It’s common knowledge that cable operators are losing customers to cord-cutting. The cable industry peaked in 2014 when there were 102 million homes that had a landline cable subscription or satellite cable service. By the end of 2019, the number of homes with traditional cable is approaching 86 million, a 16% decline in customers since 2014.
What’s not as well understood is that even people who are buying a traditional cable service are watching it less as they spend some time watching Netflix and other online programming alternatives. This has resulted in significant losses of viewers for most traditional cable networks. The statistics below are from Variety and show the average daily viewers of the top 20 cable networks in 2019 and five years earlier in 2014. The numbers represent the average daily viewers of each network, in millions.
2019
2014
Change
1
CBS
7.14
9.38
-24%
2
NBC
6.33
8.26
-23%
3
ABC
5.19
6.39
-19%
4
Fox
4.62
5.97
-23%
5
Fox News
2.50
1.75
43%
6
ESPN
1.75
2.21
-21%
7
MSNBC
1.74
0.59
195%
8
ION
1.34
0.28
379%
9
HGTV
1.31
1.36
-4%
10
Univision
1.30
2.97
-56%
11
Hallmark Channel
1.27
0.83
53%
12
USA Network
1.23
2.20
-44%
13
Telemundo
1.20
1.33
-10%
14
History
1.19
1.88
-37%
15
TLC
1.18
1.10
7%
16
TBS
1.16
1.89
-39%
17
Discovery Channel
1.13
1.41
-20%
18
TNT
1.12
2.06
-46%
19
The CW
1.09
1.66
-34%
20
A&E
1.06
1.29
-18%
The loss in viewers for some networks is eye-opening. Most networks have lost daily viewers at a faster pace than the overall industry loss of cable customers. CBS, the most-watched network, lost 2.24 million daily viewers over the last five years. Five networks fell out of the top twenty since 2014 – the Disney Channel, AMC, Adult Swim, FX, and the Food Network.
Daily viewers matter because that’s the prime driver of advertising dollars. Variety reports that the trends deeper inside these numbers reveal that networks that are watched by younger views have the biggest losses, reflecting that the average age of traditional TV viewers has climbed significantly over the last few years. In 2014 the average age of viewers of the major broadcast networks was 54 years old. By 2019 that climbed to 61 years old. Younger people are not watching traditional TV content. It’s no wonder that advertisers are moving to other platforms. In 2019, Facebook had 68 million daily users in the US and Twitter had 27 million.
The loss of viewers directly impacts the revenues of each network since each charges a subscription fee to show their content on a cable network. As viewers have plunged, many of the networks have tried to make up the lost revenues through subscription price increases.
Not every network is losing viewers. The big winners over the last five years are ION and MSNBC that have shot up the chart. A few other networks like Fox News, the Hallmark Channel, and TLC also gained viewers over the last five years. However, the vast majority of cable channels are steadily losing viewers year after year. With cord-cutting still growing and an explosion of new online programming, the loss of viewers is likely to continue and deepen.
When AT&T proposed to merge with Time Warner in 2016, attorneys at the Justice Department argued against the merger and said that the combined company would have too much power since it would be both a content provider and a content purchaser. Justice Department lawyers and various other antitrust lawyers warned that the merger would result in rate hikes and blackouts. AT&T counterargued that they are good corporate citizens and that the merger would be good for consumers.
In retrospect, it looks like the Justice Department lawyers were right. Soon after the merger, AT&T raised the prices for DirecTV and its online service DirecTV Now by $5 per month. The company raised the rates on DirecTV Now again in April of this year by $10 per month. AT&T accompanied the price increases with a decision to no longer negotiate promotional prices with TV customers. In the first two quarters of this year DirecTV lost over 1.3 million customers as older pricing packages expired and the company insisted that customers move to the new prices. AT&T says they are happy to be rid of customers that were not contributing to their bottom line.
In July of this year, CBS went dark for 6.5 million DirecTV and AT&T U-verse cable customers. AT&T said that CBS wanted too much money to renew a carriage deal. The two companies resolved the blackout in August.
