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The cable industry isn’t stupid, right?

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We’re rapidly moving to a future where cable broadband service will be the predominant choice for consumers who want fast access to the Internet. But in light of a study that predicts $200 bills by 2020 for the pay-TV portion of cable, I have to wonder, Are the cable guys the idiots, or are the consumers?

The NPD Group put out a survey on Tuesday suggesting that pay-TV rates could hit $200 by 2020 from an average rate of $86 per month now. The analysts at NPD credit rising content-licensing fees and the average 6 percent rate increase that cable companies jam down users’ throats each year. Check out the expected rise in this graph.

The big threat to cable is broadband

But the idea of paying $200 in eight years, or even $123 in three years, seems like insanity for most consumers. It also seems like insanity for the cable companies to attempt, given how rising cable costs amid grim economic times have led folks to cut the cord. But is demand for cable inelastic? The NPD report notes that 16 percent of U.S. households don’t have pay-TV service. This means 84 percent do — a huge success for the industry. But can it last? From the NPD report:

“As pay-TV costs rise and consumers’ spending power stays flat, the traditional affiliate-fee business model for pay-TV companies appears to be unsustainable in the long term,” said Keith Nissen, research director for The NPD Group. “Much-needed structural changes to the pay-TV industry will not happen quickly or easily; however, the emerging competition between S-VOD and premium-TV suppliers might be the spark that ignites the necessary business-model transformation of the pay-TV industry.”

That business-model transformation is already occurring, but the end result isn’t likely to be exactly the à la carte, pay-for-channels-you-want and watch-it-when-you-want model that many of us in the Web world are hoping for. Instead, we are witnessing the first steps toward the creation of a combined pay-TV and broadband bundle that gives consumers most of the TV they want on demand and encourages them to avoid going to the outside Web.

Cable sees the threat, but consumers are missing the opportunity

Those days of watching hours of Netflix together may soon end.

If done quickly, consumers, who are just discovering how pleasant (and economical) it can be to watch TV via broadband using over-the-top services such as Netflix or Hulu, will be lulled back into complacency and will still view their pay-TV and broadband subscriptions as necessary. So far, research this week from the Leichtman Research Group notes that 79 percent of Netflix Watch Instantly consumers use it to watch movies and television shows on a TV set, but in the past six months only .1 percent of survey respondents dropped cable because they found all the content they wanted online.

Today a big reason why people don’t cut the cord is the lack of content, such as live sports programming, as well as some people experiencing problems in getting broadcast content that should be free. This can be an issue with not being able to get the over-the-air signal clearly inside a home, or it can also be a result of the cable companies’ interfering with technology that can make it easier. And finally, consumers still want the convenience of one place to go for all of their television. According to NPD, 59 percent of pay-TV subscribers preferred having one single provider for their pay-TV services, compared with 21 percent who desired multiple providers and 21 percent who expressed no preference.

And only 20 percent told NPD they would consider going over the top if they could access their favorite shows online. This may be the case today, but if pay-TV subs reach $200 or even $123, those sentiments may change. The lure of convenience may not be enough if the content is available and people can access it without going over some set broadband cap. And it appears that cable companies, especially Comcast, are preparing for that future today.

Creating the TV walled garden

TiVo, the original TV disrupter, said yesterday it would offer Comcast’s Xfinity video-on-demand service via its boxes for users in San Francisco. A Comcast spokesman called the plan a pilot and confirmed that the Xfinity content watched via TiVo wouldn’t count against a user’s broadband cap. Comcast is offering the same arguments that it made in deciding to exempt content streamed over the Xbox, namely that this content never leaves its private network to travel over the public Internet.

The FCC left that loophole open in its network neutrality ruling, as I explained in a previous post, but as media watchdog Dwayne Winseck notes, public-interest groups and the FCC may have a chance to stop the practice using the merger conditions associated with the Comcast NBC-U deal. But the political will to enforce those conditions and recognize the potential for creating a shadow Internet has to be in place at the FCC and in the government (or courts) in general.

