‘Tis the Season for Rate Increases

Charter just announced their annual rate increases for cable TV and broadband. They are usually the first of the big companies to announce since they increase rates in November, while most other big companies do so after the new year.

The announced increases include the following:

  • The Broadcast TV surcharge will increase from $8.85 to $9.95 per month.
  • Settop box fees will increase from $6.99 to $7.50 per month.
  • Broadband prices for customers who are bundled with cable TV will increase from $54.99 to $59.99 per month.
  • Broadband prices for standalone broadband (no cable TV) will increase from $64.99 to $65.99 per month.

The cable TV increases follow the pattern we’ve seen among the big cable companies in that they are raising ancillary fees instead of the basic prices for cable packages. The Broadcast TV surcharge, which is paid by every TV subscriber, covers the costs of retransmission fees that Charter pays to over-the-air networks like ABC, CBS, FOX and NBC. Most customers probably think this is included in the cost of basic cable service, but by shifting this to a separate fee the cable companies can continue to advertise a low price for basic cable. I know what a lot of my clients pay for retransmission fees, and none of them are yet paying $9.95 per month, so it looks like Charter is padding this number with some profits.

I’m surprised that the Federal Trade Commission hasn’t slapped one of the cable companies for this billing practice. They have created ancillary fees like the Charter’s Broadcast TV surcharge along with other fees such as a ‘sports fee’ in order to be able to advertise prices that are lower than what customers pay. When a new customer subscribes to cable they often end up paying $15 – $20 more than the advertised price.

The settop box fee is another place where cable companies make a lot of money. Charter probably pays no more than $100 for a settop box, so their new increased fee of $7.50 per month pays back the cost of the box in only 13 months. The box fee is the most profitable part of the cable business since customers tend to keep settop boxes for an average of 5 years or more. At least Charter’s settop box rate is lower than the $9.95 currently charged by Comcast.

The real headline is the increase in broadband rates. I was just talking to a client yesterday who mentioned that they hadn’t changed broadband prices in over fifteen years. We have now entered an era where cable companies are likely to raise broadband prices every year. They are losing cable customers and telephone customers every year. While broadband customers are still increasing, the growth is now due to continued poaching of DSL customers since the overall pool of broadband customers is no longer growing rapidly. This means that the only way Charter and other cable companies will be able to meet Wall Street earnings expectations in the long-run is by raising broadband rates.

The $5 rate increase for bundled broadband is the largest broadband rate increase I’ve ever seen. Charter doesn’t disclose the number of customers that buy bundles. My firm, CCG conducts surveys for customers and we typically see around 70% of households buying a bundle of services. If 70% of Charter’s 24 million broadband customers are in bundles this equates to $1 billion in new annual revenues and bottom line for the company. Charter won’t realize the whole $1 billion since some customers are going to be under term contracts, but this is still by far the largest increase in broadband prices I’ve ever seen.

Interestingly, Charter just made it easier for customers to cut the cord. Before the rate increase there was a $10 per month differential between the price of bundled and unbundled broadband – meaning that somebody that dropped Charter cable would have seen a $10 rate increase. That penalty is now lowered to $5 per month. However, Charter just made up for that with the big rate increase.

Charter has recently increased broadband speeds across-the-board. They advertise that the minimum speed for their basic product has been increased from 100 Mbps to 200 Mbps (although in my markets speeds have increased from 60 Mbps to 135 Mbps). I’m guessing that Charter is hoping the speed increases will help to justify the $5 broadband rate increase that a lot of their customers are going to see.

The Pent-up Demand for Cord Cutting

I just saw an eye-opening statistic. Deloitte’s latest Digital Media Trends Survey reports that 56% of current pay-TV subscribers are keeping TV because they feel trapped by the bundle. Deloitte concludes that there is huge pent-up demand for cord cutting.

This number is not entirely surprising to me because in the last few years I’ve seen new fiber networks get a much smaller percentage of cable customers than would be expected by the subscribership on the incumbents. New fiber providers do surveys showing incumbent cable TV rates between 65% to 75%, and yet they far lower percentages of new customers buying cable TV on their new fiber network.

I always interpreted this to mean that the new fiber competitor attract customers who want faster broadband. I’ve assumed that these were natural cord cutters. But if the Deloitte statistic is to be believed, a large percentage of new customers on fiber networks are using the opportunity of changing providers as a chance to drop the traditional cable that they no longer want.

