Wall Street Thinks The Cable TV Sector Could Easily 'Unravel.' That's Probably A Good Thing.

from the adapt-or-perish dept

For the better part of the last decade, some Wall Street analysts have quietly been pointing out that the current pay TV business model is unsustainable. As it stands, broadcasters increasingly impose giant price hikes for the same programming to cable companies, who in turn pass those higher costs on to consumers. Those consumers are, in turn, increasingly "cutting the cord" by moving to cheaper streaming alternatives. And when those streaming alternatives don't provide what they want or raise rates (as AT&T recently did with its DirecTV Now service), subscribers then shift toward free options like over the air antennas or piracy.

Smaller cable providers have been warning for years that unless you enjoy the size and leverage of being a giant ISP and broadcaster combined (AT&T/Time Warner, Comcast/NBC Universal), you're not going to be able to survive this new tight-margin market. Some, like CableONE, have opted to get out of TV entirely and focus on broadband. It's a trend that's only likely to accelerate.

Some Wall Street analysts, like MoffettNathanson analyst Craig Moffett, have been noting for a while that this entire mess isn't getting better anytime soon. He's again making the rounds, arguing that there's a chance that bigger cable operators could similarly embrace the idea of giving up on video as margins tighten. And if they stop caring about video (either by dropping pricey channels or raising rates), it's only going to accelerate the cord cutting trend:

"If larger MSOs follow their smaller peers in concluding that video is no longer worth defending, then subscriber declines would almost certainly accelerate, perhaps radically so," Moffett wrote. "And that, in turn, would force programmers to be even more aggressive in licensing their content to OTT services, sealing the deal. The industry as we know it today could, or would, simply unravel. "

This is an industry that responded to increased streaming competition by doubling down on all of its very worst impulses, especially raising rates. As such, a semi-collapse of the sector could probably be a good thing. Most specifically by curing many cable and broadcast executives of the false belief that the traditional, bloated cable bundle is going to live forever, and that cord cutting is just this weird, overhyped trend that stops once Millennials procreate more. A collapse would send a very clear message that heated video competition is the new normal and adaptation is essential.

That said, giant cable operators like Comcast NBC Universal have a secret weapon in this fight: their monopoly over broadband. Moffett has been pointing out for a long time that "video just doesn't matter" anymore if you're a cable TV provider. With tight margins and hot competition in video, all the money is going to be in broadband moving forward:

"That in turn has diminished the value of a pay TV subscriber versus a broadband customer. Moffett estimated that the market values a video customer at a multiple of about 2 times cash flow, while a broadband subscriber is attached a value of between 12 and 13 times cash flow. “Video just doesn’t matter much anymore,” Moffett said."

Moffett doesn't clearly illustrate in his research notes is why broadband is so profitable. It's so profitable because in many areas it remains a natural monopoly dominated by just a few major players like Comcast or Charter (Spectrum). This monopoly control provides a secret weapon in the video wars. Thanks to no competition, these companies can impose arbitrary and unnecessary usage caps and overage fees, which drives up the price of not just broadband...but of using streaming competitors. Companies like AT&T remove these restrictions if you use their own streaming services. In short, they hope to win by dominating the pipe, then tilting the playing field to dominate the content.

Between their attacks on FCC oversight (including net neutrality) and these natural monopolies, many of the bigger companies will be protected for some time from the financial cost of increased video competition. But ultimately the entire market is going to need to be dramatically reshaped as traditional, bloated and expensive cable TV channel bundles die thanks to a little thing called competition. Avoiding the financial hit on the video side of the equation is not going to be avoidable for many of these companies, no matter how hard they tried to convince themselves the cord cutting trend wasn't a serious threat.

While that greater video competition will be a good thing for consumers as a universe of companies battle it out, consumers will ultimately be paying for the evolution courtesy of higher broadband bills and weird net neutrality violations, thanks to a broken US broadband market and regulatory capture problem neither party has historically been interested in trying to fix.

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Filed Under: cable, television, wall street