For the past two decades, American consumers have watched helplessly as their pay-TV bills have skyrocketed. The average monthly price of expanded basic service nearly tripled between 1995 and 2013, rising from $22.35 to $64.41.
It doesn't matter if you get your service from a cable company like Comcast, a telephone company like AT&T, or a satellite operator like DIRECTV. Prices have risen across the board.
However, one recent development could start to rein in this cost inflation. The launch of new streaming live TV services -- led by DISH Network's (NASDAQ:DISH) Sling TV and Sony's (NYSE:SNE) PlayStation Vue -- could help break the endless cycle of rising pay-TV bills.
Why costs are out of control
It's not entirely your cable company's fault that prices have risen so much over the past two decades. Most of the price increases have been driven by rapid growth in what cable providers pay to big media companies for carrying their channels.
Disney (NYSE:DIS) is the biggest offender in terms of driving cable costs up. Its ESPN sports network now costs cable companies more than $6/month per subscriber (on average), according to SNL Kagan. That's more than 4 times the cost of TNT, the second priciest channel in most expanded basic lineups.
Disney Channel and ESPN2 are also in the top 10 in terms of cost. Including its other properties, Disney is probably getting upwards of $10/month from pay-TV companies for each expanded basic subscriber.
Don't watch sports on TV? Don't have kids? It doesn't matter. You are still (indirectly) sending upwards of $100/year to Disney for various versions of ESPN and Disney Channel.
As I wrote last week, pay-TV distributors are in a bind. Cable, telecom, and satellite firms all have high fixed costs for delivering TV to their customers' homes. As a result, they can't afford to play hardball in their negotiations with the top cable channel owners. A lengthy blackout -- or dropping a set of top channels altogether -- could lead to a mass exodus of subscribers: making it harder to cover those fixed costs.
Streaming TV is different
For over-the-top streaming TV services, there's a different calculus. The fixed costs of operating a streaming live TV service are fairly modest. The biggest expense for traditional pay-TV operators -- building and maintaining a connection to the customer's home -- is already taken care of, since most Americans have broadband service.
Thus, a streaming TV service doesn't need to get a large market share in any particular city to cover its overhead. It can make deals with a few channel owners that are offering reasonable terms and then market a niche product to potential customers who are interested in that particular type of content.
Differentiation is already beginning
This unique dynamic can already be seen by comparing the content offerings of the two "first-movers" in the nascent streaming live TV market.
Of the 20 channels included in the basic tier of DISH's Sling TV service, 9 are owned in whole or in part by Disney. Of the other "Big 6" media titans, only Time Warner has any channels carried by Sling TV.
By contrast, Sony's PlayStation Vue has a more expansive offering. It starts at $50/month for 60 channels, compared to $20/month for 20 channels in the basic Sling TV offering. PlayStation Vue has channels from all the big media companies.
All except Disney, that is. That means it's missing the whole ESPN family of channels, Disney Channel and its offshoots, and other relatively popular channels like A&E, History, and Lifetime. Presumably Sony decided to leave Disney's offerings out of its service because they are so expensive.
It's already clear that streaming live TV services will be much more differentiated from one another than traditional pay-TV services. If you're mostly looking for sports and kids' content, Sling TV does quite well considering its low cost. If you want access to a wide selection of original TV content, PlayStation Vue does pretty well. But if you need all of the above, you're probably stuck with cable.
It's not a panacea
Streaming live TV is starting to give consumers more options for which cable channels they pay for. But it's still far from a-la-carte pricing. Whether you subscribe to Sling TV or PlayStation Vue, you are probably paying for a bunch of channels you don't watch.
Moreover, the massive size of the top half dozen media companies limits the ability of over-the-top TV services to carve out distinct niches. For example, an over-the-top service might want just Disney's sports content or just its kids'/family content. But Disney can afford to take a hard line and force them to take all of its content (like Sling TV) or none of it (like PlayStation Vue).
Despite these limitations, every increase in customer choice chips away at the pricing power of America's big media giants. As a result, the growth of streaming live TV over the next few years could be the development that finally breaks the cycle of rising prices for TV content.
Adam Levine-Weinberg is long January 2016 $80 calls on Apple, short January 2016 $120 calls on Apple, and short January 2016 $140 calls on Apple. The Motley Fool recommends Apple, Google (A shares), Google (C shares), and Walt Disney. The Motley Fool owns shares of Apple, Google (A shares), Google (C shares), 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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