The increase in pay TV programming costs is unsustainable, argues a research note from financial analysts at Bernstein Research issued yesterday. Bernstein researchers focused on DirecTV but they also noted that rising programming costs have been a concern for many video service providers.
Bernstein researchers plotted DirecTV’s programming costs per subscriber over a five year period and found that the growth rate recently has been as high as 13% on a quarterly basis.
“At 10% per year, the $40 wholesale cost of goods sold today would more than double, to about $80, in another seven years” – and that’s unsustainable, considering that the retail average revenue per user in the pay TV market is $80 a month, the Bernstein analysts wrote.
The steep rise in DirecTV’s per-subscriber programming costs is not purely the result of greed on the part of content providers, the Bernstein research suggests. A slower rate of customer acquisition also has contributed to the problem – and if video prices rise to cover costs, customer acquisition and retention will become even more difficult, the researchers said.
A broader trend
Although Bernstein singled out DirecTV, the researchers see the same phenomenon impacting other pay TV providers – and Telecompetitor also has documented this trend.
For example, programming costs were the key reason that Frontier stopped marketing the FiOS video services it acquired when it purchased lines from Verizon. And a recent financial analysis of the small telco market from the Telergee Alliance found that Tier 3 carriers, on average, are seeing a decline in margins on video services – a phenomenon that Telergee researchers attribute to increasing programming costs.
Some industry observers argue that sports programming is particularly costly – and as a result some video service providers have experimented with lower-cost programming packages that do not include certain sports channels.
Because of increasing programming costs, Bernstein researchers expect cable companies to allow video margins to compress and to “eventually shift their pricing from video to broadband (where they have greater leverage).”
The situation is more difficult for satellite video providers such as DirecTV and Dish Network, however, the Bernstein researchers note. The reason is that those companies do not have their own broadband facilities – although they do have deals with satellite broadband providers to sell satellite broadband services.
Bernstein believes Dish and DirecTV may attempt to merge so that the merged entity will be in a better position to build out Dish’s spectrum holdings – an idea that would make sense for the companies, but might not garner regulatory approval.
Impact on broadband?
The potentially most disturbing news in the Bernstein Research note, it seems to me, is the notion that pay TV providers will attempt to shore up shrinking video margins by improving margins on the broadband side. It’s not clear from the research note whether that could be achieved through cost savings or would require a price increase. But if broadband prices do go up to help cover video programming costs, it wouldn’t bode well for broadband subscriber growth.