This Little-Known Battle Could Change Cable As We Know It

Source: Suddenlink.

Last week, little-known private pay-TV provider Suddenlink Communications announced its third quarter results. The results were decent; the company reported a 6.6% revenue increase on the back of a 16.2% growth in its high-speed Internet business. However, the real story wasn't its high growth in Internet service but a meager addition of 2,200 pay-TV subscribers.

For background, at the end of last month Suddenlink did something rather revolutionary among pay-TV providers: It said no. Sources close to the deal outlined the negotiation: Viacom (VIAB), parent of MTV, BET, and Comedy Central, waited until the eleventh hour in an attempt to hastily rush through an increase of 50% for the cable company. The answer from Suddenlink (by way of Fierce Cable): "We gave away your real estate. There's no going back."

Suddenlink pay-TV subscribers can no longer watch John Stewart or Stephen Colbert. Source: Cable Central/Viacom.

By replacing Viacom's 24 networks with other channels, Suddenlink did what large pay-TV operators would love to do but can't because of the possible loss of subscribers. And that's what made Suddenlink's announcement that it added 2,200 subscribers so important; considering the company lost 3,200 subscribers in last year's corresponding quarter, perhaps the dynamic isn't as clear cut as it seems. If so, it is possible for pay-TV providers to fight back against the content costs that are raising your cable bill.

As cable unravels, look for these issues to increase
Although they've done a great deal to inspire consumer ire, pay-TV providers are in a rather unfortunate position. Essentially relegated to a middleman between exploding content costs that are expected to increase nearly 8.5% a year until 2018 and customers who are less willing to stomach those increases, pay-TV providers experienced their first subscriber decline ever last year. Led by streaming-based services such as Netflix, many would-be subscribers aren't seeing the value and are cutting the cord.

And now pay-TV providers have to compete against those same programmers as more channels opt for a streaming-only service to tap into that cord-cutting trend. Following the success of the Fox-NBC-Disney (ABC) joint venture Hulu Plus, CBS and its subsidiary Showtime, and Time Warner's HBO have either started to offer a streaming-based subscription service or are in the planning stages of offering one. And although streaming-only prices appear to be higher than pay-TV prices, indicating deference to pay-TV providers, streaming pricing can be used as leverage in future pay-TV negotiations.

Comcast and Time Warner Cable's merger helps pay TV
Although it's seemingly contrary to basic economics, consumers could possibly be better off if the U.S. Department of Justice and the Federal Communications Commission approve the merger of Comcast (CMCSA 1.62%) and Time Warner Cable (NYSE: TWC). Considering the two companies don't operate in the game geographies, they essentially don't compete for end users currently. Therefore, the ability to raise prices post-merger is muted.

However, the newly combined entity does obtain more monopsony power. Although that sounds similar to a monopoly, it means the power arising by being the only buyer with multiple sellers. Instead of having Comcast and Time Warner Cable compete to lower Viacom or Disney costs, the combined entity has the ability to better dictate costs with providers. There's no guarantee that the new entity would still have the ability to slow price increases, or whether they will pass on savings to consumers, but it does put the company in a better negotiating position.

"Viacom is trying to protect an outdated business model"
And while you have to root for Suddenlink and its CEO, Jerry Kent, it was notable that he said Viacom is "trying to protect an outdated business model." It appears Kent is blaming Viacom when most Americans think the pay-TV providers are the protectors of an outdated model. Fed up with large, expensive bundles, the ranks of those without pay-TV accelerated from 4.5% in 2010 to 6.5% last year, according to an Experian Marketing survey. In fact, the two most hated companies in the United States are Comcast and Time Warner Cable.

Kent is not only swimming an uphill battle with content providers; he's also fighting changing consumer preferences. One thing's for sure: If more pay-TV providers don't say no to content price increases, more users will say no to pay-TV providers. As is, the business model is unsustainable and will die without positive disruption.