The Industry

Prices are Driving Cord Cutting

It’s been general wisdom for several years that high cable TV prices are one of the predominant factors behind cord cutting. TiVo’s recently released Q4 2017 Online Video and Pay-TV Trends Report says that prices are even more important than we thought. TiVo talked to a number of cord cutters in 2017 and found that 86.7% of those who dropped TV in 2017 list high prices as the number one reason for abandoning traditional cable TV. This is up from 80.1% a year earlier.

It’s not hard to understand why price is becoming such a big factor. Over 50% of households now say that their monthly cable bill is more than $75 per month. And only 15% pay less than $50, down from 18% a year earlier. Annual rate increases that are far greater than the cost of general inflation are pushing cable prices out of the affordability zone for many households.

Interestingly we see this same trend manifesting in another way. In a recent survey Parks Associates report that a little over 20% of households now use digital antennas in their homes to receive over-the-air networks like ABC, CBS, NBC, FOX and PBS. That’s up from 15% in 2015. That’s a huge swing and means that over 6 million homes have started using antennas in just the last two years.

Nationwide more than 3 million households (2.4% of all households) dropped cable in 2017 – as witnessed by the subscribers of the largest cable TV companies. Just about every one of my clients will tell you that they lost a larger percentage than the average. The nationwide numbers are bolstered by the fact that Comcast lost only 0.7% of its cable customers and Charter lost 1.4%. But telcos did far worse with AT&T losing 14.6% and Frontier losing 16.1%.

Higher prices are almost entirely due to increased programming costs. Small companies have seen programming costs grow over 10% per year, and the rate of annual growth is increasing. Some have reported annual increases to me as high as 15% in the most recent two years.

One of the biggest drivers of high programming costs are the retransmission charges that local affiliates of the major networks charge to cable companies to cover the over-the-air networks. In large cities a lot of the local TV stations are owned directly by the major networks like NBC or ABC, but in smaller markets these are generally owned by others. The independent local stations have no recourse but to raise retransmission rates each year since the networks increase the costs to them for remaining as an affiliate. In the end, all of the extra revenues from retransmission fees flows up to the major networks, which now see this as a major source of revenue growth.

It’s not just the major networks that are increasing rates. Practically every cable network is increasing rates at a faster pace than a decade ago. It’s a really odd economic phenomenon to see big price increases occurring in an industry that is losing customers at this pace. Any economics 101 book would suggest that the laws of supply and demand would drive prices for programming in the other direction.

But the cable industry is perverse due to regulations. The cable rules require stations to carry local networks that are within their range. I know a number of cable companies who would gladly provide rabbit ears to customers rather than continue to raise rates every year – but they are required by laws passed by Congress to carry these stations. The same laws also force cable companies to carry large lineups in the basic and expanded basic tiers that we are all familiar with.

These laws mean that cable providers have few options on what networks to carry. I don’t know any cable providers who wouldn’t like to try something different and perhaps offer smaller packages of the most-watched networks that people could afford to buy. But the legal requirements for cable lineups embolden the programmers to charge exorbitantly because cable operators have no power to push back. The most a cable provider can do is to take all of the networks from a given programmer off the air – and even this is impractical since each of the few major programmers own a lot of networks.

You can’t really fault the programmers since they are all publicly-traded companies which are responding to Wall Street demands that they increase profits quarter after quarter. The whole cable ecosystem is polluted by the need to increase profits. It’s sad, because without the price increases each year all of the companies involved could continue to make high margins and big profits.

Even with all of this turmoil in the industry I don’t hear of any discussion in Congress about tackling the issue and relaxing the current rules that are breaking the industry. Instead we see people fleeing traditional cable TV and buying smaller packages of the same programming online from Sling TV, DirecTV Now and Playstation Vue.

The rate of cord cutting is clearly accelerating and it’s not going to take many more years until these issues can’t be fixed – because by then the majority of households will be getting programming online rather than from cable companies.

What Customers Want

Walking Away from Cable

Several different events in the last week got me thinking about an interesting trend in the cable industry. First, in my community there is a Redbox outlet in a neighborhood grocery store. My wife and I were discussing how busy they seem to be in renting out movie DVDs. All of the Blockbuster and other movie rental outlets have closed. Until I moved to this neighborhood recently I hadn’t notice any video stores or related outlets in a long time. But this Redbox seemed to have a lot of business.

