The accelerating trend of “cord cutting” is creating a new challenge in the San Diego region for cities, which rely on millions in franchise fees from cable companies to help pay for services like law enforcement, firefighting and libraries.

Those fees are starting to significantly shrink as more consumers, especially young people, drop traditional cable TV in favor of online streaming services such as Netflix and Hulu.

The shrinking fees haven’t forced budget cuts yet because city tax revenues are increasing in the relatively strong economy. But tax revenues could drop if the predictions of an economic downturn by many financial analysts prove correct.

Some California cities have explored taxing consumers who use streaming services to replace the missing revenue from cable franchise fees, but none have followed through so far.


Many media industry experts say cord cutting will continue to accelerate as streaming services add more content, which would sharply increase revenue losses for cities.

A study released this fall by eMarketer, a national research firm that analyzes media trends, predicts 22.2 million U.S. adults will cut the cord this year. That’s on top of the 16.7 million who cut the cord in 2016. According to the study, the number of cable subscribers in the U.S. will drop to 181 million by 2021.

“It’s definitely moving fast,” said eMarketer media analyst Paul Verna. “There are an increasing number of options for cord cutters.”

A typical contract between a city and a cable company, such as Cox or AT&T, requires the companies to pay the city 5 percent of their gross receipts in exchange for using wires and other infrastructure in the public right of way.


When cord cutters cancel their cable subscriptions, they lower those gross receipts and the fees the cable companies owe to the cities where they operate.

The city of San Diego has seen cable franchise fees drop 12.2 percent over the past two years, from $18.8 million in the budget year that ended in June 2015 to $16.5 million in the budget year that ended last June.

The next two largest cities in the county – Chula Vista and Oceanside -- have seen similar drops.

Cable franchise fees have declined 11.9 percent in Chula Vista, from $3.4 million in the 2015 budget year to just under $3 million this year.


Fee revenue in Oceanside has dropped 11.1 percent, from $2.7 million in budget year 2015 to $2.4 million this year.

Sheri Brown, Oceanside’s financial services division manager, said by telephone this week that she plans to include 3 percent annual declines in cable franchise fees in a five-year revenue forecast the city is scheduled to release next month.

San Diego is predicting cable franchise fee revenue will remain flat over the next five years. That’s in contrast to increases of 2 to 6 percent for all other revenue streams.

The county of San Diego has also seen a drop in cable franchise fee revenue, but it was significantly smaller than in the region’s largest cities.


Verna, the media analyst, said local governments should expect revenue losses from cord cutting to continue to increase.

That’s partly because a significant share of cable subscribers are over age 55, while most cord cutters and cord nevers – people who have never subscribed to cable — are in their 20s and 30s.

According to the eMarketer study released in September, the number of cable subscribers 55 and older will continually rise during the next four years, while the number of subscribers will shrink in every other age group.

“The demographics are unmistakable,” Verna said. “That alone would swing the pendulum.”


Verna said another factor accelerating the trend is some of the 130 available streaming services beginning to offer some live TV and sports packages.

He said cable companies won’t be going away any time soon, primarily because they carry live events, sports and other content subscribers can’t get anywhere else.

“There won’t be a mass conversion,” he said. “It’s still going to be a relatively slow-moving train.”

The study predicts that by 2021 the number of cord-cutters will be 81 million, bringing the percentage of U.S. households without cable subscriptions to about 30 percent.


Among the cities that have considered a tax on streaming services are Pasadena, San Bernardino, Glendale, Santa Monica, Culver City and Pico Rivera.

A law the state Assembly considered but rejected last spring would have blocked such taxes until 2023 to allow the streaming industry to more fully take shape before being taxed.

Verna said cities should consider such taxes or other efforts to replace the missing revenue.

“What the city should be looking to do, and I’m sure it’s easier said than done, is negotiate some sort of contract for the use of internet-delivered services,” he said.


david.garrick@sduniontribune.com (619) 269-8906 Twitter:@UTDavidGarrick