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Trouble Is Looming for Cable TV Companies

Cable TV providers in the U.S. have a problem. Well, more than one problem.

OK, fine. A lot of problems.

To start, their costs for content are increasing. Providers like Time Warner Cable (NYSE:TWC), Comcast (NASDAQ:CMCSA) and Cablevision (NYSE:CVC) buy content from just a few studios and networks. And for TWC, according to CEO Glenn Britt (quoted in Barrons), the programming cost per customer has increased by 30% since 2008.

They’re also facing competition from streaming video providers . More and more customers are ditching cable TV in favor of online streaming video services like Netflix (NASDAQ:NFLX), Amazon (NASDAQ:AMZN) Instant Video and Apple’s (NASDAQ:AAPL) iTunes store.

Some, like Netflix, offer low-price, unlimited video streaming of TV shows and movies; others, like iTunes offer customers the ability buy or rent TV shows and movies on-demand. And many use the cable company’s own broadband service to supplant their TV and pay-per-view offerings in customer’s homes.

The streaming video services often offer the same content as the cable companies have on tap — at least the stuff that people want to watch. In fact, Netflix just scored a big deal with Disney (NYSE:DIS) to get its company’s animation back catalog and exclusive first TV rights for new Disney, Marvel and Pixar movies coming down the pipe. (News of that deal gave Netflix stock a nice 9% boost, by the way).

On top of that, there’s the fact that Apple (NASDAQ:AAPL) may be breathing down their necks as a potential disruptor of the whole TV programming delivery business model, while Google (NASDAQ:GOOG) is laying down cheaper and faster broadband.

The result: Customers are ditching their cable TV subscriptions in increasing numbers. According to USA Today, Time Warner shed 155,000 video subscribers in the last quarter (up from a loss of 64,000 the previous year), while Comcast lost 275,000.

In theory, cable companies could make up revenue from fewer subscribers and costlier content by goosing their rates — pushing customers toward more expensive cable packages and looking to broadband adoption for growth. But in the current situation, these strategies are high risk.

Any additional cost is likely to drive more customers away from cable TV and into the arms of video streamers. And pushing broadband just enables customers to more easily access the competing video streaming services, while trying to charge more for Internet connectivity (as Cablevision just announced it was doing) only opens the doors for broadband competitors.

Google may only be in Kansas City at the moment, but if it can deploy fiber broadband — gigabit internet access at $70 per month — on a wider scale, ultra-fast internet access plus unlimited video on-demand from Netflix would come to less than $80 per month. A study by the NDP Group says the content version for cable bills in U.S. homes (that’s just the TV portion of the total cable) averaged $86 in 2011. It projects that rate will hit $123 in three years and $200 by 2020. How do cable TV providers keep their customers from defecting with those sorts of numbers?

One possible solution: a la carte pricing, where customers pick only the channels they want for a lower overall bill. But the argument against this is that the cost of specialty (and especially sports) programming is currently spread across many customers; under an a la carte model, some people will end up paying a lot more for specialty programming.

Those who want a big package with hundreds of channels, for example, may end up paying a fortune without the effective subsidization by everyone else. Could you imagine telling a customer that their current $75 cable package with 100 channels will be increasing to $200 as a result?

According to Businessweek, cable companies are instead leaning toward bundling — trying to tie broadband access with cable TV subscriptions. The thinking goes that if customers are going to stream anyway, then bundling makes it tough for them to get just the Internet access without paying for the cable TV content. Comcast is taking this approach even further with download caps (that limit customers’ wholesale adoption of Netflix), while offering its own Xfinity online on-demand equivalent that doesn’t count against that cap.

The bottom line is that cable TV providers are stuck between a pile of rocks and a hard place. At this point, they are basically hoping that the convenience they offer is enough for customers to keep paying a premium.

That may keep the exodus of customers to a slow trickle for now, but if their prices keep creeping up while compelling standalone broadband providers expand and online content providers gain even more content, that trickle could quickly become a flood.

As of this writing, Brad Moon did not own a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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