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Could Online and Streaming Services Help Keep Cable Bills Down?

By Daniel B. Kline - Feb 19, 2016 at 9:00AM

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One CEO thinks so, but even he admits it won't happen any time soon.

Time Warner Cable's (NYSE: TWC) CEO believes that cable networks that follow HBO in offering standalone streaming alternatives that don't require a cable subscription might be making a mistake.

Rob Marcus said that by offering streaming services or making their content available online, the channels are essentially taking away their own leverage. It's an interesting argument that offers a window into how the CEO's mind views the market and how he sees the relationship between providers and content.

It's not exactly an easy-to-follow explanation, but Marcus argued in the company's Q4 earnings call that ultimately going standalone will keep some channels off cable, which will lower bills. That, he explained, might be good for pay-TV customers because the most expensive channels would still be available on their own but no longer part of basic cable packages.

Exactly what did Marcus say?
"One of the points of leverage historically that programmers have had is that if we cease to carry a particular network due to an inability to reach an agreement, customers who wanted that network would have no other choice but to switch" to another cable provider," Marcus said during the call, The Wall Street Journal reported. "As you see more and more programmers making their networks or their content available on an a la carte basis direct to consumers, I think that dynamic changes."

Basically, Marcus thinks that certain programmers will hurt their negotiating leverage, because the cable companies won't face the same consumer pressure to carry every channel and consumers won't need to leave to get the content. For example, ESPN, currently the most expensive channel for basic cable subscribers, accounting for about $6 on your bill, according to Consumerist, could go standalone.

If that happened, TWC would be able to pull the sports network it failed to reach a deal with Walt Disney (DIS 2.21%), and in theory its customers would see their bill lowered. Some consumers would be happy with the savings, while others would just pay for the streaming or online version.

Under the current system, cable companies have very little leverage when it comes to negotiating deals for these popular stations, because customers protest when a network is dropped even if it's just temporary during negotiations. Going standalone might limit that leverage, because the cable company would be less of a villain if a deal couldn't be reached.

Marcus was careful to note that he didn't expect this process to lower bills anytime soon.

Cable companies and apps
A number of cable companies have begun experimenting with offering apps directly inside their cable service. Frontier (FTR), for example, has a "Go Interactive" button on its remote, where it offers everything from a Santa Tracker during the Christmas season to games and even social-media apps.

Currently, Frontier doesn't offer any of the major content apps or streaming services, but there's no reason it couldn't. It does have apps from some of the channels it offers, including CNBC, HSN, and The Weather Channel. In theory, the company could simply refuse to make a basic cable deal with a channel such as ESPN (which doesn't yet have a standalone app) and offer it as a premium channel or a streaming service embedded in its cable programming, making it relatively easy to access.

Of course, the consequences for doing that would be huge, because ESPN is owned by Disney, which could in theory pull all of its channels when their deals expire. With a standalone app or without one, content owners have plenty of leverage, but they also need cable companies to reach the biggest audience (with its associated carriage fees and higher ad rates).

In general, the streaming services give their set-top box partners a cut of revenue if someone subscribes directly through their device, rather than on a computer, tablet, or phone. A company such as Frontier could make a deal like that and either drop certain channels to a paid-only tier or offer a skinny bundle with well-integrated app add-ons -- but it's not likely to become a widespread practice.

My Frontier cable system does offer limited app integration. Source: author.

It's really just a theory
The reality is that Marcus is really just negotiating. He's sending a clear message to channel owners that if they choose to offer cable-free alternatives, TWC may not pay the regular increases in carriage fees they expect. That logic -- the idea of not angering existing partners -- kept HBO from going standalone for a long time.

But it's a big difference for a premium pay channel that offers an app for cable subscribers as well to go cable free and for a basic cable network to do so. A station such as TBS or USA gets distributed to over 96 million homes through traditional pay-TV services, according to TV by the Numbers. Even if carriage negotiations with Time Warner Cable, Frontier, or anyone else get contentious, it's still likely that a deal would be worked out before a company would attempt to go standalone.

Marcus is right that for certain niche channels, creating streaming apps or offering content online might make it easier for big cable to not carry them. Still, it's hard to picture major channels that would leave such a successful system until it breaks down nearly completely.

You might get a lower cable bill if more companies start offering skinny bundles, but you'll be paying less to get much less. It's possible in that scenario that some top-tier channels might follow HBO in offering standalone versions, but you can bet that any move to do that will happen in careful conjunction with the pay-TV providers that pay the lucrative carriage fees, by marking them up and passing them on to consumers.

Marcus might be making some pre-emptive noise, but in reality, neither side in this battle will upset the current system if it can possibly be avoided.

Daniel Kline has no position in any stocks mentioned. He likes having more channels than he actually watches. The Motley Fool owns shares of and recommends 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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