The cable system is slowly (very slowly) dying.
People are beginning to cut the cord and the big cable companies including Comcast (NASDAQ:CMCSA), Time Warner Cable (NYSE:TWC), and Charter (NASDAQ:CHTR) all lost subscribers in 2014, according to research from Leichtman Research Group. Those numbers, however, are still small as the entire industry lost only 125,000 paying customers in 2014.
What's more troubling for the established players in the industry is the emergence of slimmed down services like DISH Network's (NASDAQ:DISH) DISH Anywhere and, to a lesser extent, Apple's rumored streaming TV service. These offerings deliver some top cable channels, but they vastly shrink the 160 channels offered in the typical expanded basic package according to the Federal Communications Commission annual study of the cable industry.
The DISH and Apple offerings are increasing pressure for cable companies to offer a-la-carte service, plans where customers only pay for the channels they actually want. That sounds great on paper, but in reality, there are some major potential drawbacks.
Price per channel will go up
Forcing customers to pay for bundled channels they may not watch has the benefit of driving down the overall cost-per-channel. As of January 2013, the time covered by the most recent FCC study, expanded basic customers paid $0.48 per channel. That's a vastly cheaper price than what Sling customers pay. It's also lower than what subscribers will pay for Sony's PlayStation Vue digital streaming service.
|Service||# of channels||Cost/month||Cost/channel|
|Expanded basic cable||160||$64.41||$0.48|
|DISH Sling TV||20||$20||$1|
|Apple TV*||25||$30-40||Over $1|
None of the digital services above follow a true a-la-carte model, they are just slimmed down channel lineups (with Sony and Dish offering various add-on packages). But this type of package where consumers only get popular channels are a potential precursor to a-la-carte offerings, which the public has been clamoring for.
Channels will disappear
In the current cable world channels receive a per subscriber carriage fee for each customer who receives the channel (whether they watch it or not). This payment, which is negotiated on a by carrier basis, can be as little as a few cents to over $6 for ESPN.
For many channels these fees are an important part of their operating budget and without them some channels will fail. Carriage fees are particularly important to niche channels which draw small audiences. While the median price paid per channel by the cable companies is only $0.14 per month, those dollars can add up when you factor in the 100 million plus homes which get some form of traditional cable.
In some ways these carriage fees are a sort of mutual support tax for niche programming. I may want to watch the Cooking Channel while you like Country Music Television, and we both pay a little to support the other's interest.
Take away that forced support and smaller channels will either have to charge much more -- which won't work unless they have a dedicated hardcore audience -- or do with less revenue. That will ultimately lead to channels going out of business.
Yes, the system which created these channels in the first place was not market driven, but there has been mutual benefit derived from the system.
The survivors will have less money
ESPN does not get $6 a month just from sports fans, it gets it from essentially every cable subscriber. That allows the network to spend big money on everything from National Football League rights to poker tournaments and some very obscure sports.
If you stop forcing everyone to subscribe to ESPN then the cable channel will take in less money. The company could try charging more to its remaining subscribers, but there will be a breaking point. Let's say that in an a-la-carte world half of the cable universe decides it does not need ESPN. WIll the remanining half be willing to pay $12 a month for it?
It's not likely they all will so no matter how you work it, ESPN will likely end up with less money. That will lower its programming budget and ultimately bring down the value of the network. The same thing will happen across the cable world which could lead to less original programming and smaller budgets for shows which are still produced.
It's a meritocracy
True a-la-carte pricing will almost certainly shrink the cable universe and lower the amount of original programming created. It will force channels to sink or swim based on their own merits and eliminate the essentially socialist system under which the industry operates now.
That will produce a cable world more focused on the mainstream and perhaps superniches for which people are willing to pay a premium. It's a system where you may only get what you are willing to pay for, but your choices could be vastly smaller.
Daniel Kline has no position in any stocks mentioned. He would be sad to see Palladia go. The Motley Fool has no position in any of the stocks mentioned. 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.