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MSOs raising prices as costs rise

It may be risky, but operators face increasing affi fees, retrans

The pressures of a changing marketplace haven’t kept MSOs from raising subscription prices on multichannel video offerings across the country.

Some of the top cable, satellite and telco services have hiked the cost of TV service in recent months even as criticism persists regarding the high cost of subscription TV packages, particularly as the U.S. economy continues to struggle and cheaper digital alternatives emerge.

If anything, it’s a sign of confidence from MSOs heading into a series of fourth-quarter earnings calls starting Thursday with Time Warner Cable.

But for MSOs, posting any increase at all means running the risk that they’ll finally hit a pricing ceiling with consumers, triggering the very cord-cutting trend most industry observers say has yet to occur on a meaningful scale.

“Any time a rate increase happens, it comes with the potential for subscribers to make a decision,” said Bruce Leichtman, who tracks the multichannel world for Leichtman Research Group. “It’s a bit of a gamble, but I wouldn’t say it’s a bad one.”

It’s impossible to pin down an average figure for rate increases because the complexities of packaging and discounting obscure those totals. But analysts have made their best guess that a 3%-4% increase has taken effect across the board.

Comcast, the largest video distributor in the U.S., hit subs in select markets with a 3.9% increase, according to analyst estimates. Both Time Warner Cable and DirecTV registered at least a 4.9% increase depending on the market or tier.

Some markets and tiers were impacted more than others, with AT&T U-Verse raising one of its most popular packages, U100, by 8.5%. In Boston, Comcast’s repeated increases totaling 80% over the course of three years prompted the city’s mayor to petition the FCC for authority to regulate cable prices following the expiration of a price-capping agreement.

There are three notable omissions from the price hike trend: Dish Network, which vowed last year to keep its current rates frozen until 2013, and Cablevision and Verizon. For the latter two that’s probably not a coincidence given that they compete heavily in the New York area, where their respective footprints have 40% overlap.

No MSO would go on the record to discuss the increases. But the consensus inside the industry is that operators ultimately had no choice but to raise prices given the rising costs of the affiliate fees paid to programmers and the relatively recent addition of retransmission consent fees they pay to TV stations.

While a 3%-4% average hike may seem foolhardy in the current marketplace, the programming cost increases that MSOs are paying this year are pegged by ISI Group analyst Vijay Jayant to be in the 7%-9% range. All the rate increases from top MSOs are actually roughly even or slightly below 2010 levels, according to Bernstein Research.

MSOs also argue that their subs are getting more bang for the buck these days given that the addition of everything from more robust VOD offerings to streaming of channels on iPad hasn’t come at any extra charge.

Analysts expect some of the top MSOs to report losses of video subs in the fourth quarter, though the declines may not be as deep as in the same quarter the previous year. And for cable companies, in particular, such losses can be compensated for through the addition of subscribers in their broadband and phone services.

Those businesses have been growing faster than video has declined for some time now. SNL Kagan data on the cable industry shows that while video subscribers have declined by an average of 1.2% per year since 2001, broadband subs have increased by an average of 20% and voice subs by an average of 30% over the same period.

Bottom line: There isn’t much pressure for growth in video given that it’s seen as a mature market.

For consumers, however, all the economic justifications the MSOs may have to raise prices may mean little. Every increase carries with it the possibility that at least some subs will say enough is enough. “There’s no way to know precisely when pay TV will hit that wall (or indeed if it already has), but it is an ever-present risk,” wrote Craig Moffett, senior analyst at Bernstein, in a recent research note.

Last December, Credit Suisse reversed an earlier projection for growth in the MSO business and forecast a drop of 200,000 subs for 2012. The projected decline was based on the notion that young adults who had never signed up for multichannel subscriptions would gravitate to cheaper digital options.

Netflix, YouTube and Hulu are among the upstarts seeing growth for their video offerings over the past year, but they are able to charge far less or nothing at all because they don’t get the live or firstrun programming exclusive to the MSOs.

For all the debate over the existence of cord-cutting, there’s plenty of data suggesting that the numbers of households doing so are less than legion. Leichtman calculated the 14 top U.S. subscription TV providers added 150,000 subs in the first three quarters of 2011.

“Cord-cutting hasn’t been such a big thing,” said Jayant. “It’s not like you can get the same choices online.”

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