If you’re a cable TV subscriber who grumbles about paying for dozens of channels your family never watches, a media analyst has a message: That cable bundle carries all sorts of unseen benefits.
In a report that attempts to quantify the costs of an à la carte pricing for cable television, Needham & Co.’s Laura Martin estimates that $45 billion of TV advertising would be at risk under such a change, along with 1.4 million jobs, $20 billion in taxes paid by such cable operators as Comcast (CMCSA) and Time Warner Cable (TWC), and $117 billion in market capitalization. And maybe you wouldn’t miss the Christian-themed Smile of a Child channel or Jewelry Television, but if you love any of those niche networks you could almost certainly kiss them goodbye for lack of financial support.
The notion of “unbundling” cable television packages and allowing consumers to choose only those channels they want has long tantalized frustrated subscribers, who pay about $720 per year in the U.S. for an average of 180 channels. The average viewer watches somewhere from 16 to 20 of those, according to Needham, and the gap infuriates millions as they write monthly checks to cable companies.
Martin argues in her report this week that à la carte pricing would lead to higher TV bills: “The notion of creating value through unbundling may be a laudable goal from a public policy point of view, but the world this premise describes can never exist.” That’s mainly because for every $1 of subscriber revenue, advertisers pay $1.24. Those payments totaled $101 billion last year, and $56 billion came from advertisers.
To keep the average cable roster of 180 channels, U.S. households would need to pay $1,260 yearly—or 75 percent more than they do now. But, wait, you say, the entire goal would be to pare that 180 drastically, down to the 15 or 20 I care to watch. Unfortunately, this is where the economics of the industry wallop an unbundler’s best-laid plans: The average annual cost to program a cable channel is $280 million, according to Needham’s math, and it’s way more for those that carry sports. Consumers tend to name an ideal price of $30 per month for just those few channels they want, according to Needham’s surveys. Across the 104 million U.S. homes with cable, that amounts to $37 billion per year.
Only 28 percent of current channels would survive in such a world—or about 50 channels in total. “Worst case,” Martin writes, “if distributors (who collect all the money) kept the first $30 billion (as they did in 2012), that would leave only $7 billion for content, implying only 7 percent of channels would survive and 173 channels would disappear.”
What about advertising? That revenue would still exist but only for the most-watched channels, such as Fox News (FOXA), AMC (AMCX) and A&E, where Duck Dynasty has ruled cable-TV ratings. What Martin calls “passion channels” like Discovery’s (DISCA)Military Channel would, in all likelihood, not have meaningful advertising funds and would disappear, taking the massive bundle paradigm with them.
This math exercise doesn’t translate to any kind of real-world channel bundles a cable TV company would ever try to sell, given their enormous cost structures and the fact that ESPN (DIS) alone has some nine permutations. (So far.) Yet the overall “ecosystem” of Big Cable remains a lucrative market for both content creators and distributors, their periodic fighting over money notwithstanding.
While unbundling cable may not work economically, the Needham report does suggest one solution for people disenchanted over paying for all those unwatched channels: Cut the cord, keep your modem, and stream the shows you like from Hulu, Amazon (AMZN), or Netflix (NFLX). Says Martin: “That’s how capitalism works.”
In a report that attempts to quantify the costs of an à la carte pricing for cable television, Needham & Co.’s Laura Martin estimates that $45 billion of TV advertising would be at risk under such a change, along with 1.4 million jobs, $20 billion in taxes paid by such cable operators as Comcast (CMCSA) and Time Warner Cable (TWC), and $117 billion in market capitalization. And maybe you wouldn’t miss the Christian-themed Smile of a Child channel or Jewelry Television, but if you love any of those niche networks you could almost certainly kiss them goodbye for lack of financial support.
The notion of “unbundling” cable television packages and allowing consumers to choose only those channels they want has long tantalized frustrated subscribers, who pay about $720 per year in the U.S. for an average of 180 channels. The average viewer watches somewhere from 16 to 20 of those, according to Needham, and the gap infuriates millions as they write monthly checks to cable companies.
Martin argues in her report this week that à la carte pricing would lead to higher TV bills: “The notion of creating value through unbundling may be a laudable goal from a public policy point of view, but the world this premise describes can never exist.” That’s mainly because for every $1 of subscriber revenue, advertisers pay $1.24. Those payments totaled $101 billion last year, and $56 billion came from advertisers.
To keep the average cable roster of 180 channels, U.S. households would need to pay $1,260 yearly—or 75 percent more than they do now. But, wait, you say, the entire goal would be to pare that 180 drastically, down to the 15 or 20 I care to watch. Unfortunately, this is where the economics of the industry wallop an unbundler’s best-laid plans: The average annual cost to program a cable channel is $280 million, according to Needham’s math, and it’s way more for those that carry sports. Consumers tend to name an ideal price of $30 per month for just those few channels they want, according to Needham’s surveys. Across the 104 million U.S. homes with cable, that amounts to $37 billion per year.
Only 28 percent of current channels would survive in such a world—or about 50 channels in total. “Worst case,” Martin writes, “if distributors (who collect all the money) kept the first $30 billion (as they did in 2012), that would leave only $7 billion for content, implying only 7 percent of channels would survive and 173 channels would disappear.”
What about advertising? That revenue would still exist but only for the most-watched channels, such as Fox News (FOXA), AMC (AMCX) and A&E, where Duck Dynasty has ruled cable-TV ratings. What Martin calls “passion channels” like Discovery’s (DISCA)Military Channel would, in all likelihood, not have meaningful advertising funds and would disappear, taking the massive bundle paradigm with them.
This math exercise doesn’t translate to any kind of real-world channel bundles a cable TV company would ever try to sell, given their enormous cost structures and the fact that ESPN (DIS) alone has some nine permutations. (So far.) Yet the overall “ecosystem” of Big Cable remains a lucrative market for both content creators and distributors, their periodic fighting over money notwithstanding.
While unbundling cable may not work economically, the Needham report does suggest one solution for people disenchanted over paying for all those unwatched channels: Cut the cord, keep your modem, and stream the shows you like from Hulu, Amazon (AMZN), or Netflix (NFLX). Says Martin: “That’s how capitalism works.”
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