Mark March 3, 2014, as the day Dish Network (NASDAQ:DISH) and Walt Disney (NYSE:DIS) signed the death warrant for the cable industry. On that day the two companies announced a deal that allows Dish to transmit some Disney channels -- including the wildly popular ESPN and the ABC network -- to customers who don't have a traditional set-top box subscription.
The death throes for the cable industry will be slow and painful -- sort of like the ones newspapers have been going through for the past 15 or so years. But in the end the concept of customers being forced into an expensive subscription based on wires and set-top boxes died when Disney agreed to let Dish sell its channels in a streaming-only package.
Satellite competitor DirecTV (NASDAQ:DTV) has also suggested it might offer a lower-priced Net service with basic channels and, in a statement to USA Today, says it is working on its own similar agreement with Disney.
How the cable industry makes money
Currently the cable and satellite industries make their money by forcing customers into packages that make them pay for a lot of channels they don't want to get the few that they do. The most basic tier -- which costs the least -- usually offers little more than the major networks and a small selection of channels nobody wants (like C-SPAN).
The next tier up -- which usually costs a lot more -- offers most of the channels customers actually want, like ESPN, MTV, and the cable news networks. These packages also include all sorts of channels you probably don't want, but you get charged for them anyway. There are more tiers -- they vary by company -- where cable and satellite companies charge more for content like regional sports networks, but in most cases buying what you want also means paying for stations you don't.
Customers can also buy a la carte premium channels like HBO or Cinemax, but even though these channels have excellent digital apps, you must pay for a traditional cable subscription to access the app. It's a racket that has not only benefited the cable companies, but it has propped up stations that few people watch. There might be fewer than 200,000 people watching MTV2 in prime time, but its owner, Time Warner (NYSE:TWX), is charging a carriage fee for each subscriber to other cable companies that carry the network and that fee is getting marked up and passed on.
Traditional cable is starting to suffer
The idea of cutting the cord -- dropping traditional cable and satellite subscriptions in favor of streaming-only services -- has been growing in popularity. Cable, satellite, and telephone companies that offer cable-like services have managed to forestall this a little by offering price incentives (causing some customers to bounce around between providers always paying a below-market rate). But even with those efforts, the numbers don't look good for the three largest cable companies.
For the year that ended last March 31, Time Warner saw its residential video subscribers drop by 557,000, or about 4.5%, according to Fortune, while Charter (NASDAQ: CHTR) lost 199,000, or 4.8%. Comcast (NASDAQ:CMCSK), which reports video subscriber numbers that combine residential and generally stickier business contracts, lost 359,000 video subscribers in the year for a 1.6% decline. That's more than 1 million subscribers from those three companies alone, reported Fortune.
The cord-cutters drop cable and subscribe to services like Netflix (NASDAQ: NFLX) and Hulu, which gives them access to lots of television shows -- albeit not on the same schedule as traditional TV. The drawback to cord-cutting has always been that without a cable or satellite subscription there was no way to watch live sports or certain shows like the Oscars, which aired on ABC. The Dish and Disney deal will change all of that.
The Dish/Disney deal
Dish has not announced pricing for its streaming-only service or exactly what channels it will include, but its deal with Disney offers a lot of content that had previously only been available on a first-run basis through traditional channels.
"The extensive and expanded distribution agreement grants Dish rights to stream cleared linear and video-on-demand content from the ABC-owned broadcast stations, ABC Family, Disney Channel, ESPN, and ESPN2, as part of an Internet-delivered, IP-based multichannel offering," according to a Dish press release.
To put that in plainer language -- Dish can offer a streaming-only service that includes some of the most popular channels that currently keep people paying for cable. ESPN alone is the most expensive individual channel, which caused Liberty Media Corp. (NASDAQ: LSTZA) CEO Greg Maffei to describe the rising cost of ESPN as a "tax on every American household," the Wall Street Journal reported. He also acknowledged that the increasing cost of sports channels in general (due to rising prices paid for rights to televise sporting events) "create an opportunity for alternative TV offerings that could undercut the way cable channels are packaged—as bundles of different programming."
Dish and Disney is just the start
The traditional cable and satellite model now sits where the music industry did before people decided in large numbers that not paying for music was fine. In a few years streaming-only services will be the norm and cable -- if it wants to survive -- will have to move to a la carte pricing.
That will be a mixed blessing for subscribers and will in some cases bring prices down, but in others will actually raise them. ABC and ESPN pay billions in rights for sports programming, including the NFL. Currently the cost for those rights are split among nearly all cable subscribers -- many who watch those games but many who don't and pay anyway. If dropping ESPN or subscribing to streaming services that don't offer it instead of having a cable subscription is an option, some people will gladly take it. That will force ESPN to spread its cost out between fewer people, likely leading to a raise in rates.
Cable companies won't be able to force people to pay for services they don't want when they have the option of getting the ones they do from another provider. It might take years to shake out, but cable as we know it will ultimately be a thing of the past -- like owning records, reading a print newspaper, or having a landline.
You know cable's going away. But do you know how to profit? There's $2.2 trillion out there to be had. Currently, cable grabs a big piece of it. That won't last. And when cable falters, three companies are poised to benefit. Click here for their names. Hint: They're not Netflix, Google, and Apple.
Daniel Kline has no position in any stocks mentioned. The Motley Fool recommends DirecTV, Netflix, and Walt Disney. The Motley Fool owns shares of Netflix and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.