Comcast (NASDAQ:CMCSA) proudly lists the prices of its various cable packages in its commercials, on its website, in its mailed solicitations, and in its print ads. But for many Comcast customers, that's not what they actually pay. In addition to applicable taxes, many customers also get hit with a $1.50 broadcast TV fee each month.
These aren't surprise charges the company was unaware of when it created its website and ads. The broadcast TV fee is a way for Comcast to recoup the money it must pay to retransmit various channels -- an expense that's been rising in recent years.
Basically, increasing costs have made it impossible for Comcast to deliver the promised service at the advertised price while still making its desired margins. So, instead of changing the price or making the added fee clear, Comcast advertises one price and charges another.
The other major cable companies pass the cost on as well, but they add it into their overall price, according to Kevin Hunt, a business columnist at The Hartford Courant.
Even late-night TV ads for pajama jeans make it clear you pay extra for shipping and handling. But Comcast chooses to hide the full cost in its disclaimer text.
What exactly is happening here?
Over the last few years the major broadcast networks -- CBS (NYSE: CBS), ABC, NBC, and Fox (NASDAQ: FOX) -- have fought over retransmission fees, money paid by the cable company for the right to show a channel to its subscribers. The networks have huge leverage to keep pushing these fees higher because customers get very unhappy when negotiations stall and a cable provider removes a channel. This can cause subscribers to leave for another provider (likely DirecTV (NASDAQ: DTV) or Dish Networks (NASDAQ: DISH)).
Geekwire printed a statement from Comcast spokesman Steve Kipp explaining the issue, sort of.
Beginning in 2014, we will itemize a portion of broadcast retransmission costs as a separate line item to be more transparent with our customers about the factors that drive price changes.... In 2014, we will not increase the price of Limited Basic or Digital Preferred video service, and adjustments to other video service prices will be lower than they would have been without the Broadcast TV Fee.
That makes sense for existing customers who had the fee added to their bills. It does not explain why the company keeps advertising prices without including or mentioning the added fee.
The company does explain the fee -- and the prospect of additional ones -- under a small "details and restrictions" link posted near the advertised price. That might make adding the charge legal, but hiding extra costs in a disclaimer will do little to endear Comcast to its customers.
Why is Comcast doing this?
In short, advertising 12 months of service for $49.99 is sexier than advertising it for $51.49.
For its existing customers Comcast itemizes the fee in order to avoid raising its base rates while still charging more. But by breaking it out separately, the company is also telling its customers, "Hey, we don't want to charge this but those mean networks keep asking us for more money."
That argument might fly a little better if Comcast did not also own NBC, which benefits from rising retransmission fees.
What should Comcast do?
Comcast should either raise its prices across the board to cover the fee or drop it. Eliminating the extra charge seems unlikely as the company finished 2013 with 21,690,000 subscribers, according to Leichtman Research Group. Some of those users have low-end packages, which don't pay the fee, but if 75% of the company's subscribers pay an extra $1.50 a month, that's $24.4 million a month or $292 million a year. Even for Comcast that's not small change.
The basic agreement between cable companies and subscribers is that a customer pays for a set of channels and the provider delivers those channels. Charging a distinct extra fee for a cost related to providing exactly what customers have ordered is questionable behavior. It's like The Cheesecake Factory listing a piece of cheesecake for $5.99 then adding a $1.50 sugar surcharge when you get your bill.
The practice might be legal, but it's wrong. Comcast should stop intentionally misleading its current and potential customers.
Daniel Kline has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.