Cable service is expensive and getting pricier with each passing year. That's part of the reason why cheap Internet TV services like Netflix are enjoying booming growth even as big cable struggles just to maintain subscribers.
But that rising monthly cost to consumers doesn't necessarily translate into higher profits for cable companies.
Take Time Warner Cable's (NYSE: TWC) latest quarterly results. They included an encouraging uptick in average revenue per customer (ARPU): Subscribers now pay $128 per month (factoring in cable and Internet service, along with equipment rental fees) -- up from $127 per month a year ago.
Yet overall profits fell to $1.1 billion from $1.2 billion and operating margin shrunk to 19% of sales from 21% a year ago -- despite TWC managing its first annual subscriber gains in nine years.
CFO Matt Siegel blamed sharply rising content costs, specifically the distribution fees that TV networks charge for the rights to carry their shows, for the profitability decline: "Programming and content costs, which increased $128 million or 9.7% year over year, continued to be the biggest drag on [earnings] ... affiliate fee increases were the primary driver of higher programming and content costs."
Time Warner Cable's content costs are rising faster than those of its peers, but not by much. Comcast's (NASDAQ:CMCSA) 7% higher programming expenses outpaced revenue gains last year, and Charter Communications (NASDAQ:CHTR) saw its expenses jump by 8% while cable revenue ticked higher by just 3%. In an environment of flat subscriber growth, cable companies just aren't able to fully pass along the increasing cost of programming.
TWC was asked about this negative dynamic in a conference call with analysts last month, and CEO Rob Marcus said that it wasn't likely to let up soon, but could eventually shift as TV networks make their most valuable shows available online through services.
"One of the points of leverage 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 an alternative [cable company]," he explained. In other words, TWC is often in the unfortunate situation of having to choose between sharply higher costs or angry customers.
But "that dynamic changes," he explained, "as you see more and more programmers making their ... content available on an a la carte basis direct-to-consumers."
Marcus is talking about initiatives like Discovery Communications' (NASDAQ:DISCK) digital networks, which now count 350 million streams per month around hit shows like Gold Rush and MythBusters. Discovery charged its distribution partners 11% higher fees last year, but partners may be quicker to say no to renewing at higher prices if they know that their subscribers can easily grab that content online.
The latest trends point to further cable bill increases that don't quite make up for increasing programming costs -- with one important exception. Cable providers have now stabilized their subscriber bases after about a decade of declines. If customer growth gets back to a solid pace, and cancellation rates continue to improve, then TWC and its peers will be in a stronger position to pass along higher programming costs to the subscriber base. That's when customers could really see their cable bills jump.