The Future for Cord Cutters

RCA_CT100-hdI read an article by Nathan McAlone in Business Insider that opined that people are going to look back five years from now and wish for the good old days of the big cable packages. I suspect for many people he might be right.

Right now cord cutters are definitely happier with dropping out of the big packages and finding smaller solutions that fit them specifically. As a family that hasn’t had a cable package in years, the recent emergence of online content feels wonderful to my family. Even with my few paid choices of Netflix, Hulu, Amazon Prime, and Sling TV I have far more options than I know what to do with. I have found myself liking to binge watch obscure series like Death in Paradise on BBC that is about a detective on a fictional island in the Caribbean. Even with the big cable package I would not have been likely to have found or watched this kind of programming.

But there are going to be long term consequences of cord cutting and of the big cable companies migrating to skinny packages. Verizon FiOS recently reported that a majority of their new customers are choosing their small skinny package rather than the traditional big package.

The main consequence is going to be to programmers. Every customer who cuts the cord or downsizes to a skinny package stops paying fees to a big pile of networks in the traditional bundle. We now know that ESPN has lost 7 million customers over the past few years and they cannot be the only one. One has to think that the same is happening to all of the sports networks like the Big Ten Network or Tennis TV. And it’s likely that over time the same thing is going to happen to any network that doesn’t have worldwide appeal such as religious networks, weather networks, music networks, or even the smaller networks such as Discovery Health that are only carried in the big cable packages.

I see several long term consequences of the shift to skinny bundles. First, I see it returning some of the negotiating power to service providers for those networks that are only in the big packages. Cable companies are going to become more and more willing to say no to programmer demands that they must carry the full suite of everything offered by a programming company. The programmers will still be in the driver’s seat for the most popular networks – those channels that everybody wants to put into their skinny bundles like the Food Network or the Travel Channel. But the programmers are going to lose leverage with their less popular networks because cable systems will be more and more likely to push customers to smaller bundles rather than be held hostage to huge payments for content.

I also see some of the less popular networks folding. The only thing that keeps a lot of these networks going is that they get a few cents per month from 100 million households. When that audience retracts a lot of them are not going to be economically viable.

Interestingly I think skinny bundles will mean more profits to cable providers. The margins on the 300-channel line-ups are getting thinner all of the time. There is the possibility of being able to make more money selling 30 channels than there is for selling 300.

And finally, as the article that prompted this blog suggests, I think eventually it will get very expensive for the cord cutter who wants to buy a lot of different content. It might well cost more to put together the channels that you really want than buying today’s big packages. It’s not hard to imagine a world where ESPN costs $20, AMC costs $10, and a regional sports network might cost $15. Before you know it, if you have a wide interest in different programming, you could pay more than today for many fewer choices. But I think in the long run that the average person is going to do what I do today. They are going to buy a pile of programming and then learn to be happy with what they have bought. I find myself watching things now that I would never have considered years ago – and it works for me. I don’t miss the channels that I can’t see.

Fighting Against the Cost of Programming

Numismatics_and_Notaphily_iconToday I want to talk about the cost of programming from the perspective of a small cable provider. In the cable world, any company without many millions of cable customers is considered small because they have no effective negotiating power against the programmers.

For decades most small cable systems have purchased a lot of their programming with rates negotiated by the National Cable Television Cooperative (NCTC). There are currently 850 member of this cooperative. Altogether the NCTC group represents the second biggest pile of cable customers after Comcast. It’s hard to know the exact number of customers they represent because a few of the larger cable companies like Cox and MediaCom have joined and then left the cooperative over the last few years. At one point I heard the number 20 million subscribers bandied around the industry but it’s probably smaller now.

Not all programmers will work with NCTC and some require cable providers of any size to sign a contract directly with them. But NCTC represents a significant portion of the channels used by cable systems. Within that negotiated pile of content members must still sign a contract with each programmer and are free to sign the NCTC contract, negotiate directly with the programmer, or else sign no contract if they don’t want to carry a given programmer.

Back in 2014 there was a big furor among small cable companies when the Viacom group asked for a huge rate increase, reported to be over 60%. Viacom includes channels like MTV, VH1, Nickelodeon, Comedy Central, Spike, BET, and other music channels. At the time about 60 NCTC members, representing about 900,000 subscribers, decided that they could not afford to pay the higher rates and so dropped the Viacom channels from their cable systems.

We are seeing a similar battle brewing today as AMC is asking for a huge increase in rates with NCTC. I’ve not seen the new proposed rates, but have seen news articles describing this as a 379% rate increase over the term of the new contract, which is probably for five years. AMC includes the channels AMC, We tv, IFC, and Sundance TV. Additionally the new contract also covers BBC America and BBC World News, which are 50% owned by AMC.

How can a programmer ask for such a big increase? Programmers are very attuned to the Nielsen ratings which constantly track the number of people that watch each network. The general concept used by programmers is that their network is worth at least as much as other networks that get the same number of eyeballs, very similar to the way that a professional baseball player sets his worth by comparing his statistics to his peers.

AMC’s popularity has exploded in the last few years as it changed from a channel showing old movies to one which now carries very popular original programming like Mad Men, Breaking Bad, and The Walking Dead. This has raised their Nielsen rating and the network wants to charge more due to being a lot more popular.

The whole programmer industry owes a debt of gratitude to ESPN which was the first network to constantly and significantly increase their fees over the years. Every time that ESPN signed a new deal to carry programming for a sports league they then raised their prices to cover the new fees they were paying to those leagues.

But in doing so ESPN was setting an industry pricing standard against which other networks can be measured. We saw this happen with retransmission agreements with the major broadcast networks that have grown from zero to several dollars each per customer per month over the last decade. And we’ve seen popular channels ask for more as they get more viewers. The funny thing is, though, that when a network loses viewers they never seem to drop their rates.

Caught in the middle of all of this are the service providers that offer cable TV. They keep seeing bigger and bigger increases each year in programming costs and some are reporting overall programming costs growing by at least  15% per year. They are left with little choice but to raise rates, which puts many of them into a poor position compared to the satellite providers. And with each rate increase comes more customer impetus to cut the cord or at least cut back on the programming they purchase.

It’s been my experience that few of my small clients that carry cable have been bold enough to pass on all programming cost increases, and so their margins on cable keep shrinking. On a fully allocated cost basis many of them are underwater with the cable product. And sadly, as is shown by the recent AMC rate demands, there is no end in sight for continued huge increases in programing costs. It’s a lousy time to be a small cable provider, that’s for sure.