When news broke last week that the cable industry saw a net decline of some 711,000 subs in the second quarter, the news was met with near hysteria.  Oddly, though, the hysterics weren’t in cable board rooms, but on blogs.  The chattering class, it seems, was more than eager to proclaim this the work of “cord cutting” consumers, fed up with paying for cable, shedding the shackles of their captor.

As is always the case when someone bangs their gong so loudly, the noise drowns out the real story.

Yes, cable saw a net reduction.  As many have pointed out, part of the reason for this is the still-struggling economy.  A larger, and considerably more important factor, may have been the DTV transition.

But how, you ask, can that be?  The DTV transition took place a year ago.  How could its impact linger into cable sub numbers for Q2 2010?

Expiration of Cable Discounts Factor Heavily

As America prepared for the transition, the cable industry created deep discounts on cable packages to provide service to those concerned with losing their OTA broadcasts.  In some cases those discounts resulted in $10 a month for service.  In Q1 and Q2 of 2009, cable MSOs reported increases that were significantly higher than normal.  This represented people who signed onto low dollar packages to avoid any potential service interruptions.

If we take the increase from 2008, and use those numbers instead, we see the difference above.  The dashed line shows the increase based on the artificial demand spurred by the transition, while the solid line indicates what that number should have looked like absent the DTV pickups.

If you subtract out those who dropped cable when their discount expired, cable actually netted about 100,000 new subscribers in Q2 (which isn’t a huge number, but consistent with what you would normally see in the second quarter.)

The fact is Q2 is always the low point for MSOs.  There is a hit on subs people head to vacation homes and student customers disconnect for the fall.  On their quarterly earnings call, Comcast’s Steve Burke noted that the more successful they are in Q3, the more pronounced the difference is the following year.

In the case of Q2 2009, the numbers reflect not only that seasonal shift, but also the expiration of low cost packages that customers decided not to renew.  Keep in mind these were primarily customers that didn’t have cable before the transition. They may not be watching a lot of TV anyway.

What The Numbers Don’t Show

The one clear takeaway, when you realize that cable subs would have actually grown absent the external stimuli of government mandates, is that cord-cutting continues to be an urban legend promulgated by those who wish it to be so.

There are certainly people who don’t consume TV much.  Those people will add or drop cable all the time – and that was true before the Internet. In my early 20s, I added and dropped cable depending on whether it interfered with beer money that month.  There will always be reasons people tune out.

The Life Cycle Dynamic

Perhaps the most interesting thing to note is the growth of cable versus the growth of actual housing units.

In the third quarter of last year, cable subs actually began to outpace the construction of new housing units. In short, there were more subscriptions for new cable than homes built.  New subs were coming from existing homes.  The dashed line above still represents the DTV households.  Subtracting that out still shows a net add from existing homes.

The life cycle dynamic suggests that as older cable subs die, they are replaced by younger households.  There is obviously play in the middle, but the industry generally accepts that the interplay between customers at either end of the spectrum.  For the numbers above to hold true, absent the DTV subs, MSOs would be adding younger households at a rate higher than what that they’re losing.

In other words, far from losing young customers, at least in the short term, cable is signing more up – possibly as many as twice the number of elderly subs it is losing.  While that may not always hold true, it appears to be true for now.