Could the Comcast-Time Warner Cable Pact Lead to a la Carte TV?

by Jonathan Berr | February 26, 2014 7:01 am

Could the Comcast-Time Warner Cable Pact Lead to a la Carte TV?

Comcast’s (CMCSA[1]) $45.2 billion acquisition of Time Warner Cable (TWC[2]) comes down to one thing:

comcast logo e1298928702973 Could the Comcast Time Warner Cable Pact Lead to a la Carte TV?Sports.

The costs of acquiring the broadcast and digital rights for sports is skyrocketing and shows no signs of slowing. And bluntly put, few companies can write checks with eye-popping figures quite like Comcast.

However, the time will come at some point — I am not sure when — that these costs and retransmission fees will cause a rebellion among consumers and pave the way for the same a la carte pricing (where consumers pay for the channels that they want) that cable companies have balked at for years.

My reasons for this bold prediction, which goes against the conventional wisdom, are many.

First, the costs of sports programming are exploding and show no signs of slowing. In 2011, Comcast agreed to spend $4.38 billion for the rights to broadcast four Olympics, including the Sochi Games, which cost about $775 million[3]. That was well more than the $545 million the Peacock spent in 2002 to broadcast the games in Salt Lake City, and looking ahead, NBCUniversal’s tab for the next winter Olympics in Pyeongchang, South Korea, is expected to top $963 million.

The Olympics is only a small fraction of Comcast’s sports programming costs. Along with Fox (FOXA[4]) and CBS (CBS[5]), NBC signed a $28 billion deal with the NFL in 2011 to secure the broadcast rights for the most popular professional sport through 2019.

Comcast has opened its checkbook to other sports as well. Earlier this year, CMCSA signed a 25-year, $2.5 billion deal with the Philadelphia Phillies. The company has even made a three-year, $250 million bet that U.S. fans will embrace the English Premier League’s soccer teams[6].

Comcast can earn its money back from these investments in several ways. First, there are the cable bills from consumers. About $20 a month from the average cable bill goes to support channels such as Walt Disney’s (DIS[7]) ESPN … regardless of whether the consumer watches them or not. Some have even dubbed this the “sports tax.”

If the merger goes through, Comcast and Time Warner Cable will be able to cushion their rising sports costs over its 33 million customers, who don’t have much say in the matter. Though they could bolt to satellite providers, they might not get the same programming choices. Plus, they will get socked by retransmission fees.

These microeconomic conditions will ratchet up pressure on smaller cable outfits such as Cablevision (CVC[8]) and Charter (CHTR[9]) to get bigger fast and might lead to additional consolidation.

There also are retransmission fees, which content providers charge the pay-TV industry to provide their channels on their systems. Operators are forecast to pay content companies $7.6 billion by 2019, more than double the $3.3 billion they paid last year, according to SNL Kagan[10].

Not surprisingly, pay-TV operators have grumbled about these fees for years and their voices have grown louder. DirecTV (DTV[11]) pulled the plug on the Weather Channel and started its own network as a replacement. Last summer, Time Warner Cable customers quit in droves after a dispute with CBS led to a blackout.

Still, the winners under the current pay-TV industry are the content providers and carriers. The losers are the vast majority of American consumers.

Wall Street analysts and the media companies have argued that the economics of TV industry require that popular channels such as the History Channel and Comedy Central subsidize less popular offerings. Needham & Co. analyst Laura Martin[12] even served up a dire prediction that a la carte pricing would “destroy $80 billion to $113 billion of U.S. consumer value.” An astounding 124 channels would disappear … and along with it, 1.4 million jobs.

This is hard to believe.

First, it’s hard to imagine that the current system creates consumer value. For every quality show such as Breaking Bad, Mad Men and Game of Thrones, there are endless one-season wonders.

Indeed, the only people who seem to be happy with the status quo are the pay-TV carriers, which are painting themselves into a corner to maintain the status quo.

HBO Go is a case in point. The service is only available to people with a Time Warner Cable account, though it is so popular that many people share their passwords for it. Speaking at a recent industry conference, Netflix (NFLX[13]) CFO David Wells argued that its biggest rival would attract “materially more” subscribers if it offered its content directly consumers[14].

In other words, HBO should become more like Netflix.

While Wells’ statement is a bit self-serving, his argument is valid. NFLX has managed to attract subscribers by offering them content that they can’t get elsewhere such as House of Cards and Arrested Development. Fans of Game of Thrones or True Detective thus might be willing to pay extra for HBO.

Ditto for Comedy Central, home to The Daily Show and The Colbert Report. A&E would also attract fans of Duck Dynasty and Pawn Stars if it offered its A&E and History Channels on an a la carte basis. And so on and so forth.

If something is good, people will pay for it. It’s as simple as that. And if consolidation in the industry prompts pay-TV providers to start pushing back on the content providers … well, more of the might consider following Wells’ advice.

Regulators in Canada have implemented a la carte pricing, and there are no reports that the world has come to an end. The time has come for the industry to shelve the scare tactics and provide consumers the content they want at a price they can afford.

Besides, if the pay TV industry can’t figure out to do this on its own … the content providers might just do it for them.

As of this writing, Jonathan Berr did not hold a position in any of the aforementioned securities. Follow him on Twitter at @jdberr.

Endnotes:
  1. CMCSA: http://studio-5.financialcontent.com/investplace/quote?Symbol=CMCSA
  2. TWC: http://studio-5.financialcontent.com/investplace/quote?Symbol=TWC
  3. cost about $775 million: http://www.washingtonpost.com/lifestyle/olympics/in-coverage-of-olympics-nbc-has-largely-steered-clear-of-controversy/2014/02/21/5e68a088-99aa-11e3-80ac-63a8ba7f7942_story.html
  4. FOXA: http://studio-5.financialcontent.com/investplace/quote?Symbol=FOXA
  5. CBS: http://studio-5.financialcontent.com/investplace/quote?Symbol=CBS
  6. English Premier League’s soccer teams: http://bleacherreport.com/articles/1606704-breaking-down-nbc-sports-premier-league-package-for-the-2013-14-season
  7. DIS: http://studio-5.financialcontent.com/investplace/quote?Symbol=DIS
  8. CVC: http://studio-5.financialcontent.com/investplace/quote?Symbol=CVC
  9. CHTR: http://studio-5.financialcontent.com/investplace/quote?Symbol=CHTR
  10. SNL Kagan: http://www.prweb.com/releases/2013/11/prweb11360552.htm
  11. DTV: http://studio-5.financialcontent.com/investplace/quote?Symbol=DTV
  12. Laura Martin: //www.latimes.com/entertainment/envelope/cotown/la-et-ct-a-la-carte-pricing-would-cost-billions-of-dollars-20131204,0,4355658.story#ixzz2tznfYhCB
  13. NFLX: http://studio-5.financialcontent.com/investplace/quote?Symbol=NFLX
  14. if it offered its content directly consumers: http://gigaom.com/2013/09/25/netflix-exec-hbo-would-have-many-more-customers-if-it-sold-online-only-subscriptions/

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