Wall Street Thinks The Cable TV Sector Could Easily 'Unravel.' That's Probably A Good Thing.

from the adapt-or-perish dept

For the better part of the last decade, some Wall Street analysts have quietly been pointing out that the current pay TV business model is unsustainable. As it stands, broadcasters increasingly impose giant price hikes for the same programming to cable companies, who in turn pass those higher costs on to consumers. Those consumers are, in turn, increasingly "cutting the cord" by moving to cheaper streaming alternatives. And when those streaming alternatives don't provide what they want or raise rates (as AT&T recently did with its DirecTV Now service), subscribers then shift toward free options like over the air antennas or piracy.

Smaller cable providers have been warning for years that unless you enjoy the size and leverage of being a giant ISP and broadcaster combined (AT&T/Time Warner, Comcast/NBC Universal), you're not going to be able to survive this new tight-margin market. Some, like CableONE, have opted to get out of TV entirely and focus on broadband. It's a trend that's only likely to accelerate.

Some Wall Street analysts, like MoffettNathanson analyst Craig Moffett, have been noting for a while that this entire mess isn't getting better anytime soon. He's again making the rounds, arguing that there's a chance that bigger cable operators could similarly embrace the idea of giving up on video as margins tighten. And if they stop caring about video (either by dropping pricey channels or raising rates), it's only going to accelerate the cord cutting trend:

"If larger MSOs follow their smaller peers in concluding that video is no longer worth defending, then subscriber declines would almost certainly accelerate, perhaps radically so," Moffett wrote. "And that, in turn, would force programmers to be even more aggressive in licensing their content to OTT services, sealing the deal. The industry as we know it today could, or would, simply unravel."

This is an industry that responded to increased streaming competition by doubling down on all of its very worst impulses, especially raising rates. As such, a semi-collapse of the sector could probably be a good thing. Most specifically by curing many cable and broadcast executives of the false belief that the traditional, bloated cable bundle is going to live forever, and that cord cutting is just this weird, overhyped trend that stops once Millennials procreate more. A collapse would send a very clear message that heated video competition is the new normal and adaptation is essential.

That said, giant cable operators like Comcast NBC Universal have a secret weapon in this fight: their monopoly over broadband. Moffett has been pointing out for a long time that "video just doesn't matter" anymore if you're a cable TV provider. With tight margins and hot competition in video, all the money is going to be in broadband moving forward:

"That in turn has diminished the value of a pay TV subscriber versus a broadband customer. Moffett estimated that the market values a video customer at a multiple of about 2 times cash flow, while a broadband subscriber is attached a value of between 12 and 13 times cash flow. “Video just doesn’t matter much anymore,” Moffett said."

Moffett doesn't clearly illustrate in his research notes is why broadband is so profitable. It's so profitable because in many areas it remains a natural monopoly dominated by just a few major players like Comcast or Charter (Spectrum). This monopoly control provides a secret weapon in the video wars. Thanks to no competition, these companies can impose arbitrary and unnecessary usage caps and overage fees, which drives up the price of not just broadband...but of using streaming competitors. Companies like AT&T remove these restrictions if you use their own streaming services. In short, they hope to win by dominating the pipe, then tilting the playing field to dominate the content.

Between their attacks on FCC oversight (including net neutrality) and these natural monopolies, many of the bigger companies will be protected for some time from the financial cost of increased video competition. But ultimately the entire market is going to need to be dramatically reshaped as traditional, bloated and expensive cable TV channel bundles die thanks to a little thing called competition. Avoiding the financial hit on the video side of the equation is not going to be avoidable for many of these companies, no matter how hard they tried to convince themselves the cord cutting trend wasn't a serious threat.

While that greater video competition will be a good thing for consumers as a universe of companies battle it out, consumers will ultimately be paying for the evolution courtesy of higher broadband bills and weird net neutrality violations, thanks to a broken US broadband market and regulatory capture problem neither party has historically been interested in trying to fix.

