Pay-TV Prices Are at the Breaking Point — And They’re Only Going to Get Worse

Pay-TV Prices Are the Breaking Point

Why cable operator consolidation won't reverse the trend of rising monthly bills

Cable and satellite TV bills have never been higher, and more mad-as-hell consumers are cutting the cord. And nothing, not even consolidation among operators, stands to reverse the trend.

Several cable M&A scenarios are reportedly in play. Time Warner Cable is said to be the object of a joint bid by Charter and John Malone’s Liberty Media, while Comcast has also explored the possibility of a TW Cable acquisition. Cox Communications is also mulling a bid. Under another rumored Westeros-like machination, Comcast and Charter would team to divvy up Time Warner Cable’s territories between them.

Industry execs claim they’ll achieve huge operational efficiencies through consolidation, including getting better deals from TV programmers. But even if Comcast grew its video base, say, 50% to 30 million customers — a questionable outcome, given anticompetitive concerns in Washington — Kabletown still wouldn’t be in a position to tell the Disneys and Viacoms of the world that it won’t pay a single penny more the next time contracts come due.

Even if big MSOs merge, they still won’t have greater pricing leverage against the handful of media companies that control most of what goes on TV today, says Bernstein Research analyst Todd Juenger.

That’s because consolidation of cable ops wouldn’t change the number of choices consumers have in an given market, “and therefore doesn’t change the balance of negotiating power between distributors and content owners,” he wrote in a research note Tuesday. Comcast threatens to drop ESPN? Subscribers will flock to satellite or telco TV options.

SEE ALSO: Cord-Cutting Slows in Third Quarter, But Pay TV Is Still Shrinking

Even the combination of DirecTV and Dish Network — a tie-up that’s been discussed around for years, but is seen as unlikely to pass regulatory muster — wouldn’t have much effect, according to Juenger. “Satellite consolidation would be potentially more disruptive, as it would take away one distributor from every household. But enough choices would still remain that the overall balance of power wouldn’t pivot,” he wrote.

Nine companies — Disney, Fox, Time Warner, Comcast/NBCUniversal, CBS, Viacom, Discovery, Scripps and AMC — control about 90% of the professionally produced TV content in the U.S., spending an estimated $45 billion per year on that content, according to Juenger. “To date, it has been impossible for a distributor to assemble a pay-TV offering that can successfully attract and retain subscribers without having the content from all of these nine companies.”

So, that means pay TV bills will continue to climb faster than the overall cost of living for U.S. consumers. It’s worth noting that as wholesale programming costs keep ticking up, pay-TV distributors are raising set-top lease fees and instituting other charges in order to maintain video profit margins.

Comcast’s average monthly revenue per video subscriber for the third quarter of 2013 was $78.95, up 5% from $75.46 a year earlier. DirecTV’s Q3 average monthly revenue per U.S. sub rose 6.2%, to come in at $102.37 per customer. (Which also shows DirecTV customers have higher willingness to fork over money for television; but Comcast subs pay more overall for a bundle that includes broadband and voice.)

But today, the sky isn’t falling. Collectively, the industry dropped about 80,000 net subscribers over the 12-month period ended in September, according to Leichtman Research Group — a drop in the bucket for an industry with 100-plus million customers.

But the pay-TV industry’s affordability problem will continue to grow, and operators haven’t found an effective way of dealing with it.

Here’s Comcast’s latest move to explain the growing cost of TV: The cable giant is tacking on a $1.50 monthly “broadcast fee” to customer bills to call attention to how much it pays to retransmit local TV stations. But instead of shifting blame to broadcasters, that’s only going to make Comcast customers see themselves getting further nickel-and-dimed.

A quick aside about a la carte. If the government forced networks and distributors to offer individually priced channels at retail — yes, that could lower the total cost of someone’s bill. But the cost per channel would skyrocket (ESPN could go up to $30 per month, according to one analyst estimate), and consumers would end up paying much more for far less. A broad shift to a la carte would spell doom for many networks.

If millions of pay-TV customers bail, the cycle of price increases will accelerate as programmers seek to offset the declines. Longtime industry analyst Craig Moffett has conjured up this analogy: In a car racing toward a cliff, the industry is pressing on the accelerator with steady and sizable increases in programming costs.

I see it more as the frog in the pot of water that rises to the boiling point before the frog realizes it. But either way, pay-TV players are facing a day of reckoning in one form or another.

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  1. PS, Oh by the way, check out “coke and popcorn” website for free movie & TV shows. You might need an anti ad software to get through without any commercials. I use “Ad Muncher” which costs about $40 per year that works on all my web searches and browsing which eliminates all adds and pop-up when I surf the web.
    Good luck all.

  2. I have paid for Sat TV for over 16 years. And it’s not just the commercials I cannot tolerate (since I have paid for the service I still have to endure the chronic ads) that since I have paid for this TV service I should not HAVE TO AVOID. If Sat TV was commercial free I would have kept my service. But I have found after only 2 months I do not miss it at all.
    I have found several internet sites that fill my entertainment value at no cost except for the fee I already pay for my internet service. I will save almost $1,000.00 per year. Tell that to GEICO!

    C. Armiger

  3. Dalton Grant says:

    A la carte is now the standard in Canada and I suggested this to Direct TV many times over. I don’t watch sports, so this would benefit me. Direct TV, Dish and Comcast needs to do the math, 10 customers paying for a la carte programming is better than losing one customer that paid $150.