We know that there is a financial penalty for breaking a bundle, which must be a strong incentive for people to stay with their current provider. The amount of this penalty differs by customer and often has to do with how willing a customer is to fight to keep a cheap price while dropping cable. I’ve always thought the penalty for dropping cable is between $10 and $20 per month.

But sometimes the bundle is more and is forced. I moved and left Comcast less than two years ago. They would not let me buy faster broadband speeds without subscribing to basic cable TV. I tried every year to try to drop the cable – something that I never used and for which I stashed the settop box in the closet. But I was told each year that dropping the cable meant dropping back to a slower broadband speed. In my case I would have saved at least $40 per month from dropping basic cable, but I felt blackmailed into keeping it to keep an acceptable broadband speed.

This statistic has a lot of industry implications. First, builders of new networks can’t count on a big cable penetration. Obviously the Deloitte 56% finding is going to vary from market to market – but it’s such a large number that in almost any market a new network is going to get far lower cable penetration rates than what the incumbent has today. We know nationwide that the overall cable penetration rate last year was 69%, which is now probably closer to 67%. New networks are going to see significantly lower cable penetration rates – if Deloitte is right, perhaps in the mid-30% range.

If this statistic holds true everywhere it is probably one of the main reasons why customer dislike of cable companies is growing. Cable companies have been among the lowest rated companies in terms of customer satisfaction – and in recent years their already low ratings are continuing to drop. Many consumers must feel the way that I felt about Comcast – that they are being ripped-off and held captive by the bundled pricing. The same bundle that they liked when it first saved money is being used against them if they want to drop cable TV.

This statistic also makes new technologies and new ISPs more attractive. People will likely flock to 5G if the speeds are decent and they aren’t forced to take cable TV. This might also be one of the reasons that many are choosing cellular broadband – to get away from over-expensive cable TV.

Finally, this means that the cable companies are sitting on an albatross of a product. There are many millions of homes paying for a product that they no longer want. Last year there were still more homes that dropped telephone landlines than cut the cable cord. But if the Deloitte statistic holds true, it might not take much for many homes to make the cord cutting decision and cord cutting could quickly change to a deluge. The industry-wide implications of that are huge – it would quickly cripple programmers. It would put a huge dent in the retransmission fees that are currently fueling the profits of the major over-the-air networks. A huge drop in traditional cable customers would quickly be felt in the sports world – which is largely financed with TV revenues. It means a drastic drop in the incentive to advertise on TV – the other major revenue that fuels the industry.

I believe that the cable companies have been counting on cord cutting to increase slowly over time, similar to the way that the landline telephone business has slowly ebbed away. But if there is this much pent-up demand to drop cable, it’s not inconceivable that the number of cable customers could drop explosively if there is a consensus that it’s worth it to break the bundle. The whole cable industry is not ready for an explosive drop in customers and it would get ugly quickly.

Skyrocketing Retransmission Fees

I just saw that the Sinclair Broadcast Group, one of the largest owners of local television stations now gets nearly 50% of their revenues from retransmission fees. This is an extraordinary number when considering that a decade ago that number would have been zero. What is most telling about that number is that Sinclair is growing profits while their core business is sinking. Their advertising revenues are down and the cable companies that carry their signals continue to lose customers due to cord cutting.

Retransmission fees are probably the leading factor in the escalating cost of buying cable TV. Retransmission fees are billed by local over-the-air (OTA) network stations like ABC, CBS, NBC and Fox to allow cable systems to carry their programming. FCC rules make it mandatory for cable companies to carry local OTA content. A decade ago there were almost no retransmission fees outside of a few major markets like New York City. Traditionally cable companies added local programming to their line-up without having to pay a fee – and everybody was happy because the local networks affiliates still got the eyeballs for their advertising.

But today every local network affiliate charges cable companies to carry their content. The current fees average fee per station has climbed into the range of $3 per network month, meaning that roughly $12 of every cable subscription is being sent directly to the local network affiliates – not into the pocket of the cable companies.

This is a rigged game and cable subscribers are funding huge profits for the network affiliates. The cable companies are forced to carry the content and the OTA network affiliates raise rates each year, essentially printing money. There is supposedly a negotiation process for the rates, but the OTA network affiliates have all of the power in the relationship and generally are inflexible on prices.

