Tag: cable rate increases

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The Industry

The Greed of the Programmers

If you use social media you may have noticed a flurry of activity at the end of December warning that small cable TV providers across the country could lose the Fox channels on January 1. That includes Fox News, Fox Business, FX, National Geographic, FS1, FS2, and the Big Ten Network. The dispute was with NCTC, a cooperative that negotiates rates for most of the smaller cable companies in the country.

Fox was asking for what has been described as a 20% rate hike on programming. Fox was seeking a big rate increase to recognize that they have the number one network on cable TV with 1.5 million daily viewers. NCTC finally struck a deal with Fox on December 31 and the channels didn’t go dark – but the cost of buying the Fox networks went up substantially. Back in September, the Fox channels went dark for ten days on Dish Networks when the satellite company refused to accept the same big rate increase.

This is not the first big rate increase from Fox. ALLO Communications, a sizable fiber overbuilder, says that Fox has raised rates 800% since 2004, To put that into perspective, the cost of living in the US has increased by 36% since 2004.

The Fox rate increase is the perfect metaphor for the woes of the cable industry. Fox is not unique, and during the 2000s most cable programmers raised rates much faster than inflation. Cable companies have had little choice but to pass the rate increases along to customers. The programming cost increases have led to a steady annual rate increase for consumers. The soaring price of cable has led to the cord cutting trend and customers are bailing from traditional cable TV by the millions and at an increasing pace.

As a whole, traditional cable TV has probably now entered what economists call a death spiral. Most programming contracts are for 3 – 5 years and the cable TV companies already know of the big programming cost increases coming for the next few years. As cable companies keep raising rates they will lose more customers. The programmers will likely try to compensate by raising their rates even higher, and within a short number of years, cable TV will cost more than what most homes are willing to pay.

A company like Fox can weather the storm of disappearing cable subscribers since they know that all of the online alternative networks like Sling TV, YouTube TV, and others will carry their major networks like Fox News, Fox Business, and the sports networks. The chances are that the primary Fox channels will be solid and steady earners for the company far into the future. However, the same can’t be said for many cable networks.

The online cable products have far smaller channel lineups than traditional cable. There are more than 100 traditional cable channels that are losing subscribers from cable companies and not replacing them with online programming. It’s only a matter of time until many of these networks go dark, as programming revenues won’t cover the cost of operating the network.

It’s easy for people to hate cable companies since that’s who people pay every month. Cable providers like Comcast and AT&T share in the blame since they are both the two largest cable providers and also owners of content. All cable companies share some blame for not yelling bloody murder to the American public for the last decade – and for not fighting back. The cable companies instead started sliding the programming rate increases into hidden fees. However, the fault ultimately lies with the greed of the programmers. These are mostly big publicly traded companies raise rates every year to please stockholders.

It’s no longer good enough for corporations to make money, they are expected to increase bottom line quarter after quarter, year after year. We’ve only been talking about cord cutting for a few years, but the industry has been declining for over a decade. In 2010 there were nearly 105 million subscribers of traditional cable TV, and that number dropped to just over 83 million by the third quarter of 2019. It’s easy to think of cord cutting as a recent phenomenon, but the industry has been quietly bleeding customers for years. Sadly, the programmers are still denying the reality that they exist in a dying industry and are likely to continue to raise rates like Fox just did.

The supply and demand side of any sane industry would have gotten together years ago and figured out a way for the industry to be sustainable. However, the combined greed of the programmers and the big cable companies has resulted in the runaway rate increases that will doom traditional cable. It’s hard to know where the tipping point will be, but we’ll be there when cable networks start going dark – it’s just a matter of time.

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The Industry

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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Current News The Industry

Continued Cable Rate Increases

Every year about this time we see the big cable companies increase rates. Rather than list all of the changes at all of the big companies, I’m going to look at the rate increases announced by Mediacom. I’m not particularly singling them out, but the increases they are implementing this year are typical and I think Mediacom reflect the trends we are now seeing around the industry.

First, Mediacom increased the rate on its basic internet product while bumping the speeds higher. They are increasing the price from $49.99 to $54.99 and increasing speeds from 15 Mbps download to 60 Mbps download. Both of those changes are trends I see across the industry.

Mediacom claims the increase in data prices is due to the increased speeds. Anybody who understands the ISP industry knows that is a fairly lame excuse, but the speed increase gives them cover to make the claim. The cost of providing bandwidth (except for the tiniest and most remote ISPs) is only a few dollars per month per customer. Mediacom will certainly see a one-time burst in the use of data because of the speed increases since they will have unleashed homes that were restricted by the slower 15 Mbps limit. But after this one-time burst they will see usage return to the former growth curve. I have a client that did a similar upgrade last year and they saw about a 25% immediate increase in data usage as customers moved to the faster speeds. But that one-time increase doesn’t cost the ISP very much money.