  4. Lennard says:

    @Joel – Umm… CDs? Really? Yes, compact discs are still around, but they’re a niche product at best now, whereas before they ruled the market.

    Downloads, both legal and illegal, did CDs in… they just couldn’t compete. With services like iTunes, Amazon Music, etc, you can just sit back on your couch, ‘cherry pick’ the one or two good songs you actually want off of an album, and download ’em in seconds.

    What’s the CD user-experience like in comparison? Get in your car, drive to the record store, and spend $16 for the two songs you actually want, and get eight more songs that suck/you don’t care about.

    Or maybe go through Amazon and your CD mailed to you… might bring the price down to $10-12 (again, for the two songs you actually cared about), plus you have to wait a couple of days for the CD to show up in the mail, instead of downloading it in seconds.

    CDs are so 20th century. In fact, teens these days won’t touch one with a ten-foot pole. Where have you been?

  5. Mark Long says:

    I get asked a lot about who has the best deal. I also hear people say, I got the best deal with “insert random name of provider or umbilical service connection.” My mom has Dish and when I visit she’s watching the same 3 channels and noting else. So, in reality, she needs just 10 channels tops if you count the locals. So for her, a 10 channel alacarte package would be fantastic. For me, I tried them all and was a charter member of Dish when it was single LNB. But now I’m off the grid, unhooked, and totally off umbilical services. I love it. I can get what I need with the online only services and a DTV box. I love paying so little and getting what I want and need and no chaff.

  6. Artist Patrick says:

    I got an antenna. It works great for the local stuff and majors. Then I turn the TV off. I found I like to read more then watch the dribble on TV.

  7. I cut the cord two years ago. I pay for the shows I want to watch on iTunes and Netflix. I stream all my TV and get my news from my iPhone apps in the morning. As far as movies go, I rent them on iTunes. If they don’t have the rental feature available, I just don’t watch it. I never purchase movies. I’m 31 years old, and most of my friends in the same age range get their TV the same way. As a consumer, I am willing to pay for content. Cable, on the other hand, provides me with a ton of channels I never watch or care about. A-la-cart will be the inevitable future, the cable companies are just trying to make a buck before the industry implodes on itself. Give consumers real choices and they will buy. iTunes and Spotify are great examples. They made it easy for the average person to hear any song they want when they want it. TV is already going this way. Funny how we saw record companies consolidate and close, and now it’s happening to the TV industry… All because the corporations didn’t listen to the consumers needs. With music, Napster was the response. With TV, sites like My Free TV are the response. Consumers will always get what they want when they want it, legally or illegally, the question is will there be an easy way to get it in the consumers hand and make a legal and profitable buck off it.

  8. FrankM says:

    “…. Comcast threatens to drop ESPN? Subscribers will flock to satellite or telco TV options….”

    Not the issue. The issue is that ESPN is always connected to carriage of ABC stations. Customer-wise, an MVPD could easily drop ESPN, and reduce each customer’s bill the correlated $5.15 a month that ESPN costs. That wouldbe plenty alright with 80% of their customers that never watch that channel but paid for it all along. The problem is that is ESPN goes, ABC goes too in the hostage situation that is programming agreements.

  9. Uncle Morty says:

    Few Under 40 Pay For Cable

    buggywhip – short cable providers – they’re done

  10. Joe Smart says:

    One thing the article ignores is that most cord cutters are getting their programming from streaming services like Netflix and Hulu and most people who have high speed internet get it from a company that also offers pay TV services. If cord-cutting becomes an obvious problem for cable operators and raising their rates no longer makes up for lost subscribers it’s inevitable that they will switch internet billing from all you can consume to metered pricing. The FCC has already approved this switch so they could do it tomorrow. The end result would be that streaming services would no longer be a bargain if you were paying for each program that you were watching and a steady diet of streaming would be no cheaper than cable is. This would both squeeze more revenue out of the internet side of the business and instantly make cable seem like a better deal.

    As for a-la-carte, I think the author misses the point. Yes, the channels would cost more individually but most people wouldn’t subscribe to more than a handful anyway so their bills would drop significantly. ESPN would cost 30.00 because it’s subsidized by all of the people who never watch it. If people didn’t think ESPN was worth the hefty fee then ESPN would have less money to spend on programming and more sports might return to free television again. I really don’t see that as a terrible outcome.

    As for many channels disappearing, good. Viacom has a whopping 25 different cable channels, most of which people never watch. These channels exist for no reason other than to squeeze revenue from programming that has no value and they can do this because cable companies are forced to carry all the garbage channels to get the few that they actually want.

    Consumers do not benefit from getting and paying for 125 channels when they only watch a half dozen of them. The system is broken. If cable doesn’t figure this out very soon they’ll end up going the way of the compact disc. Their business model simply doesn’t work anymore.

    • Joel says:

      “If cable doesn’t figure this out very soon they’ll end up going the way of the compact disc. ”

      Uh…where did the compact disc go? I still see them for sale and still buy them (Some vinyl occasionally too!) Not everyone wants a compressed low-qualityl MP3 for music

      • davebaxter says:

        @Joel – The compact disc went from being the market leader to a niche collector’s market. Same with anything – things doesn’t disappear outright, but they shrink to the point of invisibility for the mainstream public. Or become a small part of a more fragmented market vs. the leading man in a one-person show.

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