One in eight to cut cable and satellite TV in 2010

NEW YORK (CNNMoney.com) -- Despite rising cable and satellite TV prices and easy access to streaming TV and movies on the Internet, few consumers have cut the cord. But that looks like it's about to change.

One in eight consumers will eliminate or scale back their cable, satellite or other pay-TV service this year, according to a new study released this week by Yankee Group.

The study, which was the result of a survey of pay-TV operators and more than 6,000 U.S. consumers, found that many will choose to drop premium channels or cut their service down to a basic package, while others will choose to cut off their service completely.

A cutting-the-cord trend has been the subject of speculation for some time, as networks have increasingly made television programming available for free on the Internet. But a combination of other factors, including a growing number of battles between cable companies and networks, soaring Internet video viewings and an increase in connected TVs and devices, suggest the trend is finally upon us.

"Admittedly, this is a small phenomenon now, but a number or recent transactions and new items point to a shift in consumer thinking," said Vince Vittore, analyst at Yankee Group and author of the study.

Going without cable or satellite is unthinkable to many Americans -- just over 90% of U.S. households subscribe to some form of pay TV. But just as mobile phones have replaced many customers' land-line service, Vittore said on-demand Internet video will soon whittle that 90% figure down.

The biggest reason why customers will cut the cord, according to the study, is the growing cost of pay-TV service. Cable and satellite viewers pay an average of $71 per month, and they receive an average annual price hike of 5%, according to research firm Centris.

That annual price jump could be even higher if battles between pay-TV operators and networks continue.

Broadcasters like ABC, CBS (CBS, Fortune 500), Fox and NBC have traditionally cost cable and satellite providers nothing to retransmit, since they are offered for free over the air anyway. But lately, broadcast television networks have demanded -- and have received -- fees for their programming comparable to what cable networks like TBS, E!, MTV and Comedy Central have been charging.

Recently, Time Warner Cable (TWC) and the Fox Network, Cablevision and Disney (DIS, Fortune 500), and Sunflower Broadband and Hearst-Argyle Television have had high-profile spats, which have all resulted in significantly higher fees.

Ultimately, those fees get passed onto subscribers.

Vittore said that higher costs will ultimately drive more consumers to cut their pay-TV service -- especially for non-sports fans.

Though more live sports are becoming available over the Internet, namely CBS's coverage of the NCAA basketball tournament, ESPN3.com and packages like MLB TV, most sports are still watched on television. And since sports programming makes up as much as 50% of a pay-TV provider's costs, customers who are not sports fans are essentially paying half of their cable or satellite bill on channels in which they have no interest.

Meanwhile, free or cheap alternatives to pay-TV subscriptions are growing wildly popular. More than 180 million U.S. viewers watched 31 billion videos on the Internet last month, according to online data tracker comScore. That's more than double the 15 billion Internet videos that were watched at the same time last year.

Hulu, which is jointly owned by and shows programming from NBC, Disney and Fox, has more than quadrupled its viewership in the past year. U.S. viewers watched more than 1 billion free TV programs or movies on Hulu in March, up from about 250 million a year earlier, comScore said. That's nearly 27 videos per viewer, up from under 15 videos last year.

What's more telling is how much Hulu people watch. Viewers tuned into Hulu for an average of 2.6 hours in March, up a full hour from a year earlier.

Netflix's streaming service is rapidly gaining ground as well. The company said last week that 55% of its users watched at least 15 minutes of streaming video in the first quarter. Netflix (NFLX) has grown its customer base by 35% over the past year, and recently raised its 2010 subscriber forecasts by 1 million customers.

Until recently, people had been watching Hulu and Netflix almost exclusively on their computers -- not the most desirable replacement for pay-TV service. But more devices are coming pre-installed with Netflix or Internet connections, so people can stream videos right onto their televisions.

Netflix is now available on a handful of TVs, just about any Blu-ray player, and all three major video game devices -- the Nintendo Wii, the Sony (SNE) PlayStation, and the Microsoft (MSFT, Fortune 500) Xbox -- which appear in 43% of U.S. households. A growing number of new HDTVs are also Internet ready, and according to a study released this week by Nielsen, TV purchases are up by their largest amount since 2006.

Apple (AAPL, Fortune 500) and Wal-Mart (WMT, Fortune 500) are also expected to launch streaming video devices this year.

"This is the key part of the equation," said Vittore. "Not just are these devices connected to the Internet, but they're coming prepackaged with the capability to connect to rich video sources. That really becomes a competitor to pay TV service."

Since the easiest devices to connect to the Internet tend to be video game consoles, and they tend to be owned by 18-34 year olds, Yankee Group expects that will be the group to cut their cords first.

"Just like with telephone land lines, it's going to become hard to sell pay TV to anyone under 30," Vittore said.