Keeping Up with Programming Costs

I saw a presentation recently that compared skinny bundles with traditional cable TV. One of the things mentioned in the presentation was how much the the cost of programming and the average cable rates have increased over time. I was asked recently if a cable provider should always pass on the increases in programming costs into rate increases. I know my clients have different views on the issue.

First a few numbers. The presenter said that programming costs have grown on average from $26.65 per customer per month in 2010 to $43.20 in 2016. That’s around a $16 increase and a growth rate of more than 9% per year, and that comports with what I’ve seen at my clients. But the overall numbers seem low and I’m guessing these numbers represent just the typical expanded basic package. Cable companies in general have three tiers – basic, expanded basic and premium. A lot of my clients today have programming costs that are well over $50 rather than $42.

This same presentation also showed that the average cable revenue per customer climbed from $65.90 in 2009 to $83.60 in 2016. That’s an annual 3.5% increase in rates, but it also generates a $16 increase in revenues from 2010 to 2016. I know most of my clients have had larger rate increases than this. I’m guessing the cited figures don’t reflect that the larger cable companies have significantly increased other rates such as settop box fees during this same time period. But generally the numbers cited show an industry that on average has raised rates to match the increases in programming costs. But if rates are only increased to match programming then they don’t cover any increases in the other costs of operating a cable business, such as keeping a headend up to date as well as the general inflation from operating a company.

This is an issue that my smaller clients wrestle with every year. Just two years ago I had a number of clients that saw an overall programming cost increase of more than 15% in a single year. A lot of them have seen costs go up even more than the 9% shown in the above numbers. Programming costs are driving cable rate increases that are far in excess of inflation over while average household wages over this same time frame have stagnated and grown only a tiny amount.

Small cable operators now face the dilemma that if they pass on a large programming cost they know they will lose customers. A lot of my clients operate robust broadband networks, making it a lot easier for households to elect to cut the cord. If they raise rates they are guaranteed to lose customers, and if they don’t raise rates then they directly eat into operating margins.

A company can get into real trouble by not raising rates. I had one client that had only small rate increases over a number of years and even skipped a few years without a rate increase. They compared their rates to surrounding communities and were surprised to find that their rates were nearly 40% lower than in nearby towns. I’ve seen a lot of similar situations and there are a number of small cable providers with rates that are 20% and 30% lower than surrounding communities.

Municipal operators and cooperatives have a particularly hard time with this issue because decisions are not made strictly based on the numbers. Many municipal cable companies require City Council approval of rate increases – and it’s not hard to picture politicians that want to vote against rate increases. But cooperative boards can act similarly if they think there are enough profits from other parts of the company to cover the cable rate increases. This is never an easy decision and I know a number of commercial cable providers that sometimes decide to eat some of the programming cost increases.

There is no easy answer to this question these days because nobody knows the elasticity of cable demand – meaning the degree to which customers will react negatively to a rate increase. For many years demand elasticity was low and a company could raise rates with a pretty good assurance that they would lose only a few customers. They’d suffer a spate of complaint calls when they raised rates, but almost everybody paid the increases.

But that’s no longer true. I think most small cable companies are afraid of that day when a rate increase drives a lot of their customers to find alternatives. There is a general wisdom in the industry that nobody makes money at cable, and on a fully-allocated cost basis that is almost always the case. But almost every small cable operator still has a positive margin on cable. And that means that a company suffers a real loss every time they lose a customer. The bottom line is that it’s a crap shoot these days. We all know that the day is going to come when most customers will refuse to pay the higher cable rates. But it’s anybody’s guess when that day will come.

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