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.

What if Skinny Bundles Don’t Work?

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Tony Goncalves, the senior VP of strategy and business development for AT&T said last week that he thinks that pay-TV’s experiment with skinny bundles can’t last. He said that the economics are not there for it today and that his expectation is that over time that there will be pressure on skinny bundles to grow back into fat bundles. What if Gonzales is right and skinny bundles don’t work?

It’s clear that the traditional cable TV model is broken. Programmers seem to have lost their collective minds and are raising the cost of programming more each year to the point where many of my clients have seen several years in a row with programming cost increases over 10%.

And those big cost increases for programming turn directly into big rate increases on their cable products. For most cable companies it takes a 6% to 7% overall annual rate increase on cable just to cover the increased cost of programming. One doesn’t have to do much math to see that cable rates will be over $100 per month in just a few more years of continual rate increases.

Meanwhile customers cite the cost of a cable subscription as the number biggest factor that makes them consider alternatives. A lot of households are attracted to the idea of downsizing to a skinny bundle and adding Netflix or Amazon to reduce overall spending while still providing decent viewing options.

You can look at the early skinny bundles like Sling TV to see what Gonzales is talking about. They started with a small line-up of some of the most popular channels, but since then have added more and more options. It’s now possible to spend almost as much with Sling TV as with a traditional cable subscription, but getting a lot less channels. But a lot of customers seem to be finding the skinniest Sling TV options to be good enough. It includes ESPN and some of the more popular channels like the Food Network.

I know a lot of small telcos and cable companies are really hoping that customers like skinny bundles. Their biggest fear is that they continue to lose voice customers and that as customers continue to drop traditional cable that they will be left with only broadband as a product. I advise companies to do a simple test – look to see what your existing data rates would be if your only product was data. Most of them don’t like the answer, which often shows that data rates might have to climb to over $100 per month to keep companies whole.

And so the hope in the industry is that there will be some decent margin on skinny bundles. Selling skinny bundles would basically recalibrate cable TV as a product. While the costs for providing skinny bundles might grow quickly, starting over with a base rate of $25 or $30 can mean many years of providing affordable options for customers.

I’ve heard that the NCTC is negotiating skinny bundles for the small cable providers. Everybody is hoping there will be several options and that cable operators can make some decent margin on the skinny bundles. If so, I have a number of clients who will be aggressive in moving people from today’s giant packages down to the skinny bundles.

But if Gonzales is right and the math doesn’t work then I think we can all just watch cable start fading away over the next five years. We are starting to see the same kind of changes in the marketplace with cable that we saw for many years with telephone service. Consumer advocates are not advising people to drop traditional cable. Even Walmart has come out with a package that is inviting people to drop cable. As more outside forces tell your customers that the big cable packages are a bad idea the cord cutting movement will gain momentum if there isn’t an alternative product to offer to customers.

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.

Small Cable Systems Failing

coax cablesThe American Cable Association (ACA) recently asked the FCC to look at the issue of why small cable systems are shutting down. The ACA represents small cable systems nationwide. Using data from the National Cable Television Cooperative (NCTC), the ACA says that 1,169 cable systems have shut their doors since 2008. In 2014 there were 91 cable systems that closed and in 2013 there were 133 systems.

The ACA says that the primary reason that these small cable systems have closed is programming costs, and I’m sure that has to be a major reason. The other reason is probably due to competition from satellite providers, which is also tangentially related to programming costs.

I am guessing that many of the systems that are closing are small bandwidth systems that don’t carry the 200 – 300 channels that people associate with urban cable systems. There are numerous rural systems that carry smaller channel line-ups from 30 to 100 channels. They tend to carry the most popular stations and so their customers are generally happy with them.

There is one programming issue that I think particularly discriminates against smaller systems. While I can’t cite specific numbers due to various NDAs, there are programmers that price programming in a way that kills the small operators. For instance, the programmers often make the large systems take all of the channels they offer in an all-or-nothing deal. But they price this in such a way that all of the ‘cost’ to the cable system is allocated to one or two primary channels in the suite with the rest being added for free or for a very low cost. This means that a small system that takes only a few channels from a programmer might pay as much for the programming as a large cable operator that carries everything from that same programmer.

While it is probably impossible for the FCC to regulate the programmers, I think it is probably within their purview to say that the practice of forcing systems to take every channel is discriminatory. If they could do that they could probably also insist that the programmers fairly allocate the fees among the many channels in their package. That would allow the small systems to save a lot of money on programming and to stay competitive against satellite providers.

