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

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.


NBC and the Olympics: Why Cord-cutting Will Be Slow and Hard

NBC Olympics logoNBC’s exclusive U.S. coverage of the the 2012 London Olympic Games has not, to say the very least, been a hit in the tech world. Twitter has been buzzing since last Friday about NBC’s delayed showing of major events, endless commercials, insufferable commentary, cheerleading for U.S. athletes, mawkishness, sentimentality, and a hundred other sins. All of it is true, and all of it has marked coverage of every Olympics I can remember.

There are two important things new. One is the ubiquity of social media, which have grown tremendously since the 2008 Beijing games. Twitter, Facebook, and the rest give us a global water cooler where we can we can grumble and complain to anyone who will listen. The other  is the ubiquitous availability of streaming media on our phones, tablets, PCs, game consoles, and just about anything else with or connected to a screen.

The  combination has created a strange sense of entitlement among many of the tech savvy. who seems to feel it has a right to watch the Olympics live wherever  and whenever they want. The problem is that for all the quasi-governmental, nationalistic trappings of the games, the International Olympic Committee is a private organization to which NBC Universal, another private organization, has paid a grade deal of money for the rights to televise the games in the U.S. For reasons well explained by The Atlantic‘s Megan Garber, NBC’s economic interests lie with the status quo, and are likely to for some time to come. This bodes ill for those who are counting on the internet to disrupt the way television content is delivered.

First, no one has a right to anything other than over-the-air content broadcast by local stations. Some local stations offer streaming, but it’s only of their own content, mainly news, because that is all they own the rights to. Networks offer selected shows, either on their own sites or through service such as, but what they offer and when they make it available is entirely up to them. That is why calls for a Federal Communications Commission investigation of NBC’s delayed and mangled streaming of the Olympic opening ceremony were nothing more than venting.

The situation is not going to change as long as those who control the content don’t see cord-cutters, who who would rely exclusively on over-the-top delivery on the internet, as a major economic threat to their very lucrative relationship with cable and satellite operators on the one hand and content owners, such as studios and sports leagues, on the other. That is why they are taking only baby steps to stream their content, and why Olympic streamcasts and services such as HBO Go are available only to people who are already cable subscribers. (Of course, NBC’s relationship to cable is more than close; NBC Universal is owned by Comcast.)

Furthermore, the distribution of content is tied up in a maze of contractual agreements. ESPN, for example, has contracts with Major League Baseball, the National Football League, the National Basketball Assn., the NCAA, and the College Football Assn., among others, and each specifies just how the content may be distributed. These contracts will evolve, but slowly.

One thing that is absolutely clear is no matter what alternative means for delivering content are developed, you are going to pay for the good stuff. Like newspapers, television content distributors have not found an internet advertising model that works anywhere near as well as traditional broadcast or cable. In the future, you may be able to subscribe via the internet, but you are still going to pay.

I pay a lot of money for my Verizon FiOS video service and don;t really watch very much television. I sympathize with those who only want to watch Game of Thrones but are unwilling to pay for a cable subscriptions plus an HBO premium just to get the one show they really want to see. I don’t know that HBO will ever sell subscriptions to individual shows–it doesn’t suit their business model well. But I’m sure the time will come when you will be able to subscribe to HBO without going through a cable company.It’s just going to take a while, and that is more likely to be measured in years than months.

Maybe by 2016, we’ll be able to subscribe to live feeds of the Rio de Janeiro Olympics (Rio is just one hour ahead of Eastern time, so there’s not much of an excuse for delays.) I certainly hope so. But for the time being, we all need some patience.