I also saw an article in FierceCable that noted that only 5% of US households have subscribed to a vMVPD – an online cable provider like Sling TV, DirecTV Now or Playstation Vue. My first thought is that a 5% market penetration seems pretty phenomenal for an industry that is barely two years old. But the article notes that while 5% of households are current subscribers to online programming, another 8% of the market has tried and dropped one of the services. Since only about 20% of the total households don’t have traditional cable service it makes you wonder what the real upper potential for this market might be – it might be a lot smaller than the vMVPDs are hoping for.

I also went to a Superbowl party. The half dozen families attending are from my neighborhood and it turns out all of the households are cord cutters and don’t subscribe to traditional cable service. I was the only one that used a vMVPD and I currently have a subscription to Playstation Vue. None of them had tried a vMVPD and they seemed to have no interest in doing so. (I only use Playstation Vue because it’s the cheapest way to get Big10 sports and Fox Sportsnet so I can watch Maryland sports teams – I rarely watch the other linear programming).

National broadband penetration rates are now at 84% of all households. I’ve seen many of the opponents of spending money to build rural broadband say that households just want broadband to watch video. Netflix has made a huge dent in the market and served nearly 55 million US homes at the end of 2017. Add to that some percentage of the 90 million homes that subscribe to Amazon Prime, and it seems like there might be some truth in that.

But if households are cutting the cord, why aren’t more of them buying one of the on-line cable alternatives? Those services have packages that carry only the most popular cable channels at half the price of buying traditional cable.

I think the answer is a combination of two factors. One of the predominant factors is price. Every family at the neighborhood party has kids and they dropped traditional cable because it was too expensive. That has to be the factor that explains why the Redbox outlet is doing so well. Most of the movies available from Redbox are also available online. But getting online means also having an Internet-enabled TV or else buying a Roku or other web interface. And even then, watching many of these newer movies means subscribing to yet a different online service. I think there is a cost barrier, or perhaps a technology barrier that is keeping households using a traditional DVD player and Redbox.

Two different households at the party told me that they were satisfied with just watching Netflix and the free programming available on YouTube. And that is the second important trend. Households are getting used to watching just a subset of the programming that is available to them. When somebody drops cable TV and doesn’t buy a vMVPD service it means they have walked away from all of the content that is available only in those two media.

Most of my neighbors still watch the major networks using rabbit ears (something I don’t do). So they are still watching whatever is available on local CBS, NBC, ABC and FOX. But the families on my street are learning to live without the Game of Thrones, or the Walking Dead. They are no longer watching ESPN, Discovery, Comedy Central, the Food Network and the hundreds of channels that make up traditional cable TV.

This means their kids are not growing up watching traditional cable networks, and thus are not developing any brand loyalty to those networks or their programming. If you don’t learn to love a network when you are a teenager, will you decide to watch it when you are older?

I don’t have any answers to these questions, and obviously I can’t define a trend just from talking with some of my neighbors. But I found it intriguing that they all had dropped traditional cable and had not replaced that programming with something online. This tells me that there must be a lot of people who are not enamored with linear programming whether it’s on cable or online. And a lot of people are convincing themselves that it’s okay to walk completely away from the big pile of programming that is offered by the cable TV networks.

This is potentially a watershed phenomenon, because somebody that walks away from traditional programming is probably not coming back. These folks are cord cutters who are literally walking away from most of the programming available on traditional cable. Those networks and their programming are going to become irrelevant to them. But interestingly they are still going to consume a lot of video content – just not that created by the traditional cable networks. In my mind these households are looking a lot like Generation Z in that they are foregoing traditional programming and watching something else.

The vMVPDs are banking that people will transition down to their smaller packages when they leave a cable TV provider. But will they? This is a phenomenon that you can’t determine from industry-wide statistics, other than perhaps by seeing the dropping number of paid subscriptions to the various cable networks. People like my neighbors are dropping cable due to the expense, but they are quickly learning to live without traditional cable programming and aren’t chasing the online alternatives.


The Resurgence of Rabbit Ears

There is perhaps no better way to understand the cord cutting phenomenon than by looking at the booming sales of home TV antennas known as ‘rabbit ears’ used to receive local television off the airwaves. A study released by Park Associates shows that 15% of households now use rabbit ears, and that is a pretty amazing statistic. That is up from 8% of households from as recently as 2013. And I recall an earlier time when this had fallen below 5%.

For the longest time the TV-watching public was counted in three groups – those who had cable TV (including satellite), those that used rabbit ears to watch local TV only, and those with no TV. We now have a fourth category – those that only watch OTT programming such as Netflix.