The satellite providers are definitely hurting the small systems. The satellite companies are large enough that they can buy programming for a little cheaper than a small system. But this is only a minor edge because even the big companies don’t get much of a discount on programming. The real advantage the satellite companies have is that they don’t have to maintain a fleet of technicians in trucks. That is a true competitive advantage and the small systems can’t compete with that while paying more for programming than they ought to.

The other issue that small cable systems face is not related to programming. A lot of these smaller systems are low bandwidth, meaning that they have only enough bandwidth to carry the smaller cable lineup they offer. This means they cannot offer cable modem service, which is the one huge advantages that larger cable companies have. Even if the small systems were able to increase their bandwidth somehow, these older systems often would require a major rebuild of the coaxial plant in order to handle larger bandwidth. It would mean replacing and moving power taps and amplifiers, and in some cases even replacing the coaxial cable.

To some extent a number of these systems were doomed to fail when the rest of the industry shifted to make all of their profits from cable modems and voice. Without that extra margin these small companies are competing with only a cable product against satellite providers who can offer more channels for a lower price. And these small systems have the same issues with cord cutting and a general loss of cable customers that everybody is seeing. That is a recipe for failure and I’m not sure that the FCC ought to prop up systems that are doomed to fail almost by definition.

But there are many other cable providers that would benefit and thrive if the programming issues can be made fairer. If the FCC really wants to help out cable providers of all sizes and of all technologies they will give cable providers the chance to offer smaller packages of programming to match what the OTT guys are doing. This will benefit fiber systems as much as coaxial systems and can put some balance back into the relationship between programmers and providers.

Those Insane Programmers

MTVThere is currently a dispute going on between a programmer and a bunch of cable companies that illustrates the nearly insane greed in the cable industry. I say the greed is insane because it seems like the programmers want to hasten their own demise.

The programmer is Viacom and they own channels like MTV, Nickelodeon, Spike and Comedy Central. The dispute is with the National Cable Television Cooperative (NCTC) which represents 890 of the smaller cable companies in the country. That’s just about everybody who isn’t large.

The current contract between Viacom and NCTC expires on March 31. None of us know the exact numbers, but a NCTC spokesperson says that Viacom wants a rate increase that is 40 times the rate of inflation. That itself may be an inflated claim, but in 2012 Viacom asked for a 30% rate increase from DirectTV. When DirectTV refused to pay, Viacom pulled their channels off the air for DirectTV until the issue was settled.

And Viacom is still today asking for huge fee increases. If Viacom was the only programmer doing this we could say that they are extra greedy. But the fact is that all of the programmers are doing the same thing. Every programmer is increasing fees to cable systems at rates far above inflation. The cost to cable providers for programming has climbed over 7% per year for nearly a decade, and in recent years I know some systems that have seen increases over 10%. Cable companies have no choice but to pass these increases on to customers and so we keep seeing big rate increases year after year.

But we are now at a time when customers are getting tired of the price of big cable packages and when a significant percentage of customers are thinking about abandoning cable. To keep pushing these big increases make no market sense. Just do the math to see how insane this is. For a customer paying $50 per month today, these increases will increase their rates to $70 in five years and $98 in ten years. Somebody paying $70 today will see rates of $138 dollars in ten years.

This can’t be sustained. It seems as if programmers like Viacom are making the risky bet that people will not cut the cord and find an alternative to the big cable packages. But every one of my smaller cable clients is losing customers, and at a faster and faster pace. They hear the stories every day of people who are fed up with the big monthly bill and who decide that they can get by with rabbit ears, NetFlix and AmazonPrime.

I’ve heard the idea that once most people drop cable that all of the networks will just go a la carte and sell to people over the Internet. But that is naïve and there are only a small handful of channels that have enough appeal to survive in an a la carte world. It’s likely that people will pay a monthly fee to get ESPN or Disney and maybe even Comedy Central. But probably 90% of the channels on cable systems will die if the big cable model breaks.

So why are Viacom and the other programmers being so greedy? One can chalk part of it up to the large company mentality that all that matters is the earnings next quarter. But one can also blame amazing arrogance in that they believe that the people of the US will keep paying huge fees to watch them. Are there really that many households where Nick at Nite is so important to people that they will pay $100 monthly in order to watch it? As OTT programming gets better, I foresee a day in the not too distant future when customers will bail on cable companies in droves. And then the hubris of the programmers will be fully exposed. The programmers are pushing hard to speed up the day when they will fail. If that is not insane, what is?