If you've been following the cable industry lately, or are one of the 100 million customers of pay-TV during the last few years, you've probably noticed you're paying more for cable. And while it is easy to blame the entities sending you those bloated bills -- Time Warner Cable (NYSE:TWC) and Comcast are the two most hated companies in America -- this is really a symptom of another problem: rising content costs.
For perspective, media-research firm SNL Kagan estimates the wholesale cost per network to rise 36% by 2018. This puts pay-TV providers in the difficult position of having to pass along these costs to consumers -- essentially being the billing operations for networks. And if the ratings from the week ended Dec. 28 are of any indication, these cable costs are only going to increase.
Sport, sports, and more sports
As far as cable television shows go, of the top twenty shows, 14 were live sporting events or related to sports. In addition, the No. 1 event -- an NFL game between Denver and Cincinnati -- had a 9.7 rating, higher than the next three programs combined. Four out of the top five were programs related to sports. For those watching their cable bills closely, this isn't an encouraging sign considering sports costs continue to rise.
This month, many Time Warner Cable subscribers will notice a new fee popping up -- a sports programming fee should add $2.75 per month to your cable bill for those not under a promotional offer. Time Warner Cable argues this fee is needed to offset the exploding costs of sports. DirecTV has a regional sports channel fee that varies, but can be as high as $2.14 per month.
Time Warner Cable stated the costs of cable sports channels have increased an astonishing 91% since 2008 and 60% in the past two years, although critics note Time Warner Cable did increase their sports-related content by launching Time Warner Cable SportsNet, TWC Deportes, and TWC SportsNet LA during that period, making this an apples to oranges comparison. For a third-party perspective, SNL Kagan estimates sports programming network ESPN will increase 39% by 2018 -- more than the projected wholesale network increase, but not as large annually as TWC's 2008-present increase.
ESPN is continuing to pay top dollar for sporting events
That said, it is entirely possible that SNL Kagan's estimate is low. Recently, The Walt Disney Company (NYSE:DIS) paid $7.3 billion over 12 years for the rights to broadcast the College Football Playoff package on its ABC and ESPN channels. Considering this is seven games per year for a dozen years, this comes out to $86.9 million per game. Eventually sports programming costs need to be recouped (plus a profit margin, of course) by Disney from either advertising revenue -- hence why even replays are sponsored now -- or by higher fees from pay-TV subscribers.
The current business model has been good for the NCAA, conferences, the NFL, and its owners and athletes to the detriment of cable subscribers -- especially those that aren't fans of the game. By billing this as an individual line item, it appears Time Warner Cable seeks to promote awareness of the reasons it's charging more for cable each year.
In the end, the problem is pay-TV's current business model is unsustainable. Customers no longer want to pay bloated bills for content they'll never consume. And while a la carte pricing would resolve that problem, the industry has gotten so large on this outdated business model that a la carte, unbundled pricing would most likely result in higher prices per channel. More recently, many would-be subscribers have been going without pay-TV in favor of streaming-based services like Hulu Plus and Netflix, look for that to continue without significant disruption in the pay-TV industry.
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.
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