But Medicom’s increase reflects the new trend in the industry for raising data prices. Verizon started this a few years ago with a small increase in FiOS and almost all large ISPs have now done the same thing. But unlike cable rate increases that are due to programming increases, ISPs have a much harder time defending data price increases. Yet the big ISPs are under constant pressure from Wall Street to increase the bottom line – and since they are all losing cable customers they have little recourse but to raise data rates. I expect this will become a routine annual increase like we’ve always seen in cable rates – but the public is going to catch on after a while that the rate increases go straight to profits and are not due to any underlying costs for providing data.

The other trend Mediacom is matching is the one to increase data speeds. Just last week, for example, Verizon FiOS raised speeds across the board with its fastest product now at 750 Mbps. Comcast and Charter are on a similar path, increasing speeds in some markets with plans to increase speeds everywhere. I think the cable companies have figured out that increasing speeds doesn’t cost them much and it keeps customers happy while fending off possible challenges from fiber competitors.

Mediacom also increased cable TV rates and announced an increase of $3.95 in its expanded basic package. They claim that programming costs have increased during the year by $5.50 to $6.50 (they have different line-ups in different markets). Those are not untypical numbers. But they claimed that “We are not passing along that entire increased expense to customers.” And that is not true.

In addition to the basic rate increase the company increased two other fees. They increased the ‘Local Broadcast Channel” fee by $1.61 per month and raised the regional sports channel surcharge by $0.24 per month. So altogether they raised various components of cable rates by $5.80 cents, which likely covers the increased programming costs.

This trend of disguising prices using fees is also now industrywide. Cable companies of all sizes have moved part of their cable rates into these ancillary fees, making it look like cable is more affordable than it is. The companies advertise the base ‘cable’ rates without mentioning the real cost of buying cable. These fees are confusing to customers, who often think that they are taxes of some sort. In Mediacom’s case the Local Broadcast Channel fee and the local sports channel surcharge fee now total an eye-popping $11.83 per month.

And of course, not all of these rate increases affect all customers immediately. There are customers with various specials who might not see some or all of these increases until their special expires. But a normal customer paying a month-to-month bill is going to get a total increase of $6.85 per month. That looks to be a fairly normal increase when looking around the industry this year. Each company is making different choices on the rates to raise. In addition to the choices Mediacom made, some are increasing settop box and cable modem rates to get the increases they want. Since a significant percentage of customers buy both cable TV and broadband, I’m guessing that customers don’t really much care which rates go up, they just care about the total increase in their bill.

Categories
The Industry

Video Trends for 2017

Following are the major trends in video going into 2017.

Skinny Bundles. Last year at this time the industry talk was all about cable companies offering skinny bundles to keep customers from bailing. But this never panned out. Dish Network has a true skinny bundle option but almost nobody else has done so. Comcast entered this market last month by adding Sling TV to their X1 settop box lineup. The big companies aren’t talking and it’s hard to know if this changed due to market research about customer desire for such products or if this was due to problems with programmers assembling the right packages. But for now skinny bundles offered over cable systems seems like a dying idea.

OTT Options Exploding. DirecTV Now joined Sling TV and Sony Vue as the three providers of online skinny bundles. Hulu, Amazon and YouTube are launching similar packages in 2017 and sources at programmers report there might be as many as a half dozen other companies getting ready to join the OTT fray. Additionally there are a number of programmers directly entering the market such as the CBS package that will feature the new Star Trek: Discovery starting in January and available only online. ESPN is rumored to soon be launching an a la carte offering. This is going to turn into a crazy year for online programming and it’s impossible to believe this many entrants can succeed.

Cord Cutting Continues. But nobody knows how fast. The best I can tell from the numbers is that there is a lot more cord trimming with households paring back to less costly packages than actual cord cutting. You can find estimates of annual US cord cutters between 1 million and 4 million and only the cable companies know the right answer. But even if the number is at the bottom of the range, traditional cable companies are facing real problems. Eyeball time watching cable networks is way down and is expected to continue to drop in 2017 as people watch OTT content.

Some Networks in Trouble. It looks like ESPN will lose over 4 million customers in 2016. The same is happening to a number of other channels, but analysts track ESPN closely since it is the costliest network. Some of the more popular channels are making up for us losses by overseas sales, but sports, weather and other US-specific content has no market outside the country. By the end of 2017 I expect to hear rumors of smaller networks folding.

Continuing Rate Increases. All the big cable companies recently announced their rate hikes for 2017. Rate increases seem to be as large as recent years. But more of the rate increases are being buried in ancillary fees and equipment charges rather than as direct increases to cable packages.

No Break in Programming Cost Increases. And those rate increases are being fueled, in part, by the continued increases in the cost of programming. Many of those increases are baked into 3-5 year contracts, but even new programming programming contracts being approved in 2016 continue to include significant future cost increases.

Flood of New Content for OTT. The market is being flooded by new content at an unprecedented rate. Netflix is the king of new content and is producing most of the highly-rated alternatives to traditional cable. But there are dozens of companies now making content with the hope of grabbing a piece of the giant revenues earned by the most popular content.

New Bells and Whistles. Comcast is the industry leader in introducing new features for the home video product. Probably the best new one is the ability to talk to the settop box and eschew the remote. It’s hard for smaller companies to keep up with the numerous improvements.

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