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

Steve Wildstrom / April 17th, 2013

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.

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.

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.

 

Steve Wildstrom

Steve Wildstrom is veteran technology reporter, writer, and analyst based in the Washington, D.C. area. He created and wrote BusinessWeek’s Technology & You column for 15 years. Since leaving BusinessWeek in the fall of 2009, he has written his own blog, Wildstrom on Tech and has contributed to corporate blogs, including those of Cisco and AMD and also consults for major technology companies.
  • Glaurung-Quena

    “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.”

    Two things: First, a large fraction of the content dollars paid out by stations today are going to subsidize a relatively small fraction of the content. Sporting events, in particular, are extremely expensive. If the only change to the existing system was to debundle stations and content types from each other, everyone who wasn’t a sports fan would suddenly find themselves paying a good deal less. And in our household, we’d happily pay extra to get how we want it, when we want it access to those particular sporting events that we enjoy watching, seeing as we are never free to watch them when the broadcaster chooses to air them.

    Second, I think the fact that so many people today continue to fork over $100 per month to get access to the shows they enjoy demonstrates that cost savings is a nice thing but not necessarily key. The key benefit of cord cutting or cord minimizing, as I see it, is being liberated from the tyranny of broadcast schedules and the torture of commercials.

    • steve_wildstrom

      It’sa bit more complicated. They’re called cross-subsidies because they tun in many directions. For example, I do watch sports on cable but never cooking shows or reality shows. So Iam subsidizing them. The point is that it’s not at all clear who would end up paying what if the system of bundling and cross-subsidies were replaced with a la carte pricing. It’s also not clear whether people would prefer it. (On a side note, I find it a bit odd that the people most in favor of channel unbundling tend to be the same folks most opposed to tiered or metered internet pricing, even though both involve the same sorts of cross-subsidies.

      • Glaurung-Quena

        Stories like this one suggest that sports programming costs constitute something like half of the total programming costs of the various TV network conglomerates. In the post-cable, de-bundled future (assuming we are ever allowed to enjoy it), those who don’t care for sports stand to pay much less than those who do. And sports fans will only be asked to pay for the sports they enjoy, presumably with a premium charged if they want to watch the event live.

        The thing is, all this cross-subsidization and cross-bundling is, on the one hand, delivering huge profits — the studios can definitely afford to make the same content for somewhat less than they do now. And on the other hand, that tangled nest of subsidies is allowing a vast number of not very good shows and channels to continue to exist. As long as the gravy train continues to run, many networks will continue to continue to churn out derivative remakes and spin offs of whatever was popular last season.

        Sure, on-demand content is going to get more expensive as the broadcasting profit centre starts to wither. But at the same time, a lot of undeserving shows are going to disappear, and the networks are going to have to try harder to command a healthy number of PPV subscribers… which means we’re going to get fewer shows of higher quality, which we will be able to view when we are ready to see them, and without commercials if we’re willing to pay for that. Even if the total cost per month is still as high as it is today (which it won’t necessarily be), I don’t see a downside here.

    • Yes, please, drop the sports!

  • David Olson

    My wife and I like watching a TV show or two at night to relax. It isn’t just that cable has been replaced by iTunes and Netflix. TV only gets partial attention as we catch up on news and blogs via our iPads while the shows play. Cable no longer offers us the value it did before. The industry has been disrupted by technological change and cannot assume any new scheme will allow them to get the profits they use to have.

  • I’m just fine with no cable ever. It’s a vast wasteland of garbage and the few things worth watching are available other ways. It’s the cable companies that have to adapt not us. They could make less money and better content..god forbid they do that.

  • Rich

    No matter what you watch or on what devices you consume it, two things must happen for that to occur: the content needs to be created, and it needs to be brought to you through some sort of conduit or pipe, and this includes content you receive through the air. Both the people who create the content and the people who bring it to you are going to charge as much as they think you’ll put up with. The content creators and the broadcasters “charge” more by increasing the number of ads. At some point in the past, a 1-hour show might have had 50 minutes of content and 10 minutes of ads; now a popular show might have 40 minutes of content and 20 minutes of ads.