Meanwhile, AT&T and Dish networks got into a dispute in late 2018 which resulted in turning off HBO and Cinemax on Dish Network. This blackout has carried into 2019 and the two sides still have not resolved the issue. The dispute cost Dish a lot of customers when the company was unable to carry the Game of Thrones. Dish says that half of its 334,000 customer losses in the fourth quarter of 2018 were due to not having the Game of Thrones.
I just saw headlines that AT&T is headed towards a rate fight with ESPN and warns there could be protracted blackouts.
It’s hard to fully fault any one of the AT&T decisions since they can be justified to some degree as smart business practices. But that’s how monopoly abuses generally work. AT&T wants to pay as little as possible when buying programming from others and wants to charge as much as possible when selling content. In the end, it’s consumers who pay for the AT&T practices – something the company had promised would not happen just months before the blackouts.
Programming fights don’t have to be so messy. Consider Comcast which is also a programmer and the biggest cable TV company. Comcast has gotten into a few disputes over programming, particularly with regional sports programming. In a few of these disputes, Comcast was leveraging its programming power since it also owns NBC and other programming. But these cases mostly got resolved without blackouts.
Regulators are most worried about AT&T’s willingness to allow prolonged blackouts because during blackouts the public suffers. Constantly increasing programming costs have caused a lot of angst for cable TV providers, and yet most disputes over programming don’t result in turning off content. AT&T is clearly willing to flex its corporate muscles since it is operating from a position of power in most cases, as either an owner of valuable content or as one of the largest buyers of content.
From a regulatory perspective this raises the question of how the government can trust the big companies that have grown to have tremendous market power. The Justice Department sued to challenge the AT&T and Time Warner merger even after the merger was approved. That was an extraordinary suit that asked to undo the merger. The Justice Department argued that the merger was clearly against the public interest. The courts quickly ruled against that suit and it’s clear that it’s nearly impossible to undo a merger after it has occurred.
The fact is that companies with monopoly power almost always eventually abuse that power. It’s incredibly hard for a monopoly to decide not to act in its own best interest, even if those actions are considered as monopoly abuses. Corporations are made up of people who want to succeed and it’s human nature for people to take any market advantages their corporation might have. I have to wonder if AT&T’s behavior will make regulators hesitate before the next big merger. Probably not, but AT&T barely let the ink dry on the Time Warner merger before doing things they promised they wouldn’t do.
CBS just announced that they are making over $1 billion per year in retransmission fees. These fees are a big culprit in the continually steep price increases for cable TV.
Retransmission fees are the fees that the major over-the-air networks (ABC, CBS, NBC and FOX) charge to cable companies for the right to air their content. These fees have been allowed in FCC rules for decades, but it’s been in the last ten years or so that the networks woke and up started charging cable companies to carry their content.
There are two slightly different ways that these fees work. The majority of the CBS stations around the country are owned by somebody else and are referred to as affiliate stations. CBS charges these affiliates a fee each year – which the industry calls reverse compensation – to give each station the right to carry the CBS programming. CBS and the other major networks increase these reverse compensation fees every year, and each affiliate station has little choice but to then pass those costs on as increased retransmission fees to cable operators.
CBS also directly owns 14 TV stations in major cities as well as two smaller stations. In these stations CBS directly charges the retransmission fees to the cable companies.
I call these fees runaway in the blog title because there doesn’t appear to be any end in sight for the size of these fees. At the end of 2015 CBS had estimated that these fees would grow to $2 billion by 2020. But they just now upped their estimate to $2.5 billion. To hit those targets from today’s $1 billion revenue figure means we’ll be seeing big increases in cable rates. And if CBS is raising the fees this much you can expect the same thing from the other major networks. This is verified by estimates from SNL Kagan who now estimates total retransmission fees in 2020 of $10.6 billion.
