Cable is becoming expensive, no doubt about it. The Federal Communications Commission said earlier this year that the average cost of cable increased 131% from 1998 to 2013, from $27.88 monthly to $64.41. While some inflation is expected, this 5.7% annualized increase is more than twice the 2.4% overall inflation annualized growth rate during this period. And the worst part is that, led in part by high-cost ESPN and live sports programming fees, cable will only get more expensive.
In the report, the FCC blamed the cost of content (read: channels) for cost increases. And media insight firm SNL Kagan points toward content costs increasing. It estimated double-digit increases for retransmission fees throughout 2017 and continued increases in affiliate fees. And as far as cable channels go, nothing bloats your cable bill like Disney's (NYSE:DIS) ESPN: On a monthly basis, the sports network adds $6.04 to your cable bill, nearly 10% of the average payment and more than four times the second-most expensive channel (TNT).
Sports content costs will continue to increase cable bills
Recently, ESPN and TNT signed a huge deal to continue televising National Basketball Association games. The deal starts during the 2016-17 season and continues through the 2024-2025 season. The shocking part of the deal was the cost. Under the previous agreement, the NBA deal, ESPN paid $485 million per year and Time Warner's TNT $445 million, for a total of $930 million per year. The new deal costs $2.7 billion per year, nearly three times as much as the current deal.
This isn't an isolated issue, either. The National Football League recently inked a new eight-year deal that maintains DIRECTV's exclusivity to its Sunday Ticket package of NFL games. The cost increased 50% to about $1.5 billion per year. The deal was so essential to DIRECTV that AT&T required it in order to proceed with its plans to buy the satellite broadcaster.
This is all passed to the consumer
Under the current pay-TV business model, these costs are being passed to consumers, regardless of whether you watch sports or not. Assume Disney kept its roughly 52% split of the new $2.7 billion contract and ends up paying $1.4 billion per year for NBA games. To keep its media networks business at the 33.4% operating income margin it had in the last fiscal year, it must increase revenue by $1.87 billion through a combination of advertising expenses and/or affiliate fees (read: increased costs to cable providers that will add to their margin and then be passed to you via higher cable bills).
In the last fiscal year, affiliate fees were nearly 50% of Disney's media revenue, growing 7% versus only 3% for ad dollars. Pay-TV subscribers would obviously like those growth numbers to be larger on ad-based revenue because that's money coming from third-party corporations rather than affiliate fees coming from cable bill increases.
What can you do about it?
It is virtually impossible for pay-TV subscribers to shield themselves from ever-increasing sports programming costs under the current format. Even if choosing a basic package without ESPN, consumers still generally receive ABC, CBS, and Fox, which all ultimately pass sports-related programming costs on to the consumer regardless of whether choosing to consume them. Many argue this bundled package model is both expensive and, based on customer desires, unsustainable.
One way to escape these fees is to "cut the cord." Increasing numbers of U.S. households are deciding pay TV isn't worth it and replacing it with streaming services such as Netflix and Hulu. Experian Marketing Services found the percentage of U.S. households without pay TV jumped from 4.5% in 2010 to 6.5% last year. In 2013, the number of Americans who paid for TV in some fashion (cable, satellite, etc.) dropped for the first time ever -- losing nearly 250,000 subscribers.
Pay-TV providers and their content partners are not listening to their customers. Gone are the days when consumers wanted 500 channels and large cable bills. What customers are looking for is quality programming and the ability to pay for only what they consume. At some point, non-sports watchers will decide they no longer want to subsidize sports watchers' costs and stop paying for pay TV. If cable doesn't adapt, it will continue to lose subscribers.
Jamal Carnette has no position in any stocks mentioned. The Motley Fool recommends 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.