Last week, I attended the Independent Show, which is the main tradeshow for smaller, independent and often rural cable providers. The show is jointly produced by the National Cable Television Cooperative and the American Cable Association. It’s a great show, which really does give you the pulse of the independent cable industry.
A recurring theme that I often hear from IPTV providers, who typically are telcos, was also very present at this show with these cable companies. It refers to the business challenges behind offering video services. To be quite blunt, the recurring theme I hear is the “video business sucks.” That is, it’s a profit margin challenged business – to say the least.
Rightly or wrongly, much of the blame for these margin challenges is put upon the cost of programming – both cable network programming and local broadcast (in the form of retransmission fees). Both of these fee types are spiraling upward, with no end in sight.
Speaker after speaker at the Independent Show highlighted how these spiraling programming costs basically make video as a product, unprofitable. If not for broadband, voice in many cases, and business services in some cases, many independent cable companies would not survive, they argue. In fact many haven’t survived.
The cost of programming argument is the exact same argument I hear from telcos, who feel the need to offer video via IPTV for two reasons – 1) to remain competitive, often with cable providers, and 2) to generate enough ARPU to justify significant investment in their broadband networks.
This begs the question, if NCTC members see the cost of programming as a serious impediment to profitability, is there any hope for the video business? After all, by my math, NCTC members collectively are the second largest buyer of programming, behind only Comcast. If that amount of scale does not lower the cost of programming enough for its members, what, if anything will?
Perhaps video will be forever relegated to a classic loss leader. Use it as tool to upsell your more profitable services and hope it doesn’t drag you down in the process. Or will the system simply break (or be disrupted) – many argue it’s unsustainable – with a more reasonable and perhaps profitable model as a result. Let the debate continue!
Image courtesy of flickr user Diesel Demon.
It is just unchecked greed from the programmers. Not sure how to make it end.
I'd love to hear Dale Merton's take on this.
The continued cost spiral can be attributed to the vertical integration in the industry where broadcasters are part of a national cable company complete with three or four programming companies. The poor NCTC gets whipsawed by these companies will all the toys in their knapsack.
Do I smell Congress getting anxious to preempt our public policy makers at the FC&C with a new and improved Cable TV Act of 2013?
Don't hold your breath on congress addressing this issue. Even if they redo the cable act, they're not going to address cable programming costs.
Tom T. Hall once penned in a song "There ain't no money in it, and it will lead you to an early grave."
I think you will see many Tier 3 telcos and smaller cable companies offer subscribers a lifeline service which would just be the local channels coupled with broadband. This scaled down product would offer the local operator both a better gross margin and something that gives the customer a low cost TV alternative. The operator with a small footprint may further add revenue by adding local wifi as part of the offering.
A subscriber with just the local channels plus the broadband to get other content via Netflix, Hulu or the Redbox/Verizon product would be pretty happy – especially if the costs were half that of the cable basic price.
Even if you had to add in the affiliate right costs for a regional sports network – it would still be an affordable, high margin offering.
Dang, sorry i missed you there at the event. Imagine how bad the video biz would be for this group if they didn't have help from NCTC.
I agree we need to get the programers to hold back on their increases. The local providers are really proud of their signal and what they charge when we make it better. Some how we need to get to the FCC
and get the programers under control or none of us will be offering video in the future.
I completely agree with Bill. Some of this begins with the sports channels who agree to pay huge amounts to cover games (and pay athletes millions of dollars). Then other content providers believe that their programming is the best, so they also increase their rates. While I'm not saying that there is collusion or anti-trust issues, there does need to be a break point.
While DirecTV got some attention a couple of weeks back with their millions of subs when they battled Viacom, when a content provider "negotiates" with us (as a very small rural cable TV provider), it's a "take it or leave it' attitude and they know it. There's NOTHING we can do about it except pay their exessive prices or drop the channels completely. Note that the town we serve is so small that no other cable tv provider would dare to try to put in a new catv system because of ROI…but DISH and DirecTV would be licking their chops.
Bernie: Unfortunately, your article hits the nail on the head. I'm anxiously waiting for a follow-up article with a solution. 🙂
Per the next article with the solution — no pressure huh, Mikey? 🙂
This is exactly why we chose to go OTT exclusively. I never understood why we should pay a broadcaster to carry their content when you can watch it for free with a set of rabbit ears. We provide a better user experience, expand the broadcaster's viewer base and get to pay through the nose too? Whadda deal…
Content costs will only continue to rise and you either pass the cost along to your customers or, choose to lose more money. Eventually, you will go broke or your customers will revolt and refuse to pay the high cost.
Cable and IPTV customers are already embracing OTT and watching less traditional video everyday. Providers need to promote this immediately because OTT needs a good broadband connection. As Bernie mentioned, at least broadband it one place we still can make a couple of bucks.