To put that number into perspective, there will roughly be around 90 million cable households by 2020. That means by then that the average retransmission cost per household will be $10 per month. But that average hides the real story. A lot of satellite subscriptions don’t include network channels, or if they carry some they come from one of the major markets like New York City or Chicago. I’ve always figured that the satellite guys are getting a greatly reduced price for those channels, which would benefit both them and the big station that sells bulk subscriptions. There are also many places in the country where the cable systems don’t carry all four networks, or they again carry some remote station at a reduced cost. When you consider all of that I’m guessing that the real cost per household for urban cable systems will be around $15 per household per month.
For years now the major networks have been saying that they deserve to get as much revenue as the most expensive cable networks – and that means ESPN. ESPN now costs over $6 per household per month. If the four major networks climb that high that will be $25 per household per month just for the four major networks. The irony is that most households can receive these networks for free with “rabbit ear” antennas.
But the FCC cable rules require that cable systems carry all local networks that can be received by people with rabbit ears. And that means that cable customers cannot opt out of receiving or paying for these channels in a cable subscription. The only way for a household to avoid these fees is to drop traditional cable packages completely.
A number of cable companies have begun to isolate the retransmission fees on customer bills and call it something like “local network charge.” But I don’t think the cable companies have done a very good job of explaining the retransmission fees to customers.
There are more households every year thinking about dropping cable, and for many of them the primary issue is price. As cable subscription prices keep climbing much faster than inflation my guess is that the cord cutting phenomenon is going to accelerate. There are OTT services now like Sling TV that will sell customers a high quality set of rabbit ears that can be easily incorporated with their content. There are a lot of households that will be happy to avoid paying for local networks if somebody can make it easy for them to do so.
There were several announcements in the last week from programmers who are going to put their content onto the Internet. I’ve had several people ask me if they think this means that OTT is finally here, and unfortunately I have to say no. But from these time cracks might eventually come bigger fissures. What people are hoping for is the ability to buy only the channels they want without having to buy the big cable bundles. But we still have a long way to go to get to that
The first announcement was from HBO. They plan to roll out an undefined OTT product in 2015. HBO and the other movie channels are unique in the programming world since they are always sold as premium channels and are always expensive. HBO was reported to have over 28 million US subscribers in mid-2013 through terrestrial or satellite TV subscriptions
But HBO also has the most pirated show with Game of Thrones and they have gotten a lot of requests to sell their content on an a la carte basis. HBO has not announced the details of the planned offering, but one can picture it being something like the HBO Go product that comes with most cable subscriptions. It would not be surprising to see their offering consisting of one streaming live channel along with access to the HBO library of content. There has also been no talk of price, but it won’t be cheap. HBO sells its content wholesale to cable companies in the range of $12 per month, so one would expect them to charge an OTT price at least as high as the cable companies, meaning a price of between $15 – $20. Such a product is going to appeal to some cord-cutters and cord-nevers who want to get Game of Thrones and Bill Maher without having to pirate it. But it’s going to be easier and cheaper for most people to buy HBO from their cable company. It’s a smart move by HBO who will probably be able to add a few million new subscribers. But in doing so they are not going to be damaging the traditional cable market
The other announcement this week was from CBS which announced an OTT package for $5.99 per month. This would consist of a live network stream from major market affiliates as well as a library of older content on demand. But for now it won’t include football. This product is a bit more of a puzzle from an OTT perspective. Currently if you buy content from the big cable companies like Comcast you normally get access to the CBS library online to any device. For example, I pay my cable company for a basic package for about $20 that gets me access to the libraries of all four major networks. If ABC, NBC and Fox match the CBS offering, then a person wanting all four networks online would be paying more than they pay for basic cable
The only real advantage of the CBS package is that it comes with a live stream on-line, and this is the first time that a network has offered live content on-line. But one has to ask if that is really worth $6 per month? This is about triple what CBS gets from cable companies that carry their content, so one can see why they want to sell their content for a premium price. But are that many people willing to pony up $6 just to get one channel on the Internet? There will be some but I can’t see this being very popular. After all, in most of the US I can get this on a TV for the cost of a pair of rabbit ears