    There’s a lot of brave talk about how technology is disrupting the industry and will set the public free from price gouging. Technology will make the industry different, but as long as you want to see your shows and news, a way will be found to make you pay for them. And as Steve Wildstrom explains, the idea that you’ll pay less is unrealistic.

  • Rich

    Steve, if your piece appeared on a website with a larger audience than Tech.Pinions, I’m sure you’d receive a lot of angry comments. Many people don’t want to know the facts, but I’m glad you’re here to present them.

    • mhikl

      Agreed. TP speaks to a selective group and the angry don’t stand a chance. Ps & Qs come into play.

      On an aside, but to the point of this article, what would one be willing to pay monthly should Apple persuade original sources to put up apps that took a monthly charge, for a channel? For individual shows? How many news programmes does the un-obsessed need? They do seem to say much the same. Is there life, entertainment, information outside television? A hundred bucks a month is a good chunk of change for dumbed down entertainment. Tossed into a monthly entertainment budget and let radio and the internet supply news and information, maybe an old habit can be tempered.

      I have already found quite a number of free apps with some very good programmes from both radio and television. Is society outgrowing television as it is today? It certainly is not as important to our family and many of my friends.

  • jfutral

    So what exactly does “over the top” mean?

    Joe

    • steve_wildstrom

      It’s a cable industry term for TV content delivered “over the top” of the operator’s channel structure. In practice, it means broadcast or cable content delivered via the internet.

  • jfutral

    “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. ”

    Sort of. I don’t think I have the easiest solution with OTA and a Mac Mini as my DVR, but between that and paying for the few non-Network shows I watch via iTunes, I still pay less per year.

    But thinking my solution is not a mass market solution and your premise is correct, one advantage from the consumer perspective will be the notion of at least what I am getting is what I am paying for and what I am getting is what I want.

    In the end, though, the consumer will still get a more focused vote with their wallets, which may or may not be good. Just like with the music industry and jazz, there are shows that quite possibly would not be “published” if there isn’t something else paying for it. There always has to be some system or form of risk taking and pushing the form. I think bundling is the only system the TV industry can think of for that.

    I think live sports aren’t really TV because no matter how TV evolves, live sports will always be able to dictate its own terms.

    Joe

  • def4

    The shift in technology from an analog broadcast model to a digital IP model allows for entertainment content personalisation.

    That hasn’t happened yet and the reason is as you have identified the content creation business.
    It’s that business that must be disrupted and once that starts to happen the distribution will follow like a domino piece.

    Ironically, I think your chosen example of Game of Thrones is exactly what the doctor ordered.
    The analog broadcast model and movie theatre model forced common and communal viewing that resulted in a concentration of attention and as a result, of value.
    When everyone watches the same things because they are on and easily available, the brand recognition of key contributors can easily explode. Fame then breeds a virtuos circle.

    This must change. We have too many rich actors and directors and too many struggling artists. We need more Peter Dinklage famous and fewer Brad Pitt famous actors. We need more shows like Game of Thrones and fewer summer blockbusters. We need more diverse high quality content with lower cost enabled by competition between less famous artists.

  • Gadgetenvy

    Funny, I don’t remember the part of Econ 101 that said an existing industry’s desire to make a certain profit requires me to, literally, buy it. We quit cable over 7 years ago and have more content than time to watch. Netflix DVD subscription, Hulu, YouTube and others keep us entertained. We do watch a few Network shows using a DVR on our schedule.

    • steve_wildstrom

      But Econ 101 does tell you that a producer needs enough revenue to cover costs. My main point was that at current pricing, over-the-top services aren;t going to produce enough revenue to keep the production chain healthy. It’s not as though anyone is raking in particularly outrageous profits.

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