The a la carte menu for television got a little longer last week after CBS (NYSE:CBS) joined the fold of companies going "over the top" of traditional cable delivery. The broadcast network is looking to capitalize on the market displaced when it helped shut down the Aereo streaming service this summer. It offers a live-stream of its channel (with NFL games blacked out) and access to its back catalog of primetime shows for $6 per month.
Yes, $6 per month is the price of one a la carte channel, which you could otherwise get for free with an antenna. And while there are other perks to CBS's streaming service, it shows you how much CBS still values the cable bundle. Still, CBS may be creating a model for over-the-top a la carte television.
The real reason to shut down Aereo
This summer, CBS and the other broadcast networks took Aereo to the Supreme Court and shut the streaming service down. CBS claimed that Aereo, by capturing its over-the-air broadcast and streaming it over the Internet, was violating its copyright.
After Aereo shut down, I suspected broadcasters might move to make their own over-the-top streaming services. In July, CBS Chief Research Officer David Poltrack stated the broadcaster actually makes more money per viewer on streaming content -- 10%-20% more. The wonders of the Internet allow CBS to target advertisements -- even during live streams -- much better than traditional broadcasting.
But that alone isn't incentive enough for CBS to go completely over the heads of cable operators. Aereo proved there's a market for live streaming over-the-air broadcasts, and that people are willing to spend quite a bit for it. Aereo started at $8 per month, but CBS's service is arguably better than Aereo's. It includes a back catalog that predates the service, and there's no need to set a recording for every show you want to watch. You don't have to worry about filling up your DVR allotment either. Additionally, CBS is the most-watched network, so it might justify the $6-per-month price tag.
Still, $6 per month seems pretty steep for one channel -- especially considering the network stands to gain from improved ad targeting.
Why the price is so high
Currently, anyone can get a live-stream of CBS's channel (including football) for free. Even cable subscribers, who pay for CBS through retransmission fees, see less than $0.50 of their cable bill go toward CBS. Those two quarters also give them access to a large catalog of CBS shows on-demand and via streaming.
But CBS is hoping to raise the price of its retransmission fees. The company has a stated goal of $2 billion in retransmission fees by 2020, up from an estimated $550 million in 2014. In order to reach that goal, it needs leverage. That's exactly what a direct-to-consumer product provides.
The biggest point of negotiations in the next round of retransmission fee contracts will be Internet streaming rights. CBS is setting itself up to ask for a big raise in the rates for streaming its channel outside of the home. It also has less to worry about blackout threats, because CBS can offer the channel direct to consumers -- even offering them a discount -- to prove the market price to cable operators.
A la carte might be coming, but it's expensive
CBS is one of the first networks to make the jump to the a la carte menu, but it's not a very good value. Consumers expecting to lower their cable bill by moving to an a la carte system will be sorely disappointed if and when other networks join CBS.
The other major broadcasters are most likely to join in -- perhaps adding a tier to their joint-venture Hulu Plus service. Additionally, the premium cable channels like HBO and Showtime are fully capable of going over-the-top without much problem -- as HBO intends to demonstrate next year. A few other quality cable networks may be able to make the leap -- for example, ESPN -- without much problem because they have pricing power.
But the one thing they all have in common is that the prices will be relatively high. If you watch more than five or six networks -- or any amount of sports -- it's probably best to stick with the bundle. And that's exactly what CBS wants in the end.
Adam Levy 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.