I suspect that the average cable subscriber has no idea that they are paying close to $12 per month to get the same content they could get for free with a TV antenna. We know from numerous surveys that cost is the leading factor that convinces households to cut the cord, and the escalating retransmission fees have been driving up cable rates by $2 to $3 per year.

We know from looking around the industry that many folks are rebelling against the high prices stemming from the retransmission fees. Over the last three years it’s estimated that there are almost 11 million new homes that are using antennas to get local content. Some of the most successful online video sources like Sling TV and Playstation Vue offer their lowest-cost packages of programming without any local programming.

Sling TV has gone so far as to offer as to offer a box it calls Air-TV that includes an antenna to get local content that is then integrated with the other Sling TV content. The CEO of Sling TV says that the company makes no money with this product, but it’s proven popular and helps to convince households to drop traditional cable by making it easy.

Most of the large cable companies have responded to the retransmission fees by creating a fee separate from the cost of the cable product. They label these fees with names such as Local Programming Fee and hope subscribers think it’s a tax. This is a deceptive billing practice because it lets cable companies advertise the price of cable without the local fees, yet every customer must pay these fees. I was looking at a customer bill from a big cable company last week that had a $40 rate for cable and an $11 cost for the local networks, meaning that the real price for the product was $51 yet they advertise the $40 rate when trying to attract customers.

Congress is the only one who can fix this issue. It is rules established by Congress that make it mandatory for cable providers to carry the network affiliates. I think almost every small cable provider I know would gladly provide free rabbit ears to customers if they could get out paying these fees.

Of course, there is another side to the issue to consider. If these fees ended today a lot of local TV stations would likely fold. This raises the question of whether these businesses should be propped up by this clear subsidy. The original concept behind the Congressional rules was not to establish a revenue for local affiliates, but rather to make sure that cable subscribers had access to local programming. But some smart industry consultants talked local stations into charging these fees and it’s now as close as you can get to a business that prints money.

The retransmission fees should probably not go to zero – but there needs to be a balance between network affiliates and cable companies. Today there is nearly zero negotiations on these fees. There are several possible fixes I can think of. One easy fix would be to allow cable companies to make these stations optional for customers. Then people who want to use an antenna could avoid the fees. This would put some balance into the negotiations since the networks would be less likely to gouge when they’d see the impact of customers dropping their programming. This is not the only possible fix – but we need to try something, because this is badly broken.

Runaway Retransmission Fees

rabbit earsCBS 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.

Retransmission Fees

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The vast majority of the public has never heard of retransmission fees, and yet it is those fees along with reverse compensation that is responsible for a lot of the rate increases in cable bills in recent years. These two fees are associated with what cable companies pay to carry the major networks – ABC, CBS, NBC and Fox.

For most of the history of cable TV in this country local cable systems were able to get access to local channels for free. The consensus in the industry was that local networks benefited as much as cable companies when their signal was on carried a cable system. The quality was often better on cable and cable systems often brought the local networks into homes that didn’t watch them before. And since network stations always made their money from advertising, it was argued that, if anything, putting stations onto cable systems increased the local station’s reach and gave the station more viewers.

The FCC made it mandatory for cable networks to carry local networks starting with the Cable Television Consumer Protection and Competition Act of 1992. Local network stations have the right under those rules to be carried or not carried using either must-carry rules or retransmission consent rules. A few local networks stations in major metropolitan areas negotiated small fees to carry their signal starting in the mid 1990s. But the phenomenon only became widespread in the last 10 – 15 years and today almost every local network station chooses retransmission consent rules that allow them to charge cable systems for carrying their content.

This has turned into big business. I just saw an article last week where CBS expects to take in more than $1 billion this year between retransmission consent fees and reverse compensation fees (explained below).

Retransmission fees are not cheap for cable companies and many of my clients around the country tell me that the cost for each local network station is nearing an average of $2 per month for each subscriber. For the four major networks that’s $8 per customer per month. That is a really large cost to a cable operator, especially considering that a decade ago this was free to them. A lot of the cable companies have been loath to add all of these costs into the base cable bill and instead have been hiding some of these fees in charges called something like ‘local channel fees’ or some similarly non-descriptive name.

Small cable companies obviously dislike these fees and many of them assume that their local station owners are getting rich from the fees. But that’s where reverse compensation comes into play. Reverse compensation are the fees that the major networks charge to local affiliate stations to remain affiliated with them. It’s no coincidence that the amount of reverse compensation fees demanded each year by the big networks has been rising at the same rate as retransmission fees. It turns out that the local stations are paying most or all of their local retransmission fees back to the networks. And it means that the local affiliate stations have no alternative to raising the retransmission fees in order to pay the networks.

