You've probably noticed the price of your subscription TV is on the rise. Last year, the Federal Communications Commission reported the price of expanded basic cable increased at an annualized 6.1% clip from 1995 to 2013, handily outpacing the 1.6% rate of general inflation during that period as measured by the consumer price index, or CPI.
For cable consumers, 6.1% annualized inflation is higher than many workers' annual salary increases. The situation can be even more problematic for retirees dependent upon Social Security, as benefits from the federal program follow CPI increases. In both cases, subscribers could be forced to shift spending from other areas, or even dip into savings and investment funds, to pay for cable rate increases.
While it is easy to blame pay-TV providers here -- there's a reason Time Warner Cable (NYSE:TWC) and Comcast (NASDAQ:CMCSA) are among the worst-rated companies in the U.S. -- this particular issue has another cause: the cost of content. And there's no better example than the exploding costs of sports.
Nearly 20% of fees paid
Last year, media research firm SNL Kagan estimated that 19.5% of all fees paid by subscription TV fees went paid for sports programming. Led by ESPN, which commands $6.55 monthly per subscriber, sports programming costs are a major part of your pay-TV bill.
This is important for consumers. Although the nuances of the pay-TV industry can be hard to follow, the broad business model is rather easy to understand. Pay TV's flow of funds is similar to that of most businesses: Comcast, for example, takes the cost of content, adds its costs and profit margin, delivers the product, and bills the consumer. Any increase in the cost of content (similar here to a retailer's inventory or a manufacturer's raw goods) will generally show up in the final bill. If that weren't enough, SNL Kagan also estimated the cost of sports channels will rise 7.3% annually for the next five years.
The NFL price increases
In 2011, the NFL signed long-term contracts with legacy networks CBS, NBC, and Fox, and also inked an extension for Monday Night Football with Disney's ESPN. While the terms were not disclosed, "those with knowledge of the matter" disclosed the new contracts came with price increases of at least 70%. The networks will ultimately have to recoup these costs through increased fees from cable subscribers or from advertisers that are increasingly opting for digital marketing over live TV marketing.
More recently, the NFL extended DIRECTV's Sunday Ticket deal for a rumored 50% per year for eight years. That means DIRECTV is paying a rumored $1.5 billion per year versus $1 billion in the previous contract. This year, NFL Sunday Ticket subscribers were treated to a base increase of 5%. For the all-inclusive Sunday Ticket Max, the increase fell in line with SNL Kagan annual estimate of 7.3%. While this is an optional package, it is indicative of what is going on with your cable bill.
For those who would rather watch the Puppy Bowl than see the Seahawks and Patriots slug it out, you're stuck paying for unwanted content. In the end, a la carte cable would rectify this by enabling users to pay only for content they want to consume, even if per-channel prices increase. At some point, the entire industry will have to address runaway content costs -- hopefully before the sheer volume of cord-cutters forces its decision.
Jamal Carnette has no position in any stocks mentioned. He also loves sports, but thinks the current trend of sticking large increases to consumers is unsustainable. The Motley Fool recommends Walt Disney. The Motley Fool owns shares of 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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