The price of cable has skyrocketed in recent years, leading many consumers to cut the cord. But don't blame the cable companies entirely. Programming costs at many pay-TV distributors have increased faster than revenue per subscriber. Last year, Comcast's (NASDAQ:CMCS.A) programming expenses increased more than 10% while video revenue climbed less than 4%.
While Comcast says it expects programming expenses to continue increasing for the foreseeable future, those increases may be slower than in the recent past. BTIG analyst Rich Greenfield doesn't see any incremental value programmers can offer to justify further price increases. That presents a challenge for major media companies like Disney (NYSE:DIS), 21st Century Fox (NASDAQ:FOXA), Viacom (NASDAQ:VIAB), and Discovery Communications (NASDAQ:DISC.A).
Increasing the value of a cable package
Each time media companies come to the table to negotiate carriage fees -- the price per subscriber distributors like Comcast pay -- they've brought something new. Things like HD programming, more extensive on-demand catalogs, and streaming rights have helped increase prices in recent years. For its part, Comcast has been happy to pay up for these additional features, as it believes they help it attract and retain customers.
Media companies have also been able to launch new networks by leveraging existing popular networks. For example, Fox launched FXX a few years ago by moving some of its popular FX series to the new channel and requiring distributors to carry both channels. ESPN does the same thing with ESPN2 and many of its various offshoots, most recently the SEC Network. But media and cable companies are now facing backlash for bloating the cable package more than necessary.
One hand many cable programmers have yet to play is more flexible packaging options. Disney notably doesn't allow distributors to offer ESPN as an add-on service to standard bundles. But as some programmers experience declining subscriber rates, they may opt for more flexibility, allowing distributors to create smaller, less expensive bundles, according to Greenfield.
That would help make Viacom CEO Bob Bakish's vision of a sub-$20 entertainment-only bundle a reality. He said Viacom is in advanced discussions with distributors for such a package in May.
That could certainly help Viacom, which has struggled recently to retain subscribers and negotiate with distributors. Other entertainment-only programmers like Discovery could benefit as well. Sports and news programmers including Disney and Fox could be hurt by such an option, though, so expect them to resist such bundles in their negotiations or receive higher fees per subscriber.
What can ESPN and Fox do?
ESPN is still in a relatively strong position to raise rates and keep its channels in smaller bundles. It plans to launch yet another network, the ACC Network, in 2019. Additionally, it's making moves to launch its own direct-to-consumer service through its investment in BAMTech. It can leverage both to see increased overall carriage fees and get more of its channels in more bundles.
Fox isn't in as strong of a position. While its networks like Fox News have diehard constituencies, it doesn't have much more to offer to bring its carriage fees up meaningfully. The company's investment in Hulu and the growth of new virtual distributors may provide some leverage, but it's not something unique to Fox.
Comcast is reversing the model
As programmers have asked for more money, Comcast has used the growth of online streaming services to its advantage, practically reversing the model. As the largest cable TV company in the country, it has a lot of leverage.
Last year, the company started offering Netflix through its X1 set-top box. Not only does Comcast pay nothing to distribute Netflix, it actually receives revenue for each subscriber it signs up. Comcast may do the same thing with ESPN's direct-to-consumer package, but since ESPN also operates traditional cable channels, it may tie those sales to its programming fees.
As more a la carte options become available to consumers, look for traditional distributors like Comcast to integrate them with their own service to provide consumers a better video viewing experience. That will allow distributors to continue raising rates while keeping programming expenses from climbing as fast by putting pressure on traditional programmers to keep their rates low.
Ultimately, it will be tough for programmers to keep raising rates, as leverage is shifting back to the distributors. ESPN, with its huge amounts of content, is still in a relatively strong position to keep raising rates, but others may have to sacrifice rates to maintain subscribers -- or vice versa. Even ESPN is at risk of not being able to raise rates fast enough considering the huge content obligations it faces over the next decade. Content companies have had a good run, but growth may start to slow soon.