There is no real way for a cable subscriber to opt out of getting the local networks. A customer is free to use an antenna and receive local channels over the air, but unfortunately this does not get them out of paying the cable company for these networks if they buy any cable product. The FCC rules require the major networks to be included in the basic tier (the first and smallest tier of programming) and customers don’t have an option to opt out of the basic tier if they want to buy a higher tier.

There have been several attempts in the industry to avoid the local retransmission fees. Aereo tried a different to beam local stations to customers using an antenna that was ‘owned’ by the customer. But the courts ultimately decided that this violated the cable TV laws and Aereo went bankrupt. But now, finally there is an alternative, which is to get programming from the Internet and not the cable company. But that means if a customer wants to avoid these fees they must cut the cord and get these channels with rabbit ears.

There doesn’t seem to be any end in sight to significant annual increases in retransmission fees. The major networks are coming to rely more on these fees as they see advertising revenues peaking, with the expectation that advertising will decline in the battle with online advertising. I doubt that very many people understand that they are already spending $100 per year for networks that they could receive for free with a set of rabbit ears. But since there is no easy way around these fees other than to cut the cord, I’m not sure it would matter much even if they did understand.

Raising Cable Rates

comcast-truck-cmcsa-cmcsk_largeIt’s that time of the year when the large cable companies all raise their rates. In a time with increasing programming costs every cable provider needs to raise rates annually. I know that a lot of small cable providers are loath to raise rates, but if you have to do it then it’s worthwhile to look first at what the big companies are doing. Following is a summary of the rate increases that have been announced so far this year:

Comcast as usual looks to have one of the largest rate increases. They announced an overall increase of 4%, but the details seem to show something larger. The company is raising the rate on double-play packages by $3 to $4 per month. They are also raising the ‘broadcast TV fee’ from $3 to $5. This is a fee that really ought to be included in cable rates which they have broken out as a separate charge to supposedly cover the cost of paying for local network retransmission fees. That makes their overall increases to be between $5 and $6, which is hard to reconcile with the 4% increase statement. But perhaps some of the increase is being counted as broadband increases. It’s really hard to know how these big companies think about the components of their bundles, and all that really matters to customers is how much their bill goes up.

Comcast did cut the cost of HBO from $21.95 to $15 to match the price for HBO’s direct online product. This is an interesting cut that some other large companies are matching. Perhaps this was one of HBO’s reasons for putting their network directly online. You would think that lower prices at the cable companies ought to increase HBO customers.

Time Warner Cable looks to also have a sizable rate increase. They raised the prices of cable packages between $2 and $4 per month. They also increased their broadcast TV fee by $1. Time Warner has broken out a sports programming fee as a separate billing item – something that also ought to be included in the cable prices – and raised this rate by $2.25 per month, up to $5. There are also small increases on settop boxes.

Cablevision says their average increase will be $3 per customer. That includes a $0.85 increase in the settop box rental fee. Their sports surcharge is going up $1 to $5.98.

AT&T is increasing the cost of all bundles by $2 per month. Several Spanish packages are going up between $3 and $4. The company increased its ‘broadcast surcharge’ by $1. While not TV, the company is increasing its voice product that includes 250 long-distance minutes by $2 to $27. I haven’t seen an increase in voice prices for a while. I also find it interesting that the company with the largest voice network is charging more for a package with 250 long distance minutes than most companies charge for unlimited LD.

DirecTV increased rates across the board. Their lowest tiers are increasing by $2 per month. Their ‘Choice’ and ‘Xtra’ bundles will go up by $4 and their largest package will increase by $8. They are also increasing the broadcast TV fee by $0.50, up to $6.50.

Dish Networks is increasing rates significantly. Most packages including ‘America’s Top 120’, ‘America’s Top 120 Plus’, ‘America’s top 200’ and ‘America’s Top 250’ are going up by $5 per month. This will be a relief to rural systems that compete against them. Their smallest package is going up $2 per month while their ‘Everything’ package is going up $8 to $140 per month.

Charter hasn’t announced any rate increases and may not do so until the expected merger with Time Warner Cable.

Verizon also hasn’t announced increases yet for its FiOS TV products, although increases are expected.