Will There Be a Tipping Point in the Cable Industry?

The Tipping Point: How Little Things Can Make ...

The Tipping Point: How Little Things Can Make a Big Difference (Photo credit: Wikipedia)

This is not a book review, but a few years ago I read a book called The Tipping Point: How Little Things Can Make a Big Difference by Malcom Gladwell. This booked looked at examples of tipping points – when minor events reach a level which triggers a more significant change. In the book he looked at a number of popular culture events such as how Hush Puppy shoes went from being something worn by New York hipsters to being in every mall in America in a short period of time. It was a thought-provoking book that looked in particular at how certain types of people are able to effect much bigger changes in the world than ought to be expected.

What made me think back on this book is that I have been thinking a lot lately about the cable TV industry. There are a ton of those ‘minor’ events happening in the industry and I have talked about some of them in my blog before. And I have been thinking about whether these small trends can accumulate together to fundamentally change the industry or if it will just change more slowly over time. I’ve been trying to think about what it might take for the whole industry to reach a tipping point.

We have a parallel to what might happen with cable TV service by looking back at what happened to home telephone service. Fifteen years ago about 98% of households had a traditional home telephone. But then Vonage and other VoIP carriers came along a little over a decade ago and whittled into the home phone market. But the VoIP carriers collectively did not do that great and after a couple of years in the business had captured only about 3% of the total market. But then other factors began hitting the industry. For instance, companies like Skype arose allowing people to make calls over the Internet without even using a phone. But the number one factor that has killed many home telephones has been the meteoric rise of cell phones. In looking back I think the landline phone industry really started losing lines when the cellular industry introduced family plans and all of the members of a family could have a cell phone.

In a study done in the first half of 2012, the Center for Disease Control asked many questions including ones about telephone usage. They found that the number of households with landline phones has dropped below 65%. In looking at the statistics in that study I conclude that the landline telephone industry never reached a tipping point. The industry certainly declined over a fairly long period of time and will almost certainly continue to do so. But there has been no tipping point such as was seen in the music store business which went mostly bust within just a few years after iTunes got popular. And so I ask myself if there will be a tipping point with the cable TV industry or if it will instead go into a long steady decline like the landline telephone business?

There are a number of factors that are affecting the cable TV industry, and most of them are relatively new. Some of these include:

  • Over-the-top video where programming is available on the web instead of by a traditional cable TV subscription.
  • Cord-cutting. Neilson has estimated that there are now 5 million homes in the US that don’t watch any form of TV and that this number grew by 1 million last year.
  • Cord-nevers. These are young households who get their entertainment from cell phones, pads and other methods and who do not sign-up for traditional cable TV packages when they start a new household.
  • Rate fatigue. The ever climbing cable bills that are pricing cable service out of the range of many households. This leads some customers to leave cable but others to downgrade to smaller packages.
  • Ever increasing programming costs. To a significant degree the cable TV rate increases are being driving by the programmers who charge more each year to cable operators for carrying their content.
  • Tons of companies competing for cable’s customers like NetFlix, Hulu, Amazon Prime and many others. And to some degrees the broadcast networks are helping them by making programming available on the web soon after it is aired live.
  • Companies like Aereo making it easier for customers to watch TV on any device.
  • Really simple devices like Roku, Apple TV, Playstation and many others making it easier for the non-technical household to get alternate programming onto the TV.
  • Unique programming being created just for the web. NetFlix and others are now developing programming directly for the web. There is also a movement to pick up popular shows that get cancelled and to continue them on the web.

There are a few experts that believe that the cable industry will be able to hold its own, even with all of these trends going on. But there are a lot more experts who are positive that the industry will decline, but the predictions of how fast vary from a slow decline like telephone service up to predictions of a fiery crash like what happened to CD stores due to iTunes. And there is ample evidence that the decline has begun. I saw a statistic that said that in 2012 the cable industry as a whole added a net of 50,000 new customers, wherein past years that would have been millions. And there is evidence that every one of the above trends is hurting the industry.

And there is more disruption to come. Wireless connections have gotten faster making it easier to watch TV while on the go. John McCain just introduced a bill that would promote (but not guarantee) a la carte programming. Comcast just increased their cable modem speeds nationwide. It just becomes easier and easier for a household to elect something other than the traditional cable TV packages.

Like many I certainly foresee an industry that is going to lose customers at a faster and faster pace over time. But I just don’t know if all of these little factors can somehow produce a tipping point for the whole industry. With that said, I believe that the effect of these changes will differ by market and I expect that there will be companies and markets that reach a tipping point long before the whole industry does.

Finally a la Carte Programming?

English: Signature of US Senator John McCain.

English: Signature of US Senator John McCain. (Photo credit: Wikipedia)

 

John McCain recently introduced a bill to the Senate that would allow for a la carte programming. The bill will be known as the Television Consumer Freedom Act of 2013  and is attached by clicking the link. Also here are the comments made by McCain when he introduced the bill.

Here are the things the bill does:

  • 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.