So by offering the cap as a stick to prevent over-the-top streaming from disrupting pay TV and the carrot of exempt television content from the Xfinity service, Comcast is well on its way to creating a safe haven inside its network to keep subscribers complacent and making the idea of leaving to grab content elsewhere a risky proposition: If you go over the cap too often, you get cut off. And if the fears of a cap don’t stop people, the cable industry is also tied pretty closely with content providers via ownership, as Comcast owns NBC-U, or via the relationships forged by access to their subscribers (see this awesome post from the Economist on why HBO isn’t going to abandon the cable guys and go over the top).

So the question for TV consumers is, Do you keep paying $86 today for access to a walled garden of really good content that will likely continue to rise in cost? Or do you go outside the walled garden and scramble to get your regular shows while fighting the caps and agreements that will eventually make the world outside the walled garden inhospitable for a TV lover? And the bigger question is whether or not the FCC or anyone in Washington is watching this play out and plans to help the consumers by taking action. Otherwise $200 cable doesn’t make the cable guys stupid. It makes them brilliant.

Walled Garden image courtesy of Flickr user sportsilliterate

32 Responses to “The cable industry isn’t stupid, right?”

  1. brianhayashi1

    I’m amused by critics who point to the latest cord-cutting numbers as justification for grandiose predictions. The top fallacy is that somehow cable operators are unjustly enriching themselves. The reality is that the fee structure provides payouts for two key audiences: cable networks and local municipalities.

    Most analyses fail to differentiate between different classes of programming. Sports programming is the top reason why costs have skyrocketed. Remember the two strikes in pro sports last year? They were all about TV money. The reality is that pro sports franchises like the LA Dodgers have no interest in trying to find new ways to attract viewers. They are totally invested in ways to be a part of that $200/month cable bill.

    The second group, local municipalities, is the other reason why your fees are going up. Virtually all of the online video services don’t pay. Only Netflix pays municipalities and that amount pales next to the contribution that Time Warner, Comcast et al. make to cities, who are increasingly desperate for ways to offset their losses in sales and property taxes. In the medium term, I expect that the government will find some way to make Hulu pay, perhaps using the same justification behind your existing utility payments or the limiting principle of the Affordable Healthcare Act to make all consumers underwrite the cost of video delivery. This will wipe out much of the cost advantages driving the current wave of cord-cutting.

  2. nfldanchor

    This can only happen if consumers continue to pay for cable and accept their increases . I cut the cord recently and have never looked back . A couple of days after I scheduled cutoff for the following month they called and offered me 50 percent off cable . I said forget it and you will never have me as a cable subscriber again. I sold a hd box and 3 digital boxes I have and got two apple tv’s and use a couple of rca antennas for locals in free hd. Also use a free vpn and netbook to access hulu and have netflix subscription . Rogers and Bell should be accountable for gouging customers for years. Also cut off home phone and got Majik Jack Plus and it is 30.00 per year unlimited calling in North america and works perfect .

  3. JimmyZen

    A few commented about things like Netflix and other services. What they overlook is that almost every ISP has capped service. AT&T caps at 250 GB for customers and 150 GB for Internet only accounts. Comcast, my provider, caps at 250 GB. Streaming video like Netflix counts against these caps. There are penalties for exceeding the caps that start with warnings, go to penalty charges and a charge be unit over the cap, having Internet service billed at the commercial rate, to having your account suspended or cancelled.

    And what’s with the “old people” do this and “young people” do that garbage? What is it? Do you young people who spew that stuff think somehow you are blessed with eternal youth and that somehow after a person reaches a certain age the fall into some mindless haze and are incapable of rational decisions and figuring things out? Boy are you lot in for a rude awakening because I promise you what you put out will come back. I’m approaching 60 and I assure you I forgot more about technology that most of you will ever know.

  4. JimmyZen

    Last month my Comcast bill went from $189 and change to $209 and change for no apparent reason other than they could. I don’t have their full premium service or their phone service- just the two ‘regular’ cable tiers and the cheapest HBO/Showtime/Starz/Max thing plus my Internet which also has no real competition. I have no sports packages, no pay-per-views, no other specialty packages. The only competition is AT&T U-verse which, when all the special pricing is done, ends up costing within a few dollars of the same price per month as Comcast but offers far fewer of the premium channels, e.g. one HBO, etc. and they don’t carry a some of the ones I like. The dish networks are a joke costing almost as much to get their premium TV services and when it’s stormy or windy the picture pixelates and freezes. I have friends with both the big players and have seen this first hand. There is zero competition because there are so few players because the big companies keep it that way. I bet the full TV, Internet, and phone service from Comcast is closer to $300 a month than $200 right now. Something needs to be done to bring competition back to control pricing.