It’s becoming obvious that any OTT programming that makes it to the web is not going to be cheap. And it’s money that drives the cord cutters. The New York Post reported a week ago that the upcoming Sony OTT package was going to offer 100 channels on the web for $80, while others are reporting a price of between $60 and $65. Those prices are not going to lure many people off cable in metropolitan markets due to the bundling from the big cable companies. Most people are in a position where the cost of their cable internet product rises if they ditch cable TV. In my own case, Comcast would only sell me a 50 Mbps connection if I bought at least basic cable
One has to ask if any of the packages mentioned to date are going to have much appeal. There are going to be the stray customers who will think these products are great. The one with the most chance of success is HBO, because it’s going to appeal to some of those with no cable subscription. But the CBS offer to me is a head scratcher. While there will be some who would love to get network TV on any device, the $6 monthly price tag feels like a lot for one channel. And Sony’s plans are even odder to me. There are certainly people who hate their cable company and would love to change to somebody else. Having 100 channels available on any device sounds attractive (assuming that this won’t only be available on Sony smart TVs). But it’s really hard in metropolitan areas going against the bundle, so it seems that selling packages for about the same price as the cable companies won’t be that attractive. Sony might do better in rural areas for people who want to get off satellite, but those are the areas that often have the worst broadband and where people might not be able to subscribe to OTT programming
None of these announced products are going to make a big crack in the cable market, but these are all the starts to the change. Somebody is going to have to come up with packages that a lot of people are going to find attractive to get any market traction, and that is going to take the willingness of the programmers. They are still making too much from the traditional cable packages to flinch too much. A lot of these early attempts at OTT will probably fail, but that’s what happens to those willing to go first in a new market – a market that consumers want if it can ever be done right.
Photo of cable tv headend rack. Louisiana. Now closed out of business. (Photo credit: Wikipedia)
Since cable TV became a nationwide product the content has been delivered by the cable providers in large packages that differed little from coast to coast. Small rural systems have typically smaller line-ups, but the programming available in the big cities is about the same everywhere.
The first big crack in how programming is delivered came with Tivo which let people record TV to watch later, including the ability to skip commercials. And quickly following that was video-on-demand from the cable companies. Now we are seeing a large amount of programming available on the Internet and I think we have turned the corner and consumers now have more say than the cable companies in how and when they watch content. This trend will strengthen and greater numbers of people will step away from traditional packages. I looked around to see what others are expecting for the future of content and here are some of the predictions:
Content Participation. This started in a mild way when home viewers could vote each week for the winners of shows like American Idol. This got millions of viewers heavily invested in the outcomes of such shows. Expect a lot more of this in the future and to a much greater degree. There will be programs that are driven by the viewers. The viewers will get a say in the plot development, the introduction of new characters or getting rid of existing ones. The shows and characters will participate in social media and become part of fan’s lives.
Viral TV Production. Even better than participation, viewers will be able to help fund new shows they want to watch. To some extent this has happened to a few shows today that were discontinued by networks but then picked up for independent production for the Internet. Viewers will not only get to participate as backers of new shows but will have the ability to have some say in the creation of content. I can picture Star Trek fans funding episode after episode forever.
Produce Your Own Content. Anybody who has witnessed 14-year-old girls watching video will see that a lot of what they watch is clips made by their friends or by themselves. As it becomes easier and easier to make your own content, and as this content is easier and easier to play anywhere, a lot of people are going to produce content to share with their friends.
More Local Content. To a large degree local content has died on cable TV. Larger markets have local news, but there is a lot of demand to watch local content such as high school football and basketball, parades, government meetings and other local events. The Internet is already producing ways to channelize local content and I expect local ‘channels’ to pop up all over the country. There is no reason that every high school, every college, every church can’t have their own local channel of web content.
Fewer Network Channels. I think everybody expects that as more content is on the Internet and as some of the more popular content becomes available on a per-pay basis that many of the existing cable networks will die. It’s been reported that 80% to – 85% of cable channels don’t make enough money to stand alone in an a la carte cable world.
