Hidden Fees Adding Up

Consumer Reports recently published a special report titled “What’s the Fee?: How Cable Companies Use Hidden Fees to Raise Prices and Disguise the True Cost of Service”. Cable companies have advertised prices for many years that are significantly lower than the actual bills customers see – but the CR report shows that the size of the fees has grown significantly over the last few years.

The report lists several specific examples. For example, the broadcast fee and the regional sports fees at Comcast increased from $2.50 in 2015 to $18.25 currently. The broadcast fee supposedly covers the cost of buying local network channels – ABC, CBS, FOX, and NBC. The regional sports fee can cover the cost of channels carrying regional college and pro sports. In both cases, the cable companies never disclose the actual fees they pay that are covered by these fees.

The report shows that Charter increased its broadcast fee three times in the last year, starting at $8.85 in October 2019 to reach $13.50 per month in October 2019.

It’s not hard to understand why customers are confused by the many fees. The report points out that some cable bills have more than a dozen line items, which are a mix of rates for products, external taxes and fees, and these various ‘hidden’ fees – meaning they are usually not disclosed when advertising the products.

In addition to the Broadcast TV fee and the Regional sports fees the report lists the following other fees:

  • Settop box rental fee. This is to recover the cost of the settop box hardware. For many years this fee was around $5 monthly for most cable providers, but this is an area that has also seen big price increases in recent years and the highest rate I’ve seen was $12 per month. This is to recover a settop box, which for small ISPs costs a little over $100, and must cost less for the big cable companies.
  • Cable Modem / WiFi Router. This is the fee with perhaps the biggest range of pricing – some ISPs don’t charge for this while others are charging more than $10 per month.
  • HD Technology Fee. This fee used to be charged by almost every cable company back when they started offering HD channels (a decade ago many channels were offered in both an HD and an analog format). Now that the whole industry has largely gone to digital programming, CR reports the only company still charging this fee is Comcast.
  • Internet Service Fees. This is a relatively new fee that gets billed to anybody buying Internet Access. The report highlights the fees charged by RCN and Frontier.
  • Administrative and Other Fees. These are often fees under various names that don’t cover any specific costs. However, some fees are specific – I just read an article describing a $7 fee to business customers by AT&T in California to recover property taxes.

Consumer Reports collected a number of sample bills from customers and reports that the average monthly company-imposed fees for the bills they analyzed averaged to $22.96 for AT&T U-verse, $31.28 for Charter, $39.59 for Comcast, $40.16 for Cox, and $43.79 for Verizon FiOS. They estimate that these fees could total to at least $28 billion per year nationwide.

To be fair to the cable providers, these fees are not all profits. The companies pay out substantial retransmission fees for local content and pay a lot for sports programming. However, some of the fees like settop box and modem rentals are highly profitable, generating revenues far above the cost of the hardware. Some of the fees like administrative fees are 100% margin for the companies.

Consumer Reports advocates for legislation that would force cable companies and ISPs to fully disclose everything on bills, similar to what happened with the airline industry in 2011 with the Full Fare Advertising Rule. CR believes that the FCC has the authority to require such transparency without legislation.

‘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.