I was once in the category of not watching TV at all. I remember twenty years ago I went to Circuit City (now gone) to consider buying a set of rabbit ears and the clerks there weren’t even sure if the store carried them. With some asking around they found that they had a few units of one brand that had been gathering dust.

But today there is a resurgence in rabbit ears and there are easily a dozen major brands. And there are new rabbit ear options coming on the market all of the time. For example, Sling TV just launched AirTV, a $99 box that integrates Sling TV, Netflix and high-quality rabbit ears together with a voice-activated remote control that makes it easy to cut the cord. This looks to be one of the better voice-activation systems around and lets you search programming options by using the name of shows, actors names or genres of types of programming.

Since most people have had cable TV for a long time many have no idea of what they can receive off air for free. The FCC has an interesting map that shows you the expected reception in your area. In my case the map shows that I can get a strong signal from every major network including CW and PBS along with signals from MyTV, Univision and a few independent local stations.

The Parks study also looks at other industry statistics. A few of the most interesting ones include:

  • Penetration of pay-TV was down to 81% in 2016 and has fallen every year since 2014. Parks cites the normal reasons for the decline including the growth of OTT programming, the increasing cost of a cable TV subscription and growing consumer awareness that there are viable alternatives to cable TV.
  • Satisfaction with pay-TV keeps dropping and only one-third of households now say that they are very satisfied with their pay-TV service.
  • OTT viewing continues to rise and 63% of US households now subscribe to at least one OTT offering like Netflix while 31% of households subscribe to more than one.
  • In 2016 12% of households downgraded their pay-TV service (meaning dropped it or went to a less expensive option). This was double the percentage (6%) who upgraded their pay-TV service in 2016.
  • Very few cord nevers (those who have never had cable TV) are deciding to buy pay-TV, with only 2% of them doing so in 2016. This is the statistic that scares the cable companies because cord nevers include new Millenial households. This generation is apparently not interested in being saddled with a pay-TV subscription. In past generations the percentage of new homes that bought pay-TV closely matched the overall penetration of the market – buying TV was something you automatically did when you moved to a new place.

These statistics show how much choice the OTT phenomenon has brought to the marketplace. Ten years ago there wouldn’t have been industry experts predicting the resurgence of rabbit ears. In fact, rabbit ears were associated with other obsolete technologies like buggy whips and were used as the butt of jokes to make fun of those who didn’t like the modern world. But this is no longer true and new rabbit ear homes are perhaps some of the most tech savvy, who know that they can craft an entertainment platform without sending a big check to a cable company.


What Customers Want

One Way to Cut Cable Bills

I just read that retransmission fees may climb to $6 per network in the next few years. At a recent industry summit Randy Bongarten, the CEO of Bonten Media Group and the owner of a number of broadcast stations, said that he predicted cable systems would soon be paying as much as $6 for each of the major broadcast networks – ABC, NBC, CBS, and FOX.

For those not familiar with the cable industry, every cable company must pay a retransmission consent fee to each of these major networks to compensate them for carrying their programming. This is a relatively new phenomenon in the industry and following is a brief history:

  • In 1972 the FCC said that cable systems must carry stations that are within 60 miles of their service area.
  • In 1992 the FCC ruled that station owners could negotiate compensation for carriage of their signals.
  • Not much was done with this until the early 2000s when small payments for network content were negotiated in a few major metropolitan markets.
  • But within a decade every cable system was paying for local content and the networks increased rates aggressively with each new two-year contract. Most network stations today charge between $2 and $4 per customer to cable companies for carrying their content.

And now the networks want to keep increasing the payments for local content to $6 per customer per month. That means that soon $24 out of every cable TV bill in the country will be sent back to the four primary networks. With roughly 100 million cable subscribers that is nearly $29 billion per year and $288 per household.

This situation is made worse by the fact that cable companies have little recourse but to carry this content. Customers would drop cable if they refused to carry the local stations. But cable companys’ hands are also tied because in order to carry advanced programming such as expanded basic or digital tiers they are required to carry the basic tiers – that tier that must be given to every customer. The other problem faced by cable companies is that there is little real negotiation on the retransmission rates – it’s generally a take-it-or-leave price demanded by the network affiliates.

The FCC could return some fairness to the process and also give a break to consumers with one simple change in the rules. The FCC could let customers opt out of buying the basic channels from the cable company. Anybody who lives in a metro area can already get all of these networks for free with a pair of rabbit ears. If customers had the option of opting out of these channels from cable, then they could cut their cable bill significantly while still being able to watch the channels for free from rabbit ears. It’s relatively easy to install rabbit ears to work alongside your cable system.

