Powered by TMCnet
| More

Cable Technology Feature Article

September 23, 2011

Will Consumers Save Money as Streaming Grows?

By Gary Kim, Contributing Editor

“Don’t sell products into a platform where you end up with less money than when you were selling it to the previous buyers,” says Time Warner (News - Alert) CEO Jeff Bewkes. That bit of advice suggests why consumers might not save much money, if any, as professionally-produced video and movie content distribution shifts from current channels to new channels.

Over-the-top programming could help moderate rising programming costs in the future, Cablevision Systems (News - Alert) chief operating officer Tom Rutledge has said.

Consumers often grouse that their cable television bills go up every year, but video distributors are often just passing along ever increasing costs, says a new report from Ball State University. “The Truth about Cable Rates” finds that while the cost for basic cable television has increased by 54 percent over the last decade, customers are getting more channels, technologies and services that were not available at any price 10 years ago.

According to Matthew Harrigan at Wunderlich Securites, in 2009 DirecTV (News - Alert) paid approximately $37 per subscriber, per month,  out of an average revenue per subscriber of $85 per subscriber to content owners for programming costs.

Those affiliate fees represented roughly 43 percent of total revenue for DirecTV. At Comcast (News - Alert), programming costs represented 37 percent of video revenue. Each firm pays between $7 billion and $8 billion a year in programming fees.

By some estimates, cable TV companies alone pay $32 billion a year to content providers each year. If Bewkes and other content providers get their way, none of that revenue is to be jeopardized as support for new channels develops. Of course, cable companies and other distributors have good reason not to want a shift, either.

That does not mean financial interests are completely aligned. “TV Everywhere” is an effort to entice consumers to buy full traditional cable packages in order to get access to much of that video on other devices, at least within a subscriber’s home. Content owners would prefer to negotiate additional streaming rights for most of that content.

But the point is that content owners and major distributors do not have any interest in fostering content consumption modes that would jeopardize current subscriber revenues. On the other hand, the interests of content owners and distributors are not completely aligned.

Video distributors might consider some expansion of on-demand delivery modes, so long as such moves are revenue neutral or slightly revenue-enhancing. For some content owners, especially the programming networks, on-demand access actually undermines the current business model.

Affiliate fees are the reason. Networks sell their programming on a cents or dollars per subscriber basis. That means a network wins if it has some “must see” programming, where consumers want a particular channel for one or two key series, even if they don’t watch the other material. The value of the whole channel often is driven by a lead TV series or two, while the rest of the programming, which creates an advertising stream, might not be highly viewed.

That strategy essentially bundles a “must see” program or two with other less-demanded programming, with the affiliate fee driven essentially by the power of demand for the top series.

On-demand programming, on a wide scale, would destroy the affiliate revenue stream, and much of the advertising potential as a secondary hit.

But that creates a significant barrier to any rapid embrace of streaming delivery on the part of the TV networks. Given the obvious desire not to reduce their revenue streams, neither does it seem likely that additional steaming options that deliver TV network programming are likely going to be cheaper for end users, at least for the current material that is of most interest.

A move to streaming delivery might be technologically inevitable. But it is not automatically inevitable for business reasons, nor is it necessarily the case that consumers can expect to pay less, even as the business environment for streaming improves. A significant decline in viewer appetite for current versions of video programming would create more pressure.

But as Bewkes argues, cord cutting really hasn’t arrived, there is relatively little immediate pressure of that sort on TV networks or video distributors. 

Gary Kim (News - Alert) is a contributing editor for TMCnet. To read more of Gary’s articles, please visit his columnist page.

Edited by Jennifer Russell