If Nexus do choose to stop the contract with DB (they have that option until next year) then they will be preparing to put it back out into private operation. Nexus don't want it, mainly because they can't afford it. Any new operator will start in 2019, and Nexus now hope for new rolling stock by the end of 2020.
Nexus have been discussing cutting the service back. There idea is for a 15 minute service towards South Hylton/South Shields, and Airport/St James, 7 minutes through the core during the day. At peaks, that 15 minute will go to the current service level but with trains every 3 minutes through core instead of every 2 minutes. At night after 8pm, service will decrease further to every 20 minutes (possibly every 30). Saturdays will follow weekday timetables, without the additional peak services. Sundays, will follow the evening timetable of every 20 minutes, and most likely going every 30 after 6/7pm. Now, they don't sound too drastic, but they are, it would mean through the core; 2 less trains per hour (at least) during the week (10 less in the peaks), 2 trains less on a Saturday, and 2 trains less on a Sunday (4 less after 7pm).
It would be very PR friendly really as they don't sound like huge changes until you actually look properly.
See this is where I disagree for several reasons, firstly DB gets no extra finance apart from the £36ish million it receives from Nexus, I am under the illusion that they do make a small profit therefore running the current service is economically feasible for a Public Organisation that is not to make profit, this is bolstered by the £200m that was agreed for day to day running costs of the Metro, so I don't really understand where the funding blackhole is coming from.
I do know Nexus have a potential deficit of 5m however many of these cuts will not come from the Metro end as the metro does offer more pound per passenger than some of the local bus services they run. Also, we need to keep an eye on the devolution deal, which could have some interesting financial implications for Nexus.
Furthermore, any change in service levels, no matter how small will be a political bomb for the Metro, and The MP for South Shields will be on the next train to Westminster. People are not going to standby quietly when the service that they believe is too crowded is further eroded, although as you said, it has only been discussed, consequently is it far from concrete. Personally I believe many of the peak works should be removed from the timetable, especially the Regent Centre services.
Decreases in the already stretched service will most certainly lead to a reduction in patronage, as the metro looses its edge as a rapid transport system, instead it becomes more of a local rail network, I for one would not be using the metro if the service was catalysed as has been suggested in this thread.
From what I've heard, I really do doubt that Nexus will make any major amendments to the timetable, it is too volatile and they do want to make a positive case for keeping the system in public hands, there really isn't going to be much difference between the current service apart from the lack of financial incentives to run a good service.
Personally, I think there should be a transport tax in Tyne & Wear to help fund the fantastic network we have.
Isn't the service already every 3 minutes through the central belt now anyway?