Filed Under: cable, television, wall street


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  • identicon
    Anonymous Hero, 3 Apr 2019 @ 7:05am

    No! I love watching programming that's 90% re-runs, with language censored, interrupted by commercials for the latest thing I should ask my doctor about!

    reply to this | link to this | view in chronology ]

  • identicon
    Anonymous Coward, 3 Apr 2019 @ 7:26am

    Exactly Right

    "Those consumers are...'cutting the cord' by moving to cheaper streaming alternatives...when streaming alternatives don't provide what they want or raise rates...shift toward free options like over the air antennas or piracy."

    Somebody's been reading my diary.

    reply to this | link to this | view in chronology ]

  • identicon
    Anonymous Coward, 3 Apr 2019 @ 7:33am

    And then comes the broadband competition.

    I've watched the various US capitalists and their methods of thinking. Once the cable bundle breaks they will all try to jump ship to broadband. This will result in more broadband competition.

    Most of it will be failed projects that don't last more than a year or two or only last in some locations that the maker of the project had enough of an edge in to get some market share that will keep them going with the broadband developed, but nothing more.

    However the free for all will break things in the broadband market that will make room for more competitions down the line.

    Of course none of this means the consumers should just rely on a sequence of events that won't be beneficial to them for another decade or two. Call your representatives and demand a better broadband market now instead of waiting for the cable market to tear it a new hole for innovators to slither trough.

    reply to this | link to this | view in chronology ]

    • identicon
      Anonymous Coward, 3 Apr 2019 @ 8:19am

      Re: Call Your Politiicians ?

      reply to this | link to this | view in chronology ]

    • identicon
      cordless6, 3 Apr 2019 @ 8:27am

      Re: Call Your Politiicians ?

      "Call your representatives and demand a better broadband market now "

      _

      yeah right, your government slugs have just been so great promoting price competition and market competition in this industry --- we just need even more of their brilliant interventions ASAP !

      reply to this | link to this | view in chronology ]

  • identicon
    Anonymous Coward, 3 Apr 2019 @ 7:40am

    2 times cash flow isn't enough?

    Moffett estimated that the market values a video customer at a multiple of about 2 times cash flow, while a broadband subscriber is attached a value of between 12 and 13 times cash flow. “Video just doesn’t matter much anymore

    Wouldn't "2 times cash flow" mean half the money they collect is pure profit? How can they say that doesn't matter?

    reply to this | link to this | view in chronology ]

    • identicon
      Anonymous Coward, 3 Apr 2019 @ 7:45am

      Re: 2 times cash flow isn't enough?

      Because it's only 2 times. It isn't 12 or 13 times or more.

      The greed is strong with cable companies.

      reply to this | link to this | view in chronology ]

    • icon
      Dan Neely (profile), 3 Apr 2019 @ 9:07am

      Re: 2 times cash flow isn't enough?

      For accounting purposes customers are assets that generate $x/year(?) in revenue, and thus have a book value which is a factor of their current revenue generation.

      The very low multiplier on TV customers in turn says that they're expecting a lot of them might go away fairly soon (either cancelling traditional pay-tv service entirely, or just switching to satellite for a cheaper new customer bundle) and thus aren't worth as much.

      The higher multiplier on internet customers says that their accountants expect to make a lot more money long term from each internet customer because they're much less likely to cancel service.

      reply to this | link to this | view in chronology ]

      • identicon
        Anonymous Coward, 3 Apr 2019 @ 9:13am

        Re: Re: 2 times cash flow isn't enough?

        Are you suggesting they measured cash flow in dollars over time but value in simply dollars, without stating the time unit used? Plausible, but very sloppy to not state their units.

        reply to this | link to this | view in chronology ]

        • icon
          Dan Neely (profile), 3 Apr 2019 @ 12:18pm

          Re: Re: Re: 2 times cash flow isn't enough?

          It's definitely sloppy wording on someone's part. I'm assuming yearly cashflow because it's the only range that really makes sense; and would be a more natural fit with major annual reporting.

          reply to this | link to this | view in chronology ]

  • icon
    Anonymous Anonymous Coward (profile), 3 Apr 2019 @ 8:04am

    A lack of competition will, in the long run, create competition.