  5. I think we’re forgetting that the people reading this article don’t represent the majority of the population. People are still watching 5+ hours of TV a day on average and still love that they don’t have to think for the entertainment to be spoon-fed to them. Live sports seems to me to be the biggest obstacle to cord cutting so you’d better believe cable’s hanging onto it with an iron grip.

  6. NoCableGuy

    IPTV is happening already, search and you will find, live sports (HD quality!), news, entertainment from around the world, it’s free and is dead simple to setup on your PC and watch it on TV.

  7. It seems that the percentage of people who cut the cord is not the relevant figure. What you have is old people who don’t adapt to changes holding on to their cable subscription and young people who move out and establish new households not signing up for cable because they watch TV on their computer and go to bars or the homes of friends for sports events. Anytime the younger generation is opting out of your product you have a big problem.

  8. As someone who worked in the CATV industry from 1983-2000, there was an old saying that tough economic times were bad for everything except booze and cable TV, because when people go out less they still want something to see at home.

  9. Cable COs are absolutely going the wrong direction. There’s no way I will pay more for more. I’m pretty much ready to cut the cord now. They must comes to grips with unbundling and offering ala carte t keep some of their video revenue bundled with internet access, otherwise it’ll just be internet access and Netflix and catch as catch can…. I can live without the huge bundle and huge bill….

  10. WillieFDiazSF

    I didnt read the whole article, sorry, I got excited when you said that people arent jumping on the broadband TV bandwagon based on LIVE programming like sports. EXACTLY! My roommates and I made the switch to Hulu, Netflix, etc via Roku and I can still watch local news broadcasts over my computer live when they are on, or I can watch them on UStream for one station amazingly, but all in all, missing out on CNN is a big thing for me, so I watch International CNN LIVE on Roku or the top stories when I can. When networks decide to bypass cable and use their leverage of free programming like they have for HD channels OTA, but put them online, I think will be a time when cable and cable networks and broadband providers finally stop being greedy in the TV aspect and start upgrading their hardline networks for the future, people want IPTV not “cable”

  11. Suibne Geilt

    tv. cable tv. the inter net. movie theaters. cell phone apps…all of them…..soon to be extinct or close to extinct. the world will be so different in five years you will wonder what happened. you probably won’t like it. but it wil be too late.

  12. Pete Kleinschmidt

    Right now everyone assumes video entertainment (however it is delivered) will continue to remain the primary way people amuse themselves. I’m not so sure.

    Developers are already coming up with new forms of entertainment (games, social media, etc) and people are investing significant amounts of their leisure time using them. In my opinion it is just a matter of time before someone creates something really interesting and people decide TV isn’t worth $2 much less $200. Just because we can’t envision these new forms of entertainment, doesn’t mean they won’t be built.

    Personally I eliminated my TV about 3-4 years ago. I didn’t disconnect it because I couldn’t afford it, I disconnected it because I found the Internet is a far better source of news and entertainment (most of it in non-video form) than anything the TV industry has to offer.

    • WillieFDiazSF

      TV companies (cable) are more terrified to let go of their networks, and open up to external content providers. Part of their downfall is that reason. If they opened up and let the programming people find online, or get in other ways through their cable networks (hardline, not broadcasting I mean) then they might be able to entice people to stay attached to their service. Comcast are you listening?

    • JimmyZen

      And why do you think all the major ISPs capped their service years ago? Do you think it was really to make sure we ‘all’ got a high level of service unaffected by the few’bandwidth hogs’ they claimed were ruining the internet experience for all of us regular users? They were years ahead of all of you knowing what was coming and made damn sure they had their boot on the throat of anybody who dared challenge them. Streamed data, be it video, audio, or whatever counts against your cap. Most caps are 250 GB which may be OK for many, but as more and more things move to the Internet it may not be enough down the road. Guess what happens then? What do you think is going to happen to Internet access fees? How about tiered services? Metered usage? The same lack of competitopn that gives them free reign over pricing now. Oh, we’re all going to keep paying alright.

