Most conventional cable television service providers (like Comcast's Xfinity and Charter's Spectrum) face little geographical competition. In theory, if a potential competitor can sidestep these companies' regional reaches by delivering lower-cost cable TV using a high-speed internet connection, it's got a chance at breaking into the cable television market.
But virtual cable TV company fuboTV (FUBO -3.50%) is coming face-to-face with a tough reality. As it turns out, acquiring the video content passed along to paying subscribers isn't cheap. The vast majority of the company's cable subscription revenue is being chewed up by affiliate fees passed back to networks and cable channels.
And worse, there's no end in sight to this dynamic.
fuboTV isn't getting better as it gets bigger
If you've already cut the cord (or are considering doing so) due to the ever-rising cost of cable TV, don't curse your cable company too much. It's not them. Most of your monthly bill is forwarded to the networks and other entities providing the channels you like to watch. They're the ones raising prices.
This business model, however, is proving particularly costly for up-and-coming streaming cable provider fuboTV. Of last quarter's $319.3 million worth of revenue, $297.4 million was consumed in the form of "subscriber-related expenses" like affiliate fees (also called carriage fees). That doesn't leave a whole lot left to pay for things like marketing, administration, or the technology needed to deliver its digital signals. That's why fuboTV lost nearly $94 million last quarter despite year-over-year revenue growth of 38.1%.
Were fuboTV a relatively new venture, such a loss would be forgivable, even expected. Most start-ups tend to spend more than they collect in revenue, after all.
fuboTV isn't exactly a spring chicken, though, and the mathematics of the cable television business are hardly unfamiliar. fuboTV should arguably be making clear fiscal progress after launching the sports-centric cable business back in 2017. It isn't. Its subscriber-related expenses continue to closely trail its total revenue, nearly dollar for dollar.
Data source: FuboTV Inc. Chart by author.
The trends of the two fiscal metrics raise one overarching question: When will carriage and affiliate fees not chew up the vast majority of the subscription fees fuboTV collects from its customers? Again, there's been no evidence of such progress at all.
Limited negotiating power
It should be noted that fuboTV may be facing an unfair expense challenge.
In theory, fuboTV should be paying about the same content costs on a per-subscriber basis that bigger competitors like Xfinity and Spectrum are. The Federal Communications Commission (FCC) mandates that cable companies, networks, and cable channel owners negotiate reasonable carriage fees "in good faith," with the goal of creating reasonable fairness in how the public is served.
There's some language found in the FCC's current rules (and past litigation) on the subject, however, that work against fuboTV's negotiating leverage. That is, the commission also considers the "totality of circumstances" in cases where one cable platform may not be paying quite the same price for the same programming that another cable service is.
Given that fuboTV's customer count of less than 2 million people is only a fraction of Charter's 15.1 million and Comcast's 16.1 million, its "circumstances" arguably mean it doesn't have a great deal of leverage when it comes to negotiating its carriage expenses. Networks and cable channels just don't need it as much as they need the bigger cable companies.
Too many unknowns for most investors
Never say never. fuboTV is still tweaking its platform, adding regional sports for an additional fee that sports fans may be OK with paying, while removing channels like AMC Networks' Sundance, IFC, and AMC, which most of its subscribers might not miss.
In other words, it's still finding the ideal cost/cable programming balance.
It's a balance, however, that may never be found because it simply doesn't exist ... at least not to a meaningful degree. Recent research from Ampere Analysis indicates that annual spending on any form of pay TV peaked at $1,146 per U.S. household last year, and will now start to ebb lower through 2027, led by the continued decline of any form of cable television. In the same vein, nScreenMedia suggests continued cord-cutting will mean 2023 is the first year in decades that more U.S. households won't be paying for cable television than will be paying for it.
It matters to current and prospective fuboTV shareholders because that's where the majority of its customers reside.
Bottom line? While there's certainly a "can't get any worse" bullish case to be made for beaten-down shares, for most investors there are just too many unknowns to risk taking on a new position. Chief among these unknowns is when and if the company will ever be able to charge meaningfully more than what each of its customers are currently costing the company in per-subscriber affiliate fees.