Different Perspectives. Expect programming that will offer different perspectives. This has been done a little in the past with shows being filmed with different endings for different viewers, but expect a lot more of this in the future. There will be shows that will allow the viewer to watch the show from the perspective of a specific character.
Personalized Ads. Of course, with all of the good changes that are coming, there is a lot of consensus that ads will become more personalized. Of course, advertisers think that this will make you like to watch their ads since most of what you see will be aimed at you, but I suspect that is going to make most people even more jaded about advertising.
Sensory TV. As a science fiction fan I have been to a number of movies that purported to invoke the sense of smell, taste or touch during movies. I must say that movies with Sniff-o-rama were a little less than successful! However, it is predicted that in the near future that it will be possible though personal electronics to make a viewer really invoke the different senses. This will begin with gamers and will involve wearing helmets or goggles that will trigger brain sensations. But this will move eventually to wider programming.
Laura Martin and Dan Medina of Needham & Company, a branch of an investment banking and asset management firm have issued an analysis on the Future of TV. There has been a lot of other reporting about this report, most of which zeroed in on the fact that ESPN would need to charge $30 in an a la carte environment. I’ve written several other blogs about the a la carte issue and instead want to highlight some of the interesting facts from the report.
They say that TV is a bargain and that the average family spends 30 cents per hour to watch TV. This is based upon an average cost of $75 for a cable subscription and a family watching TV eight hours per day. I think they miss two points with this. The price of cable has grown much faster than inflation and there are now more and more homes who feel they can’t afford the cost of the subscription. If cable rates keep climbing 6% per year, in only five years this same subscription is going to cost over $100 per month. Also, there are many households who do not watch TV eight hours per day. It is these two groups that are leaving the cable system, the first reluctantly and the second because it no longer feels like a bargain.
TV content is expensive to produce. The four main broadcast networks (ABC, CBS, FOX and NBC) spend an average of $2.5 million to create a prime time hour of programming. To contrast, all of the other 130 or so cable networks spend an average of about $100,000 per hour. But there are new rivals now producing programming. There are a number of companies now producing content for the web and this is expected to grow rapidly. For example, YouTube is spending about $100 million, NetFlix $200 million, Hulu $500 million. And both AOL and Yahoo have created web ‘channels’.
They say that about 80% of content never pays for itself. The TV world is driven by hits since they draw the bulk of the advertising revenue. But hits are ephemeral and unpredictable. The broadcast networks have been geared for decades to product hits and it’s obvious that even with the money that they spend that it’s very hard to do. But the top shows garner the lion’s share of ad revenues. To show the power of hits, the top 1% of movie hits account for 18% of movie rentals / views.
They recognize that TV viewing is shifting in a digital age. They cite the following statistics:
72% of viewers watch content only on a TV set.
11% watch content only on some digital medium such as computer, pad or smartphone.
17% of viewers watch some content in both ways.
61% of TV watchers now use the Internet while watching TV and 10 – 25% of those viewers go to the website of the show being watched (depends upon the network being watched).
29% of the viewers who use the web while watching TV are on Facebook.
The report estimates that over 1 million jobs are dependent upon the TV sector. These are mostly middle class jobs and include cable TV installers, customer service reps, people who work in various roles at the networks. Comcast alone has 126,000 employees. By contrast the new companies trying to make money from web content have very few employees. Hulu has 420 employees, YouTube has 650 and NetFlix has 2,348. The report thinks that most of the traditional cable TV jobs are at risk if we move to an a la carte system.
The public companies in the TV sector have about $400 billion in market cap (investable securities). The report estimates that at least half of that market cap would disappear under a la carte programming. They warn that even having the government looking at a la carte programming puts these investments at risk.
These are just a few of the many facts cited in the report, which is why I have included link to the full report for anybody who wants to read more. Oh, and at the end of the report they recommend buying CBS and AOL stock. If you buy them and it doesn’t work out, you didn’t hear it here.
