What Does a Shrinking Audience Mean for Cable?

While the hype around cord-cutting hasn't exactly panned out as dramatically as many people had expected it would, cord-shaving -- the practice of getting a smaller package of channels -- is taking off as a much more accessible alternative.

Ultimately, this could lead to some channels going out of business because they count on carriage fees -- money paid by cable companies based on subscriber totals, not on who watches -- to survive.

In this clip from the Industry Focus: Consumer Goods podcast, Vincent Shen and Daniel Kline explain exactly what cord-shaving is, how it shifts power away from cable companies and back to consumers, and why the subsidized cable bundle model that we've seen for decades never really made much sense to begin with. Also, they take a quick look at Viacom's (NASDAQ: VIA) (VIAB) managerial drama and how they think it's likely to end.

A transcript follows the video.

This podcast was recorded on May 31, 2016. 

Vincent Shen: Taking a bigger-picture look, I wanted to talk about Broadcasting & Cable. Recently they reported on Nielsen's monthly estimates for cable TV subscriptions. Thank you for sharing those with me, Dan.

Daniel Kline: No problem.

Shen: They pointed to the ongoing trend of what you had mentioned, cord-shaving, as cable TV households are expected to decline about 2.2% in June. What do you think? Longer term, is this just something else that Viacom is really going to have to be thinking about?

Kline: I think it's going to be a big problem. I mean, for years we worried about cord-cutting. That was people completely getting rid of cable in favor of streaming services, Hulu, Netflix (NFLX -1.61%), Amazon Prime, whatever it was, and that really hasn't happened. There were signs this year that those numbers may be topped out. In the fourth quarter of 2015 and the first quarter of 2016, the industry actually made gains, small ones in the first quarter.

If you look at cord-shaving, which is the idea of "OK, I have 200 channels and that's ridiculous, I only watch 25." Now the challenge is that if for 200 channels, maybe you pay $103 a month -- I'm guessing at a number -- but your average cost per channel is about $0.50. When you get down to 20-25, you might pay a dollar or two, but you might still pay a lower price overall and get everything you want. I think we're going to see more of that, and when that happens, we end TV socialism. Right now, if I love the History Channel -- I don't, but let's pretend I did -- you might be subsidizing that by paying for it in carriage fees.

The second they give you the option to get rid of it, you're not going to pay for the Tennis Channel, the History Channel, Discovery ID, or whatever these stations are, and all of a sudden a channel might have 200,000 or 300,000 users, and either those people are going to have to pay $20 a month or they're not going to get the channel. Maybe there's a few things like the Tennis Channel that can exist just as a subscription model, but I'm not going to pay for The Cooking Network just because I watch it sometimes if it all of a sudden costs $15 a month.

Shen: Do you see this, Dan, as kind of like a shift in power? Essentially now that these companies like Viacom are unable to get these carriage fees among this massive base of viewers and earn lots of revenue that way, and they're losing that leverage they have in negotiations, essentially?

Kline: I use this word lightly, sort of in a joking manner, but I think it's the end of a scam. The reality, should I have to pay for 17 Disney (DIS -0.41%) channels that I don't watch? Of course not. Now, if you could find ways with packages to make me want to subsidize what you like, I think we'll see some of that, where everyone or almost everyone is still probably going to pay for ESPN on any of the skinny bundles, which is the most expensive of all the channels, but this was never a logical system. I don't force you, when you go do the movies, to go see X-Men: Apocalypse to buy tickets to The Nice Guys in case someone else wants to see that. That's just not how it works.

I think we're going to see television have to stand on its own merits. On one hand, that's bad. On the other hand, on Netflix, something like Unbreakable Kimmy Schmidt, which does about 4 million viewers, is considered a hit, whereas on NBC that would be a huge flop. You really have a changing world, where if you create content and it stands on its own and it finds an audience, it'll work, but the public isn't necessarily going to pay for content that almost nobody is watching.

Shen: Any other thoughts that you wanted to leave our listeners off with about Viacom or the industry overall? I really think the point that you touched on that is most important when you're investing in a company like this is that what you mentioned with the fact that National Amusements, the company that Sumner Redstone's father founded -- which was originally a movie theater company, still operates theaters but is now mainly the investment vehicle for the control of Viacom and CBS -- the fact that it has this 80% controlling voting share of these two massive companies, these individual shareholders, I feel like their voices can get lost, but anything else you wanted to leave off with?

Kline: Yeah. I think, as you look at this now, it's all very exciting. Oh, the board is suing, and will Dauman be replaced? There's a lot of Shakespearean intrigue here, but if you really step back, the reality is Shari Redstone is going to end up controlling this. It's a question of whether she controls it before her father dies, after her father dies, or maybe it'll take a few years, but she'll end up controlling this trust, and independent people and outsiders are not going to be able to get in the way of a family-dominated, Sumner Redstone hand-picked board of trustees.

No matter what you call her, if you're looking at CBS and Viacom, you have to realize she's the big boss at the end of it. That's not fair to Les Moonves or Philippe Dauman or whoever takes their jobs next, but she is Big Brother when it comes to all this. If you're going to invest in these companies, I think you have to look at her track record.