Pay-TV is far from cheap. Acknowledging this fact, a growing number of small operators are ditching the multi-channel TV business altogether in favor of Internet and phone services, according to The Wall Street Journal.
The WSJ cites two just two smaller companies that have dropped TV from their bundles entirely -- Ringgold Telephone Co. and BTC Broadband. But other cable operators, including mid-sized MSO Cable One Inc. , are listed as paring back their offerings because of escalating programming costs and growing consumer adoption of online video.
It would have been unthinkable in years past for cable companies to sell connectivity without the content that rides on top, but the economics of the video business have changed dramatically in the last decade. At the American Cable Association (ACA) Summit in Washington, D.C. in April, CEO Steve Weed of Wave Broadband went so far as to suggest that small operators should embrace the opportunity to get rid of TV service. "I want to be a dumb pipe," said Weed, "with a lot of good service."
Weed also described just how far higher licensing fees have eaten into operator profits. For Wave, when you take out the broadcast TV service tier, the rest of the video business only accounts for 14% of the company's gross margin. Internet service is far more profitable. (See Rep. Rips Retrans 'Racket' .)
Put another way, SNL Kagan estimates that cable programmers will rake in $35 billion in licensing fees in 2014. That means that cable operators are shelling out big bucks for the privilege of distributing content from companies like Walt Disney Co. (NYSE: DIS) and Viacom Inc. (NYSE: VIA).
While programmers may be happy with the situation today, that could backfire on them if more operators ultimately decide the content isn't worth the price. Just this week, Suddenlink Communications dropped Viacom when its contract expired on October 1. The two companies couldn't reach an agreement on licensing fees.
There's another corollary here too. As the big pay-TV providers get bigger, they also have an impact on the cost of programming for smaller operators. At the ACAA Summit, Weed explained that big operators can negotiate lower programming fees because of their expanded customer reach. According to Weed, small operators are then forced to help make up the difference.
Maybe becoming a dumb pipe isn't such a dumb move after all.
— Mari Silbey, special to Light Reading