It makes it voluntary for cable operators to offer a la carte programming.
It mandates broadcast networks (ABC, CBS, NBC, FOX, etc) offer their channels to cable providers on an a la carte or face the possible loss of their broadcast license.
Programmers like Discovery and Disney can only sell their programs as a bundle if they also offer them a la carte. So cable operators can buy only the programming that they want.
It threatens that any broadcast network that pulls its programming off the airwaves would lose the spectrum and also any rights that go with being a broadcaster. This is a threat for local networks to not mimic Aereo.
Current sports blackout rules won’t apply in cases where the stadium being used was publicly financed.
Here are the practical consequences if this bill becomes law:
Cable companies could save money by eliminating channels they don’t want to buy. I helped one client get into the cable business a few years ago who ended up taking almost twenty more channels than they wanted due the bundling requirements from the programmers. And so I see cable providers shedding channels. This may not necessarily result in any price cuts and might just increase the profits of the cable company. But over time this ought to help hold down costs and rates.
This bill does not mean that any customer will get a la carte programming. In McCain’s announcement he said that ESPN costs $4.69 per month. That is the price that a cable provider pays for the ESPN suite of channels if they agree to make them available to, and charge every customer for them. But if ESPN is forced to sell this on an a la carte basis, they understand that a lot of households are going to opt out of paying for it since many households have no interest in sports. I would expect that ESPN’s a la carte price is going to be a lot higher than the $4.69 bundled price. If that occurs (and there is nothing in this law that would prohibit it) then the math for ESPN and customers changes drastically overnight. Rather than everybody paying $4.69, if only one-third of households would want ESPN the price would have to go to nearly $15. And this same kind of math is true for every cable network. So my prediction is that none of the large cable companies will move their programming to a la carte. But there might be small ones who try it.
This benefits companies who want to deliver programming in a non-traditional way. This might open the door for Aereo or web-based companies to buy programming. I can see sports fans willing to pay $30 a month for a suite of sports channels and nothing else. But the first cable company that tries this is going to see the wheels come off. It could end up costing consumers as much to buy the channels they want a la carte as it is to buy the big bundles of today, due to the way the current pricing averages the cost across millions of homes instead of just those who want to watch it.
I can see cable operators who will put the broadcast networks on a la carte. There is a huge battle between local stations and cable companies over retransmission fees and I can envision cable companies who will price each channel according to what they must pay and letting the public deciding what they want to watch.
Marginal cable networks will fold. Some of the large programmers have made cable providers buy channels they didn’t want, and if enough of them elect to shed some of these networks they will fold.
It would be interesting to know if this law would override existing multi-year contracts for programming or if it would force new contracts immediately.
The primary benefit of this law is that it breaks the bundling being done by the large programmers who own many channels. The cable business is not profitable for cable operators and I have some clients who lose money on cable. They make almost all of their profits on data and voice. If cable companies have the ability to set any line-up they want they might be able to return some sanity to what they pay for programming. Over time this might be the change that breaks some of the power of the programmers and stops the insane price increases. McCain cites a 6.1% average increase in programming costs since 1995, but where I have been tracking it in the 2000’s it has been more than 7%. These kinds of rate increases are heading the whole industry towards a consumer revolt. If the 6.1% increase that McCain cited continues unabated, a $75 cable bill today would be over $136 within ten years.
The real shame of the bill is that the public will interpret this bill to mean they are going to get to pick just the channels they want to watch and that is still unlikely to happen. The bill is a good idea, but it’s really a la carte for the cable companies, not a la carte for consumers.
The Aereo ruling on April 1 certainly has the cable industry in an uproar. In that ruling a federal appeals court upheld a lower court ruling that Aereo’s wireless streams to customers are not a ‘public performance’ and thus do not constitute copyright infringement. On Friday Glenn Britt, the CEO of Time Warner, said that his company was considering pulling the broadcast networks off of his cable TV systems and sending them to customers over a radio in the same way that is being done by Aereo. And recently, in response to the Aereo ruling the broadcast networks threatened to pull all of their content off the air and move their programming to cable TV. So what is up with Aereo, and can these companies do what they have threatened?
