Some interesting data was recently reported by the Wall Street research firm Cowan. They were looking at cable TV margins among bigger cable companies and concluded that it’s hard for anybody but the largest cable companies to be profitable with cable.
Consider Altice, a cable company with almost 3.3 million customers. Cowan calculates that Altice spends about 80% of cable revenues to buy the underlying programming – for 2018 that was cable revenues of $813 million and programming costs of $683 million. That means a gross operating margin of only 20% even before considering any of the costs of selling, billing and maintaining the product.
The really large cable companies do better. Comcast has around 21.8 million customers and Cowan calculates that programming only costs them 60% of cable revenues. The other big cable companies like Charter and Dish Networks pay about 65% of cable revenues for programming.
This raises the interesting question if anybody who doesn’t have millions of customers can make any money at cable TV? It’s unimaginable that Altice makes money in cable with a 20% gross operating margin. ISPs all tell me that the cable TV product is the big eater of staff time. Most of the calls to customer service are about cable signal quality. Cable issues cause the majority of truck rolls. When you look at the full effort required to support cable TV there is no way that it can be done inside of a 20% operating margin.
The bigger companies are a different story. You can see why Comcast still works hard to win and keep cable customers. At a 40% operating margin, each cable customer still has significant bottom-line value to the business.
Comcast must be dismayed at finally starting to lose customers to cord cutting, having lost 120,000 in the first quarter of this year. The company has done better than any other cable company in retaining customers. They’ve got the state-of-the-art settop box that continually updates with new features. They’ve pushed TV everywhere to allow TV on any device. And yet, even Comcast is seeing the inevitable declines from cord cutting as a result of high cable prices and the lure of online alternatives.
These numbers ought to show any smaller company that there is no sensible business plan for investing in a cable TV headend. I can’t imagine why anybody would buy a new cable headend today. It’s hard to imagine covering the cost of new electronics when the margins from cable barely cover operating expenses.
I’ve done the math and if a small ISP is honest with the evaluation, it’s hard to think that cable TV for a smaller company has any net operating margin after operating expenses. This puts companies in an uncomfortable position. The national average cable penetration is still 70%, although now dropping at 6% of market annually. That still means that a lot of customers want to buy traditional cable TV and they are going to buy it from the ISP who offers cable and broadband together. All of the surveys we’ve done at CCG show that there is still a sizable portion of the residential market who won’t buy broadband without cable TV.
I hear about ISPs exiting the cable business every month. That’s the ultimate in cord cutting when the ISP drops the cable product before the customers disappear on their own.