Cable Growth from Rate Hikes
Cheyne Gateley for Variety

Cable network revenues were up again in the fourth quarter, a development that may reassure investors that cord-cutting doesn’t yet seem to be hurting these businesses. But dig a little deeper, and you’ll find that what’s keeping revenues up are contractual rate increases from deals signed long ago. And that won’t last forever.

In aggregate, the major U.S. cable networks’ business was up 3.5% during the quarter, growth that flies in the face of the doom and gloom pervading the TV industry. Even though many of the underlying cable networks are losing 1 million to 2 million subscribers each year, the financials are holding up. What gives?

In fact, the rate of growth has been falling steadily. Yes, growth is positive, but it’s a lot slower than it was a year ago.

sources: Company Reporting, jackdaw research Analysis

Underlying the total revenue are several moving parts; most notably, affiliate fees and advertising. Advertising is largely driven on a short-term basis, reflected by a combination of upfront commitments and spot purchasing. As such, it’s more sensitive to ratings dips and perceptions of reduced reach. Affiliate fees, on the other hand, are driven by the number of subscribers receiving a channel and the going price for that channel.

Ad revenue declined rapidly in 2014 and early 2015, went through a nice revival in late 2015 and early 2016, and has gone back into rapid decline since.

Affiliate revenue, meanwhile, also went through a decline for some time but seems to be on an uptick now. Given what’s happening with overall subscriber numbers due to cord-cutting and cord-shaving, the reason for the uptick clearly isn’t subscriber growth (with some exceptions).

sources: Company Reporting, jackdaw research Analysis

What’s really happening is that rate increases built into long-standing contracts are driving growth, even as subscriber numbers head south. Indeed, the phrase “contractual rate increases” is showing up with increasing regularity in the financial reports of cable networks and pay-TV distributors.

For now, that’s great news; the rate in- creases are offsetting what would otherwise be an accelerating decline in affiliate-fee revenue and helping to drive overall growth.

But now that subscriber numbers and ratings are dropping, pay-TV providers may begin to resent those built-in rate hikes. We’re likely to see more haggling over channel prices and, especially, future increases. Whether the increases evaporate or we see subscriber shrinkage accelerate, things aren’t going to be pretty for most cable network owners in the next few years.

Jan Dawson is the founder and chief analyst at Jackdaw Research, an advisory firm for the consumer technology market.

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