Cord-cutters Beware: It’s Going To Get Expensive

on April 17, 2013
Reading Time: 3 minutes

Photo of cable cutting (Fotolia)The are many reasons why television viewers choose to cut the cord, to be among the 15% or so of Americans who get by without a cable or satellite feed. But probably the most important is the desire to pay less for the content by grabbing it out of the airwaves or finding it on the internet.

I have some bad news for penny-pinching cord-cutters. The more people choose to do without a cable subscription, the more expensive the over-the-top alternative is going to become.

The economics of this are stark. Charlie Ergen, CEO of Dish Network, describes the current U.S. environment as “90 million [households] paying $1,000 a year. I don’t think in my lifetime that number goes up.”

Broadcast stations still rely heavily on advertising, but the retransmission fees paid by cable and satellite providers, estimated at about $3 billion a year, are an increasingly important part of their revenues. That’s why broadcasters are so scared of, and are fighting so hard against, Aereo, which provides over-the-air TV over the internet without compensating the stations.

Basic and lower-tier cable-only networks also get advertising revenue, but their rates are often much lower and cable fees represent a larger part of their income. Premium channels depend mainly on subscription fees. Except for the relatively small amounts they pay through subscription internet services such as Netflix and Hulu+, cord cutters are not part of this economy.

Comcast, which plays in pretty much all aspects of the TV game, provides a good look at these economics. Last year, its cable operations generated $20 billion in revenues from video services. Of that, by far the biggest chunk, $8.4 billion, went to pay for content. Its NBC Universal unit received $8.8 billion from its cable channels, $8.2 billion from broadcast (including both the NBC network and 10 owned-and-operated local stations), $5.1billion from movies, and $2.1 billion from theme parks.[pullquote]Somewhere, money will have to be found to feed the content beast. Otherwise, it will be goodbye Game of Thrones, hello Survivor: Mall of America.[/pullquote]

By contrast total Netflix revenues last year were $945 million, the great bulk of it from 27 million U.S. streaming subscribers.

Somewhere, money will have to be found to feed the content beast. Otherwise, it will be goodbye Game of Thrones, hello Survivor: Mall of America.

A number of things are going to have to happen if a significant fraction of customers cut the cord. There’s going to be a lot less free stuff available and the paid content is going to cost more. TV show owners who now regard whatever they get from Netflix for old seasons of Mad Men as gravy will have to drive up the cost if that becomes the primary channel of distribution—and the $9 all-you-can-eat monthly Netflix subscription will be a thing of the past.

HBO will eventually decide to sell content to viewers without cable companies acting as intermediaries; it already has the infrastructure to do this in place with HBO Go. But don’t expect the cost to be much less than the $10 a month or so you’d currently pay for an HBO subscription (the bundling practices of both the cable operators and the content providers make it very hard to figure out the charge for any particular service.) Similarly, access to ESPN sports is going to cost at least as much as the $5 or so per customer per month that cable operators pay for the service.

A second thing that will happen is that content providers are going to become a lot less sanguine about account sharing. Trust me, the services know that you and your three closest friends are sharing one Netflix streaming account or that your college-student son has “borrowed” your Verizon FiOS login credentials to watch HBO Go and ESPN 3. For now, it’s more trouble than it is worth to stop these practices. But as over-the-top revenues grow in importance, the content providers tolerance of such cheating will shrink. A crackdown is inevitable.

Fortunately, getting your television over-the-top has some advantages other than price. You get to watch what you want, where you want, and on the device you want. But all those charges are going to add up, and by the time you’re done, you could be paying as much as you do for a cable subscription. Or more. The byzantine cross-subsidies created by bundled prices mean that at least some customers are getting more than they pay for. In the end, that one payment a month for a big bundle of content may look at lot better than it does today.