    But are we, or should we be willing to wait?

    I am waiting and watching for the new cable replacement, Silo's R Us, to get to the point where not only will each silo have to have something worth watching, but might also have to compete price wise in order to get or maintain subscribers.

    One effect of such a phenomenon will be a decline in revenue for the producers of such content. Of the possibilities of how those producers react I bet raising prices to content delivery systems will be the first gambit, except when they are also the content delivery system.

    The second will be reduce the cost of the content which also means a likely decline in quality. The big problem in their whole line of thinking is that their profits need to not just remain static, but grow quarter after quarter, while income declines. That is not sustainable, and they will be very, very sad when that realization comes to light.

    I think the third probability will be in silo consolidation, which is a move back to a single subscription with multiple channels. Like cable is today. Then I am betting that the cycle will repeat itself. The single silo entity will raise prices to pay for the increased demands from the content creators and we will be back to where we are today. With one big caveat. There will likely be more than one single silo content deliverer and they won't own the connection to your view screen.

    I cannot imagine what the mess will look like after that. With cost/quality of content so low they will have a hard time enticing people to their services. And that might lead to the possibility that society decides that there are better ways to spend their time other than watching the tubes. What those 'entertainments' will be is part of the unknown, but it will take a decade or two to run through the scenario above, and as we all know, a lot can happen in a decade or two.

    reply to this | link to this | view in chronology ]

  • icon
    Bamboo Harvester (profile), 3 Apr 2019 @ 8:11am

    Spectrum

    Interesting timing, I spent a couple of hours dealing with Spectrum just yesterday.

    NY "threw them out". Result: They stayed and jacked the cable bill up $7.00

    Last month, they hiked it another $12.00 to cover their "costs of complying with OTA requirements".

    Got a letter from them last week that the TV side of my account was going up another $35 due to "unexpected costs incurred". (WTF?)

    Call them to see if I could downgrade the TV side. No, I'm on the lowest tier.

    Ok, cancel it - I'm not paying $1013 and change a year for NBC News and Jeopardy (all we really watch).

    Well, of course, they can't have THAT happen. They offer me "Spectrum TV Choice", OTA channels, music channels, and 10 non-premium networks of my choice - for $12 less than my current bill.

    I would have just cancelled it and saved $768/year, but in the interests of domestic tranquility, I had the wife pick ten channels and changed the plan to that.

    It took her three HOURS to pick ten channels. Not because she had to pick her favorite ten, but because the first five she picked were "free", the OTA channels, on a second pass she couldn't come up with more than six channels she could even recall having ever watched.

    So we bulked it out with four channels we'll probably never watch just to fill the list.

    reply to this | link to this | view in chronology ]

    • identicon
      Anonymous Coward, 3 Apr 2019 @ 8:49am

      Re: Spectrum

      All the big companies do that. Look for "retention deals" online; there are web forums where people discuss what they were able to get. It can help to have a quote from a competitor, but, since there are never any cable competitors, that might have to be a satellite or online service. Toward the more shady end, some people will actually cancel and then have a spouse/roommate grab a "new customer" deal (sometimes even inventing a fake "Apartment B").

      It's stupid, but "retention" can be a whole other department with deal-making powers the normal customer service people don't have. The catch is that you'll have to call and threaten to cancel every year.

      reply to this | link to this | view in chronology ]

    • identicon
      Anonymous Coward, 3 Apr 2019 @ 9:58am

      Re: Spectrum

      What I want to know, has any cable channel achieved the zero viewers for a day, a week, a month or a year?

      reply to this | link to this | view in chronology ]

  • identicon
    The Baker, 3 Apr 2019 @ 12:58pm

    Is this next?

    Pai pushes for the elimination of “FREE” OTA TV.
    Because we know that the free model does not work.

    reply to this | link to this | view in chronology ]

  • icon
    ECA (profile), 3 Apr 2019 @ 1:11pm

    If there is true competition...

    this is not going to be a problem..
    Problems exist..
    Old days the TV and cable corps were separate companies..
    There is a requisite of Broadcasters to Freely broadcast somewhere in the market place.. and it still there, MOST of the old channels ARE broadcast somewhere in the nation..
    But the NUMBER of owners has dropped, from 100's to around 7-8..

