Can You Imagine Cable Abandoning its Video Roots?

Unimaginable as it may seem, a growing number of cable system operators are considering discontinuing the video delivery business that sparked the industry’s creation in the first place. As Cablefax’s “Indy Show Notebook” reported, the shift, which some cable system operators have already initiated, is driven by seeing operating margins drop to “minimal” amounts while increased programming costs represent the bulk of their customer complaints and reasons for churn.

However, Needham and Company media analyst Laura Martin warned the show’s attendees that Silicon Valley is a bigger threat than rising content costs, Cablefax reported. I think it’s an observation worth exploring.

Martin’s perspective is based upon numbers that show the cable industry overall has done a better job than most other media industry segments in addressing the Internet’s impact on their businesses. Overall TV viewing is up, largely due to collaboration on TV Everywhere. In fact, the industry’s $75 billion in subscription revenue, combined with $75 billion in advertising revenue, represents a gain of roughly 20% over the past five years.

Martin shared a similar outlook during her keynote address to the media industry’s financial management leaders at Media Finance Focus 2104, MFM’s annual conference. As part of her presentation, she provided her firm’s analysis on bundling, another factor that has been divisive in programmer-cable operator relationships. Among the findings in Needham’s “Valuing Consumer Choice” report were:

• The average pay TV household watches 4,400 hours of TV/year and pays $720 per year ($60/month), or $0.16 per hour of TV viewed
• Based on average U.S. household income and video subscriber rates, TV costs 3%/hour of what this time is worth to viewers
• For every $1.00 paid by consumers to fund content creation, advertisers pay $1.24.

The Needham report also observes that 90% of total U.S. households currently pay for 200+ TV channels. To me, this statistic is the reason any cable system operator would want to think long and hard before deciding to abandon video offerings.

The $150 billion subscription video business isn’t declining, which means a system’s current video customers will need to buy their programming from someone else. Right now, customers who choose to purchase their video from a DBS provider also need to find a broadband service provider or pay for a bundle involving another telecom provider or, in the case or rural markets, a satellite broadband company.

There are reasons to expect this landscape is going to change. When analyzing AT&T’s interests in acquiring DirecTV, “The Motley Fool” recently commented, “Bundling is the name of the game for cable and Internet providers, and AT&T is hoping its much larger customer base will allow for better bundled packages that pry more cash from subscribers.”

And of course there is Dish Networks’ stockpile of wireless frequencies to consider. As a recent Bloomberg story about wireless spectrum observed, “There could be a gold mine in owning one of the few networks capable of handling that demand in the gadget-hungry U.S., where people have proved willing to pay steadily for wireless service even as spending drops elsewhere.”

Also keep in mind Laura Martin’s warning to be more concerned about Silicon Valley than programming costs. At the MFM conference, she reminded our attendees that Internet companies like Google have the financial resources to acquire major content companies. At the Independent Cable Show, she focused on the ramifications of Google Fiber, which is “losing a fortune” as part of goading cable operators to spend money on broadband infrastructure. In this scenario, cable winds up in a heavily commoditized ISP market while Google reaps the benefits of delivering cloud-based solutions for the “Internet of things.”

Martin reminded her Indy Show audience that technology disruption “starts at the low end, where there’s no economics, and in time it moves up into the profit pool.” This observation should give members of the video programming community pause as they see a growing number of cable operators say they can’t stay in business if they stay in video. As I noted in a Cablefax viewpoint column earlier this year, the recommendation to offer better terms to companies serving smaller markets benefits everyone in the end.

We can’t, and shouldn’t, ignore the warning signs from the members of the cable operator community, where the disruption the industry has so skillfully avoided thus far is beginning to occur. To me, having the ability to prevent it and not doing so is as unimaginable as it gets.

(Mary M. Collins is president and CEO of the Media Financial Management Association and its BCCA subsidiary. She can be reached at [email protected].)