Aereo has an interesting product that seems to have found a market niche, at least in New York City where it is now operating. Aereo sets up a radio link to each customer and sends them a 28 channel packagethat includes the major networks, some other low-cost networks and some spanish and asian-language channels. Aereo can be installed on any Windows or Mac computer and can then be streamed to iOS devices like the iPhone, iPad or Apple TV. It can also be made to work with a Roku box. And one would imagine it will soon be made to work with other pads and tablets. The service also lets a consumer record some programming for later playback. The pricing is cheap compared to cable TV with a $1 per day plan, monthly or annual plans, including a monthly plan for $8 that lets a customer watch everything live plus record and play back 20 hours of programming per month.
Why does this controversy even exist? Can’t people just receive the broadcast networks over the air? On June 12, 2009 all full-power analog television transmissions ended and starting with that date the full-power television stations, which include all of the major networks like ABC, CBS, NBC and Fox could only broadcast in digital. Customer now need a Digital Television Adapter (DTA) to receive the signals and any home that is near to a station can receive it for free. But it is not easy for the average consumer to get these signals from the TV to mobile devices, and Aereo’s real marketing niche is providing signals to computers, iPhones and iPads.
Why are Time Warner and the cable companies so stirred up over Aereo? Aereo seems to have found the niche of people who want to watch mainstream programming without being tethered to their TV. If Aereo was limited to New York City this probably wouldn’t be a huge deal, but they have announced that the service is coming to 22 other major markets in 2013.
As is the case with all big business controversies it all comes down to money. In the 1992 Cable Television Consumer Protection and Competition Act, Congress required that all cable operators obtain the permission from broadcasters before carrying their signals on their cable systems. For a while this permission was granted for free, but in recent years the broadcasters have asked for significant fees and it is not unusual to see each local broadcast network charging $1 or more per customer per month for retransmission consent. So a cable system now has to pay that much each for ABC, CBS, NBC and Fox, and in some markets multiple stations of some of these. This has driven large increases in cable rates and is now a point of huge contention between broadcasters and the cable companies.
The broadcasters are angry that Aereo is able to bypass their fees since retransmission fees currently make up as much as 10% of their revenue. And the cable companies are angry that Aereo has gotten out of paying the same fees that they must pay. And they are worried that Aereo will accelerate the trend of customers who are ditching traditional cable TV in favor of programming from the web and elsewhere, the trend referred to as the cord-cutters.
Can Time Warner really do the same thing that Aereo is doing? Certainly Time Warner or anybody could form a company that does the same thing as Aereo and compete with them. Such a company could sell the same sort of line-up and do it using radios like Aereo has done. But they first must recognize that it’s important that Aereo is using radios because this is what allows them to not be a cable TV company, which is defined as somebody who delivers cable content using cables. So Time Warner would have to use radios also. And Time Warner is still hoping that the Supreme Court will look at the issue so it’s not entirely certain that Aereo, or anybody, has the legal last word that this is okay.
So Time Warner could establish an Aereo-clone company and do exactly what Aereo is doing. But they could not do this as an alternative to putting the network channels onto their cable system. In the aforementioned 1992 Cable Act, Congress set forth the rules for cable systems to carry broadcast channels, referred to as the must-carry rules. Congress said that a cable system with 12 or fewer channels must carry at least three local broadcast channels. Larger cable systems must carry all local broadcast channels, up to a maximum of 1/3 of their system. This means that Time Warner could not pull the local broadcast networks off of their cable and deliver it in a different way. But Time Warner could probably sell an Aereo-like product to somebody if that is the only product they sell to that customer.