  13. Borys Musielak

    It’s interesting. I just wrote a blog post on exactly the same subject last night, with some of the same arguments (live sports being one of the reason people don’t or regret dropping cable). You can read it here:

    At MIPTV in Cannes last week I talked to many cable providers from multiple countries like Lebanon, Norway, Switzerland, Israel, France, Germany or Netherlands. They are all looking for ways to keep their customers in front of the TV and one of the ways to do it is providing them all the VOD and Internet videos in one place (the cable TV interface) under their own branded platform, with no access to “the real internet”.

    I’m not a huge fan of this vision of the future (from the consumer point of view) but I’m preparing for it by making our personalized TV platform ( deployable both on cool platforms like Roku or Google TV (as an app) and on set-top boxes distributed by cable companies (as the default interface). I’m not yet sure which one will win but I’m a huge fan of Google TV so I’m counting on it.

    • WillieFDiazSF

      If cable companies want people to be glued to the TV, they have to do a few things. 1. Make it compelling – Make the programming and content stick with a person, make them desire it. 2. Make the interface intuitive, easy to use, seamless, and have it transition from mobile, set top box, computer. 3. Make it affordable, the more affordable it is, the more people want it, the more they will sit and use your service. 4. Open it up to innovation, add new things that people may want, but keep the garbage out. Listen to customers desires.

  14. Is there a model to copy from the deregulated natural gas and electricity businesses? Can content be purchased from third party competing providers and the cable monopolies be paid for the delivery/cable?

    • carlso2

      That is a great analogy ! It was also a great sales pitch for the utilities… Too bad this supposed market never materialized. I still buy gas and electric from the same companies.

  15. Dail Whiteley

    a lot of people are paying 200 already if you add phone and internet. i think cable and content providers are going to have to come to an agreement that all sports channels need to be in one tier. and content providers may need to cut dead weight. do we really need a third disney channel? i’m a liberal but do we need current?. do we need fox business when we have cnbc and Bloomberg?. do we need we when we have oxygen and lifetime? cmt for example , i didn’t know police academy had anything to do with country music. some of these channels can be dropped and save consumers money.

  16. I’ve never had cable and don’t know. I use Netflix, Hulu, and Unbox extensively. I intend to keep it that way and am really excited about the original programming Netflix and Hulu are making…and Amazon is also dabbling a bit…I can’t see $200/mo. fees ever happening…its becoming easier for folks to make and distribute content…the high-priced content is going to have to come down in price of die.

    • There are different layers of cost here. Creating the content itself, which can be expensive, paying for/distributing content and the cost of content over the long term in terms of syndication rights etc. Right now those costs are offset in different ways depending on the distributor of the content, but while the web has the potential to change it, there’s no guarantee it will. The content owns have seen what has happened in music and the pay TV providers watched what happened in voice, and this isn’t a fight they’ll give up easily.

  17. And lets be honest, they could provide more broadband options but they’ll still severely overcharge for it. If they cared they’d let us pay only for the content/channels we want.
    I also wish internet prices were cheaper. I pay $70 just for friggin internet…..thanks Comcast. Sorry bit imo, that is way too much just internet


      Switch providers or threaten to cancel. I get 30 percent off Rogers here in Canada .I signed up for a year but will ask for a larger discount next time or I will switch to Bell and get a deal for new customers. Use competiton and retentions dept. to your advantage.

  18. I cut the cord the cord this year. Mostly due to cost and the fact I don’t even watch 98% of the channels on tv. Also, I think I have plenty else to do with my time than sit on my butt in front of the tv where most of its garbage anyways.
    If there’s really something I want to watch I find it online legally and otherwise. There’s no way they can justify the cost of cable tv and I wish more people would cut the cord and send a message

  19. keninca

    I thought by now, the internet would be cutting into TV like it has music, but it’s only just begun. I have to think that by 2020 the current video distribution system will be on its way out, if not done. Once broadband speeds get to 25 Mbps, there will be more sharing of video, and that will force content providers to sell and rent video just like the music industry has transitioned to.