1 Way Streaming Video Is Killing Pay TV

Pay-TV subscribers are a tough bunch to keep hold of.

DISH Network (NASDAQ: DISH  ) lost 78,000 of them last quarter. Comcast (NASDAQ: CMCSA  ) saw 159,000 vanish from its books. Time Warner Cable (NYSE: TWC  ) had 191,000 of them bolt in the second quarter.

All told, about 380,000 fewer people are paying for TV video service than at the same time a year ago, according to a Moffett Research report cited by the Wall Street Journal.

Sure, many of these companies booked higher revenue, as gains in broadband and other services offset the loss of video subscribers. And while the cancellation numbers are bad, they don't point to a quick collapse of the pay-TV model. This year's defection figures are actually a bit lower than 2012's. Still, pay-TV providers are in a serious bind. Programming costs are forcing them to hike prices, while online video services can keep prices low and soak up all of the subscriber growth.

These shows don't come cheap
Content costs have been spiking all around. Comcast's programming expenses grew by 8.1% last quarter. Thanks to more fees and the higher price of sports content, the company expects costs to rocket higher by 10% over the full year. Time Warner Cable saw its costs jump by 8.5% last quarter, as well.

The tricky part for pay-TV providers has been passing those rising expenses along to customers. They've been using a mix of price increases and service fees to keep their average revenue figures climbing along with their expenses. But with each tick higher, more customers decide to end their TV video service.

Choices are getting better
That decision is getting easier now that the alternatives have improved. Amazon.com's (NASDAQ: AMZN  ) streaming service boasts 41,000 movies and TV shows available at no extra charge to Prime subscribers, as compared to the 18,000 titles it claimed a year ago. Netflix (NASDAQ: NFLX  ) is spending upward of $2.5 billion annually for content, including hundreds of millions on exclusive and original shows.

Sure, these streamers are paying higher prices for their programming, too. But one major advantage they have is flexibility when it comes to choosing content. If a show or package gets too expensive, they can walk away, as Netflix did this year with its Viacom deal for MTV and Nickelodeon shows. Paying less than $10 per month, most online streaming subscribers expect to find something they want to watch -- even if it isn't exactly what was available on the service last month.

Contrast that situation with DISH Network's latest quarter. Price increases sent the company's per-subscriber revenue up by $3.30 to hit $81 a month, but the cancellation rate spiked along with it. Pay-TV providers can't help but continue to price subscribers out of the lower end of the market.


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