Comcast (CMCSA -0.47%) has decided it's willing to anger some of its customers in order to enhance its bottom line. Though consumers have shown an increasing willingness to drop their traditional pay-television subscriptions in favor of streaming services, the cable giant has shifted some popular channels into a pricier tier.
It's a move based on the calculation that enough customers will pay $10 to $20 a month extra to upgrade their packages to the Digital Starter tier to keep options such as Food Network, Disney Channel, Cartoon Network, and TruTV in their lineups. (The prices vary based on whether or not a customer is bundling other services from Comcast along with cable TV.) The bet is that the extra revenue the company makes from upgraders, -- as well as the higher margins it will earn on its now cheaper-to-provide lower-end package -- will more than offset whatever revenue it loses from customers who view this as the final straw, and cut the cord.
At the same time, the cable giant swapped some less-watched offerings from its more-expensive Digital Starter tier down to the Digital Economy package -- among them, BBC America, BBC World News, Bloomberg TV, Hallmark Movies and Mysteries, and Smithsonian Channel. Subscribers had been warned about the pending changes in their last two bills.
What Comcast hopes to gain
Older customers, and those who are for whatever reason unwilling to cut the cord, are most likely to pony up for a higher-priced deal to keep Bobby Flay or Mickey Mouse. But those who stand pat with their slightly less appealing Digital Economy option will be getting a package that costs the cable company less to deliver.
Pay-television providers pay a fee for each subscriber to each channel they offer -- from the more than $7 per viewer per month charged for ESPN to just a few pennies for lesser channels. And speaking of ESPN owner Disney, the Disney Channel, at $1.61 per viewer last year, is one of the more expensive cable channels to offer. Replacing it in the economy package with something cheaper is an instant margin enhancer.
The goal of these moves isn't to keep the most customers -- Comcast lost a net 96,000 cable subscribers and saw pay-TV revenue drop by 8% in the first quarter. Instead, it's attempting to preserve revenue, even if that means letting its customer count decline.
What happens next?
The financial result of these changes will be visible relatively quickly. Comcast wins if the extra revenue produced by those who upgrade to the Digital Starter tier, plus the amount it saves on its Digital Economy package, exceeds what it loses from those who cancel their subscriptions. The company should also get an added little boost, because at least some -- and perhaps many -- cable cord-cutters will have to keep Comcast as their ISP because they have no other choice, and they will pay more for internet when they lose bundling savings.
Comcast -- already infamous for customer dissatisfaction -- appears unconcerned that this will displease customers. Even its statement to USA Today, which attributed the changes to "the company's regular examination of programming costs and viewership levels," displayed no hint that it feared a public backlash.
"We understand that some customers find this programming valuable, and we will work with them to explain options that may help them continue to watch this programming or other content like it," Senior Director of Corporate Communications Jenni Moyer told the newspaper.
By "work with," they mean, largely, "tell them that their only choice is to pay more." This may work as a short-term tactic to preserve revenue. In the long run, however, it gives people yet another reason to dislike one of the least-popular companies operating in the two least-popular industries in the U.S. Eventually, that's going to come back to bite the brand on its bottom line. It's really just a question of how long it takes to happen.