Finally, can the broadcast networks pull their signals off the air and move them to be cable only? I can’t think of any reason why not. At that point they would no longer be a broadcaster and they would avoid all of the FCC rules applicable to over-the-air broadcasters. But if they do this they would become like any other cable network, and so ABC would be treated the same as HBO or TBS or any other cable network. It is likely that such a change would infuriate Congress since around 15% of the people in cities still receive free TV over the air. There would certainly be political repercussions from a broadcast network deciding to become just another cable network. For instance, might they lose their ability to carry professional football?
At the bottom of this controversy are huge dollars and also the underlying fear of the cable industry that Aereo is one more factor that is accelerating the bypass of their systems. It seems like Aereo might be in a similar position to MCI back when they broke the long distance monopoly. Aereo has stuck a sharp stick in the eyes of both the cable companies and the broadcasters and there is one hell of an interesting fight yet to come.
There are a number of trends affecting the cable TV industry that all add up to an industry that is going to be seeing big changes over the next decade. These are what I see as the biggest trends affecting the industry:
Cord Cutters. The number of people who are completely dropping cable is growing and the speed of that drop is accelerating. I have seen several different recent estimate that 5 million households will have completely dropped all cable service by the end of 2013. And only the cable providers know how many other million households that have cut back on the size of the package they buy rather than drop service totally. I anecdotally know many people, myself included, who have gone from the big cable packages to something less – in my case I now have only the basic package of about 20 channels.
Higher Programming Costs. Programming costs have been rising steadily for the last decade and until the last few years were climbing between 6% and 7% per year. Costs have climbed even faster in recent years due to the high fees being demanded by local network channels in each market (ABC, NBC, CBS and Fox). Local network programming was free for cable companies until a few years ago, but now they paying as much as $1 per month per customer for each major network channel. Many contracts between cable providers and programmers are for multiple years and those contracts show the price increases are going to continue to come.
Even Higher Rate Increases. The large cable companies have increased rates around 7% per year for many years. The programmers have usually blamed the size of the increases on increased programming costs, but until the recent increases in local network programming the increases were generally about twice what was needed to cover programming cost increases. If the rate increases continue at that level, then a $70 package today will cost $129 in ten years. Prices are already at a point that are forcing households off the network.
Very Solid Cable Modem Business. To a large degree the cable companies have won the war with DSL. However, they have stiff competition from Verizon and FiOS on fiber. There is limited competition outside the Verizon footprint, but with Google building fiber in Kansas City and having announced Austin and Provo there is going to be more competition for the residential business.
What do these trends add up to? I see them resulting in the following:
Ever decreasing cable customer base. The most dire trend for the industry is that young people are not interested in traditional cable, and as that demographic ages the percentage of households wanting cable is going to drop faster and faster. Add to this the households dropping due to never-ending price increases and most experts see cable subscribership going down the same path as landline telephones. Subscribers are dropping somewhat slowly now, but every prediction I have seen believes the rate of disconnects will accelerate over time.
Cable Providers Become Data Companies. As cable penetration decreases the cable companies will become more and more reliant on selling data. This is going to lead them over time to maximize their networks for providing bandwidth for data rather than cable TV. And I predict it also means that they will start raising data prices over time, something that we just started seeing in the last year. There is not much profit in selling cable packages and the cable companies could be more profitable selling data eventually (assuming they are in markets where they don’t have stiff competition).
Winnowing of Cable Networks. As the industry loses subscribers and as people downgrade from larger packages to smaller ones, the demand for some of the networks is going to diminish. One way for cable companies to control costs is going to be to whittle away at their line-up, and that is not that hard to do with 300+ channels on many cable systems. So some of the marginal networks are going to either die or greatly reduce the fees they charge if they want to stay in business.
There is one change that might affect the industry that could upset these trends, and that is a la carte programming. There are a lot of barriers to make that happen, but cable companies might get new life if they are able to sell only those channels that people want to watch. It’s certainly possible that they could sell a package of 20 channels to a family at an affordable price and make more profit than they do today with the large expensive packages. But this is going to require a major change in an industry that is currently controlled by the programmers and not by the cable companies.
