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.

Why the Big Programming Cost Increases?

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I recently talked to several clients who are expecting an increase in cable TV programming costs of between 8.5% and 9% for next year. They are able to forecast this because most of the contracts for programming cover at least three years of baked-in rate increases.

Every one of these clients is bleeding cable customers. We hear about how the big cable companies are experiencing impact from cord cutting. Last year the big companies altogether lost about 1.7 million customers, which is a little less than 2% of their customer base. But my small clients seem to be losing cable customers at a much faster pace. Cord cutting is obviously a real phenomenon and I’ve seen recent estimates that the big companies are expected to lose around 1.9 million customers this year. But while the big companies are losing customers at a steady pace, smaller cable operators are seeing a much bigger impact.

I think there are a number of reasons that small cable providers are suffering more.

  • Most of my small clients don’t pay the same billing games as the big cable companies. The big companies have created a number of ‘fees’ such as a local programming fee or a sports fee to disguise the real cost of cable. Many customers think these fees are taxes of some sort and they believe that the base price of cable shown on their bill is the actual price they are paying. That lower number is the one that they use when comparing to other alternatives.
  • The big companies are also far more aggressive with their bundling. They work hard to force customers into bundles and they penalize customers for leaving a bundle. Customers often don’t know what they pay for any specific product in a bundle and when they try to drop one product the full bundle savings are applied to that product. Even when small companies have bundles they don’t create a huge financial disincentive to leave the bundle.
  • Big companies are willing to give ‘special’ pricing to keep customers. They tend to give special pricing discounts aimed at new customers to anybody else who is willing to wade through the customer service minefield to ask for it. I think since smaller companies often don’t advertise ‘special’ prices they are far less likely to even be asked to reduce rates.
  • My smaller clients are generally more rural than the big companies, and as such they face far stiffer competition from the satellite companies. Both of the satellite providers now have a ‘skinny’ bundle that a lot of customers are finding attractive.

Why are the programmers raising rates so aggressively when it’s clear that the price of cable service is the number one driver of cord cutting? I have several ideas why they might be doing this:

  • These are all publicly traded companies and to some degree they don’t have a choice. Over 90% of cable channels are bleeding customers much faster than the rate of cord cutting. This shows that many customers are cord shaving and downgrading to smaller, less expensive packages. The programmers are compelled to increase profits, and with declining sales they can only compensate by raising programming rates. That sounds insane because it sounds like the beginning of a classic death spiral. But you must remember that any large publicly traded company that performs poorly is subject to being purchased by somebody else who will then force profits back up again. Our dreadful quarterly profit driven economy is forcing the programmers into a path that is not in anybody’s best interest.
  • They are all chasing hit shows. There are now a lot more companies like Netflix and Amazon creating unique programming, which adds to the pressure on the programmers. The financial rewards from producing even one hit show is gigantic, so they all keep spending money trying to find that next big hit, and raising rates to cover the cost of producing content.
  • Another theory is that the current rate increases are their last hurrah. They can see where the industry is headed. I saw an interview with the head of programming for FOX and he said that he expects that the company is going to have to ultimately collapse most of its many channels as they keep losing customers. And so perhaps these rate increases are the chance for making big profits for a few more years before the wheels come off. It seems that end is coming anyway, so maybe raising rates now is a way to milk every last penny out of a fading industry.

Programming content is certainly never going to go away. But companies like Netflix and Amazon are showing that there are reasonable alternatives to the huge TV bundles. I just wish I knew what to tell my clients. The most common question I seem to be getting these days is, “Should I even be in the cable business any longer?” I’m starting to think that the answer for many of these businesses is no – or it will be no within a few short years.