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No paid TV for ‘cord-nevers’ puts drag on sales for providers

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 Inc., Inc. 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 hasn’t ever subscribed to pay TV: channels from a cable company, such as Time Warner, or 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 who are 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 a knock-on 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 only added 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 LLC 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 Inc. and Verizon Communications 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 LLC and the wide range of programming available for download or streaming through Apple Inc. and Google Inc. websites. Silicon Valley technology companies such as Intel Corp. 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, reaching 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.

“The pay-TV business is fundamentally sound,” he said.

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.

Satellite providers DirecTV and Dish are even more vulnerable than the cable industry, which benefits from rising 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 LLC in New York.