Why Your Cable Bill Won’t Get Smaller When Big TV Gets Bigger

The premise behind Charter Communications buying Time Warner Cable, or Comcast buying Time Warner, or Charter and Comcast buying Time Warner together, or any other pay-TV consolidation, is the same: If distributors get bigger, they’ll have more leverage with the TV networks, and can get better rates for their programming.

I’ve already expressed my deep skepticism that this will have any effect on what you pay to watch TV. Because I don’t think that John Malone, as benevolent as he might be, has any intention of passing along his savings to you.

Bernstein analyst Todd Juenger reaches the same conclusion, for a different reason. He doesn’t think that John Malone, or any other pay-TV distributor, will have any savings to pass along.

Shortish version: Juenger argues that it doesn’t matter if the cable guys get bigger, because they won’t reduce the number of pay-TV options in any given market — Comcast doesn’t compete with Charter, or Time Warner Cable; it competes with Dish and DirecTV and Verizon.*

And Juenger believes that, when push comes to shove, customers still really care about getting shows from a handful of programmers like Disney, CBS, Viacom, 21st Century Fox and a few others. Which means that programmers still have all the leverage: If negotiations don’t go the way they want, they can always go dark on Comcast, etc., and invite customers to switch to Verizon, etc.

The most glaring example of this happened this summer, when CBS disappeared from some major Time Warner Cable markets, and Time Warner Cable ended up reporting a miserable quarter after customers defected to Verizon and other competitors. (Even though anyone who wants to watch CBS can do so for free!)

The same argument, with numbers: Juenger figures that nine programmers produce just about everything you want to see on TV. Any pay-TV provider willing to contemplate dropping one of those programmers needs to figure out how much money they would save in rights fees, versus the amount they would lose if customers defected.

So, for instance, if Charter wanted to drop all of Disney’s programming, including ESPN, it would save $7.75 per customer, per month. But only if less than 16.2 percent of Charter’s subscriber base defected after the blackout. After that, the lost money from subscriber revenue outweighs the reduced programming fees. Here’s the rough math:

Juenger does note that, over time, if programming fees keep rising — and there’s no reason to think they won’t — this math eventually makes it easier for distributors to drop programmers and come out ahead. But that’s a long game, one we won’t see playing out for a decade or so.

The short-term counter to Juenger’s argument is that he — and the rest of the TV Industrial Complex — may be overstating the value of the “professionally produced content” the programmers control. If enough people are happy enough watching whatever they can get on Netflix, YouTube, etc., then this calculus above needs to get refigured. And it’s quite possible that this math may need to be reworked sooner than later.

* This is also why lots of people assume that regulators will bless any consolidation plays. Though anything Comcast wants to do will generate more scrutiny because of its size.