Following in the footsteps of Time Warner (NYSE:TWX.DL) and HBO, CBS (NYSE:CBS) plans to offer Showtime without a cable subscription. Speaking on the company's third-quarter earnings call last week, CBS CEO Les Moonves told analysts, "We could say fairly definitely, sometime in '15, there will be some [over-the-top] service from Showtime."
While that is far from an official announcement, offering Showtime a la carte ought to help CBS get the most out of pay-TV operators while defending itself against Netflix (NASDAQ:NFLX), HBO-Go-It-Alone, and other over-the-top services.
It's all about leverage
When HBO announced that it plans to go over the top next year, network CEO Richard Plepler noted, "Just the threat of going [over the top] gives us added leverage." CBS followed the announcement by offering its CBS All Access streaming package for $6 per month -- much higher than most would consider paying.
Going direct-to-consumer is less about getting HBO, Showtime, or CBS into as many homes as possible, and more about putting the pieces in place to subvert cable operators if necessary. HBO will use its a la carte offer to negotiate better revenue splits with operators, and Showtime could very well do the same. CBS can use its $6-per-month package to negotiate higher retransmission fees, which the company aims to quadruple by 2020.
Showtime makes up the vast majority of revenue for CBS' cable networks segment, which consists of Showtime, CBS Sports Network, and Smithsonian Networks. The premium cable channel has over 75 million subscribers worldwide, with about 28 million in the U.S. Those numbers put Showtime just behind HBO in U.S. subscriber reach.
While CBS' cable networks segment is growing revenue at about 5% this year, it is being held back by lower revenue splits with cable operators. Going over the top will allow CBS to renegotiate revenue splits as contracts expire with operators. At the same time, incremental revenue from broadband-only households could accelerate the segment's growth as well.
Battling Netflix for eyeballs
Over the past year, the average time spent watching television in the U.S. fell by 13 minutes per day to 307 minutes. At the same time, the average Netflix viewer watches 12 minutes more each day today -- now 96 minutes per day -- than he or she did last year.
While Netflix doesn't completely account for the shift in viewing habits (there are more TV watchers than Netflix subscribers), it's part of a move from live TV viewing to more over-the-top services. The issue is particularly bad for CBS in households where it once dominated entertainment: noncable subscribers.
There are currently between 10 million and 15 million broadband-only households in the United States. A significant portion of those households don't even have television sets, let alone an antenna to pick up over-the-air broadcasts. CBS' new All Access subscription, as well as the potential a la carte Showtime offer, give the network two resources to attract eyeballs away from Netflix.
CBS is slowly trying to diversify its revenue beyond advertising. Last year, advertising accounted for 58% of revenue, but declining ratings have cut into the company's ad revenue. Retransmission and carriage fees only partially offset advertising declines. Opening up Showtime to the 10 million to 15 million broadband-only households could help make CBS less reliant on advertising.
What does Showtime have to lose?
After HBO announced it would go a la carte, it was almost inevitable that Showtime would follow suit. But Showtime had the opportunity to stay by the side of cable as HBO distanced itself from the bundle. Sticking with the pay-TV operators could have opened up the opportunity for Showtime to get more promotion from operators as they promote HBO less.
Ultimately, much of the relationship between Showtime and cable companies will depend on how CBS prices its a la carte service. CBS is clearly interested in keeping the bundle intact, as evidenced by its $6-per-month CBS All Access service.
Still, CBS and Showtime have a lot to gain by going over the top.
Adam Levy owns shares of Apple. The Motley Fool recommends Apple, Google (A shares), Google (C shares), and Netflix. The Motley Fool owns shares of Apple, Google (A shares), Google (C shares), and Netflix. 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.