    Something NOT said is the idea that there are SECTIONS to the internet... the ISP that connects to the net, and the Heart of the net, that belongs to the greatest builders OF the internet..
    Its already been shown that MOST of the ISP's want Fast turnaround and profit, and arnt able to take the TIME to develop Much from Scratch, to compete with things created in the past and built up OVER along time.
    They dont want to INSTALL Server centers Large enough to do much of anything. They would love to install 1 HUGE computer then build up an integrated Combination of servers that can maintain the WHOLe of the internet.
    Think about How much WE have spent for the CIA, in 2-3 locations Just to Look/monitor the net...in the USA..

    reply to this | link to this | view in chronology ]

  • icon
    madasahatter (profile), 3 Apr 2019 @ 1:47pm

    Other Sources

    A problem for cable and TV is the existence of the Internet. There sites like Netflix or Hulu that stream conventional shows and movies. But there are sites like YouTube that provide massive amounts of videos. Some of the documentary channels on YouTube are excellent and are often very small operations with very low per episode costs (entire annual budget might be low 6 figures including salaries). The issue is if one is watching Hulu or a YouTube channel, one is not watching a cable or TV channel.

    reply to this | link to this | view in chronology ]

  • identicon
    Max, 3 Apr 2019 @ 2:49pm

    I'm having a hard time telling - do they still run "Home Alone" every. single. year. on. Christmas...? How about E.T.? No...? Well, I guess I'm never going to find out...

    reply to this | link to this | view in chronology ]

  • identicon
    Anonymous Coward, 3 Apr 2019 @ 9:25pm

    By the time the cable tv cash cow is dead, we will have perverted the broadband side to generate the same income. At the very least, $100 month for starter internet. DNS server access fee. Continuous streaming access fee. Upgraded usage cap fee. Network congestion fee. Rental fee or usage fee for non-rental equipment. If you can imagine it, we will fee it.

    reply to this | link to this | view in chronology ]

  • identicon
    Anonymous Coward, 4 Apr 2019 @ 5:50am

    At the end of the day, it's still just entertainment. Right?
    At the end of the day, we (customers) still write the checks. Right?
    At the end of the day, even if we did have true competition, we'd still end up with an oligopoly (Comcast, Spectrum, Cox, Verizon, AT&T). Right?

    If we pay the taxes to the government who then turns around and funds the expansion of these ISPs via tax breaks, and we Pay for the products and services that are advertised (commercials) on the shows that these ISPs carry, and we PAY for the subscriptions to these ISPs, haven't we pAiD enough?

    reply to this | link to this | view in chronology ]

  • identicon
    Anonymous Coward, 4 Apr 2019 @ 10:00pm

    Here's a solution you idiot service providers: bundle a few channels WITH broadband!!! WHOA, YOU CAN HAVE BOTH, DID YOU KNOW THAT??????

    reply to this | link to this | view in chronology ]

    • identicon
      Anonymous Coward, 4 Apr 2019 @ 10:07pm

      Re:

      And I'm not joking one bit here. Some people just want a few channels to flip through on a TV AND be able to look things up online. YOU KNOW IT IS SORT OF LIKE HOW PEOPLE LISTEN TO MUSIC ON A DEDICATED STEREO SYSTEM VS A PORTABLE PLAYER... THEY LIKE A BIT OF BOTH AND DON"T WANT TO GIVE EITHER UP TOTALLY BECAUSE THEY SERVE SLIGHTLY DIFFERENT PURPOSES GIVEN DIFFERENT CONTEXTS!

      Comcast: DO YOU UNDERSTAND????

      reply to this | link to this | view in chronology ]

  • identicon
    U.N. Plug, 5 Apr 2019 @ 1:09pm

    $400M baseball palyers and kneeling football players. Two years of lies from CNNPMNBC. Infomercials.

    reply to this | link to this | view in chronology ]


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