Using bundling discounts to keep people paying for cable packages likely contributes to why cord-cutting has grown so slowly. Only 105,000 homes dropped pay-television in 2013, followed by 125,000 in 2014, then 385,000 last year, according to data compiled by Leichtman Research Group (LRG). That's three times the cord-cutters in 2015, but it's still a relative trickle in the 94 million-or-so-home cable universe.

During those same three years that cable has shrunk (a little) broadband has exploded, adding 2.6 million users in 2013, 3 million in 2014, and 3.1 million in 2015, according to LRG. Those new broadband customers reflect cord-nevers (people who have never had a pay-TV subscription) and they represent an excellent hedge against cord-cutting losses.

Even though these consumers do not have cable they already have a relationship with Comcast, AT&T, Charter, Frontier, or some other player. Because of that, their ISP can market pay-TV to them in a variety of ways. In some cases it's offering too-good-to-pass-up pricing to add cable and in others it's raising broadband prices (after a promo deal expires) to make getting a bundle a smart way to keep your bill in check.

Can anything stop big cable?

The pay-television industry really only has one Kryptonite and that's competition. The problem is that in the vast majority of the United States most people either have only one choice for broadband internet or they can pick between a cable provider and a phone company provider. That's a bit like selecting death by hanging or being executed by a firing squad -- it's choice, but either option gets you to the same place.

Major pay-television providers have made it so it simply makes no sense for most people to only buy broadband service which has been priced so the provider makes its money even if the person does cut the cord. The only thing that would change that would be having an alternative broadband provider -- one which does not offer pay-TV or prices it in a fair way allowing consumers a real choice -- go national.

A product like Google Fiber, which is offered only in very select markets, makes cord-cutting viable. Without that, for most people, dropping cable is a symbolic protest where the savings of switching to streaming video will be eaten up by increased broadband charges.

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Daniel Kline has no position in any stocks mentioned. He pays for cords at two homes and two offices. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.