If you're like most Americans, you dread receiving that monthly cable bill. Between aggressive customer service agents, delayed service calls, and poor signal quality, there's a lot to be angry about. And the fact that your bill for this awful customer service is rising at more than three times the level of inflation is the icing on the anger cake. In fact, cable provider Comcast (NASDAQ:CMCSA) earned Consumerist's Worst Company in America award this year.
But while Comcast and fellow legacy cable pay-TV provider Time Warner Cable (UNKNOWN:TWC.DL) have done much to deserve customer ire, when it comes to rising cable bills they aren't the primary culprit.
Mickey Mouse wants his cut
While many think of Disney as resort parks, cruises, and the occasional animated film, investors should know the company as a media empire. Led by ESPN, the company derived an astonishing 45% of revenue and 64% of operating income during its 2013 fiscal year. Wunderlich Securities assigns a value of $50.8 billion to ESPN alone, making it worth an astonishing one-third of Disney's total market capitalization.
Just how did ESPN become so successful? Powered by Americans' interest in sports, the network charges an astonishing $6.04 per month per cable subscriber for its original channel. That's by far the most expensive cable channel. Do you also have ESPN2? That's No. 8 and costs an additional $0.72 per month. For perspective, considering that the FCC reported the average basic cable bill is $64.41; these two channels alone, then, are more than 10% of the average basic cable bill.
Time Warner's host of networks is a distant second, but it has something in common with Disney
When it comes to programming costs, Time Warner's TNT is second on the list of most expensive cable channels, costing subscribers $1.48 per month -- or less than 25% of ESPN's cost. In addition, the ninth-most expensive channel, TBS, is also a Time Warner entity, coming in $0.02 less per month than Disney's ESPN2. The reason TNT is among the most expensive channels appears to be live sports via its deal with the National Basketball Association. The latest contract will cost TNT almost three times more than the last one, and you can bet that, in some form, those increased costs will be passed on to the end consumer.
Comcast needs to pass on increasing fees from ESPN. Source: ESPN
Of the top four most expensive channels, three have deals with major sports leagues. After Disney and TNT, the NFL Network comes in fourth at $1.22 per month per subscriber. Sparsely carried 3D channel 3net comes in third; it is owned by Disney.
Why cable companies aren't (fully) responsible for price increases
Research firm SNL Kagan projects that ESPN will cost $8.37 per month per subscriber in 2018, good for an increase of 8.5% per year. While that seems high, when compared to the estimated wholesale cost per network it is actually in line with estimates.
This situation leaves cable providers faced with aggravated subscribers who see their providers as the face of ever-increasing high cable bills. Not to mention content providers that want even more revenue for their shows.
That's a strong reason why Comcast wants to acquire Time Warner Cable: to better negotiate content costs with providers. As a larger entity with more subscribers, the two companies will cease to compete for content and could perhaps curb content price increases.
While many look at their pay-TV providers with anger, price increases and poor service are symptoms of a greater problem: the existing business model is unsustainable. Over the last couple of years, many subscribers have cut the cord and turned to streaming-based services such as Netflix; last year was the first year that total U.S. pay-TV subscriptions declined. And while Comcast is stuck between a proverbial rock and a hard place, Disney and Time Warner will continue to jack up your bill.