Of course, the cable companies have to ask for this kind of change and so far none of them have gone this far. And this is because, as much as they hate passing on the big fees from programmers, the big cable companies are also complicit in the process. When their programming costs go up $3 in a year they will raise rates $4, and so their profits keep climbing every year along with the programmers.

But we are finally starting to see cracks in the system. Most cord cutters are doing so to save money and I am positive that if people had the ability to opt out of paying for the local networks from the cable company that many of them would. Today if such programming costs $4 per network, then a customer could instantly cut their bill $16 per month or $192 per year.

So perhaps what we need is for individuals to start asking the FCC to allow them to opt out of paying for local channels that they could otherwise get with a cheap pair of rabbit ears. The cable companies might eventually come around to wanting this if cord cutting grows to be too significant, but right now they have no interest in looking out for the benefit of their customers.

I know many smaller cable operators who would love to have this option. They feel the local networks are holding them hostage by demanding bigger payment for local content every year. If a cable company was willing to work with their own customers to bypass the local stations this might bring some balance back to this process and turn it into the negotiation that the FCC originally envisioned in 1992. I know smaller companies who would gladly provide every customers with rabbit ears and help them integrate them into their TVs if that was allowed. But today a cable company could find themselves in hot water if they actively helped customers bypass the local networks.

The runaway greed of the networks and station owners is ruining the cable market. Cable rates continue to skyrocket much faster than the cost of inflation. Households really love their TV, but more and more households are finding cable to be unaffordable.

I hope the FCC wakes up to this and perhaps this blog can be the first tiny step towards planting this idea in people’s heads. Nobody really wants to pay $24 per month just to get ABC, CBS, NBC, and FOX. So let’s start asking the FCC to let us opt out of those payments.

Current News

Aereo to Get their Day in Court

The various Aereo cases have finally worked their way up to the Supreme Court who will hear the case on April 22. There have been a number of District Court findings on Aereo, some for and some against them, prompting the Supreme Court to arbitrate the differences.

Aereo is now a little over two-years old and in that time has stirred up a lot of controversy. Aereo offers a package of network programming and web programming delivered directly to customers devices such as a pad, computer or cell phone. They have been very successful in the market so far and have announced recently that they have sold all they can in several markets like New York City and Baltimore.

But the reason that they are so controversial is that they have assembled their package without paying retransmission fees to the networks. Retransmission fees are those fees paid to the major networks – ABC, CBS, FOX and NBC – for the right to carry their programming. These fees are gigantic. In most markets the cost to now carry a local affiliate station is in the range of $2 per customer per month. And that is a remarkable figure since as recently as five years ago there was no charge to most cable companies for carrying these networks.

These fees are a significant part of the reason why cable rates are climbing so quickly. At $2 per network channel, these fees have increased the cost of cable by $96 per year to a cable subscriber. And nationwide these fees drive over $7 billion per year in revenues.

Aereo found a way around retransmission fees. The networks all use public spectrum, and for the use of that spectrum they broadcast their shows through the air for anybody with a set of rabbit ears to get free. Aereo uses a technology that basically uses a separate set of rabbit ears (actually a tiny one-inch antenna) for each customer. They receive the programming at a centralized hub and then send it to the customer’s devices.

Customers love this. The one thing you can’t get when you try to wean off cable is a live version of the network shows. People by the millions have dropped cable or downsized cable packages. At home such customers can get programming on their TVs for free with an antenna. But there is no easy way for them to get this to tablets and smartphones, which has become a very popular way of watching TV.

I like what Aereo is doing. Certainly as a customer I think this is a good thing. If I can receive this programming for free at my house then I feel I ought to have the right to pay somebody to help me get that free programming onto my iPad. That is really all that Aereo is doing. I certainly am offended that the network channels want me to pay $96 per year for programming that I can get with a $50 set of rabbit ears.

Some network execs have said that if Aereo wins at the Supreme Court they will pull their channels off the free airwaves and only sell them through cable TV. I have a hard time believing that any network would have enough hubris to do this. I am picturing a big political backlash when the networks that carry local sports and the local NFL teams disappears from the airwaves.

The networks are making huge gobs of money today, and while the money from retransmission fees is making them fatter, they still derive most of their revenues from advertising. One would have to think that their advertising model would change drastically if they were to suddenly become just another of the many cable channels. Personally, I hope one of them tries this and then loses their ass and their customer base. Because we would all benefit from using the spectrum they will vacate.

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