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Four reasons why content fiscal discipline just a dream for cable

Comcast increase ARPU Programming Costs Inflation

Charter’s CEO believes programming costs will moderate in the coming months. Looking at what programmers and online video providers are doing; content costs look more likely to continue to spiral upwards.

 

Tom Rutledge, Charter

Tom Rutledge, Charter’s CEO, thinks that programming costs increases will start to slow, though they will continue to rise:

“They’ll moderate a bit, but I don’t think you get a whole new paradigm.”

He also thinks that there will be industry-wide fiscal discipline moderating the spiraling production costs. Neither of Mr. Rutledge’s predictions seems very likely. Here are four reasons why.

Reason #1: Above-inflation program license fee increases will continue

Programmers have been demanding, and getting, big license fee increases from pay TV operators. Between 2011 and 2016, the average annual increase in programming fees paid by Comcast was 8.9%. Over the same period, inflation averaged just 1.6% per year. 2017 doesn’t look to be any better. Quarterly year-over-year increases have been averaging around 3.5%, roughly in line with last year.

Reason #2: Online competition for content

Netflix will spend $6 billion on content in 2017. Amazon is estimated to be spending $4.5 billion in 2017 and Hulu $2.5 billion. New entrant Apple is also planning to spend $1 billion this year. Next year looks to be even worse. All the major SVOD providers are planning significant increases in spending.

Costs for scripted content are not the only ones going up. Sports licensing costs look about to put on a big growth spurt. Facebook is looking to hire an executive to negotiate sports rights and is reportedly ready to give him or her a budget of a “few billion dollars.” It looks like the social giant is serious as earlier this year it bid $600 million for Indian cricket rights. Amazon is also pushing into sports streaming. It has been streaming Thursday night NFL games this season and recently won the rights to ATP World Tour tennis in the UK. It outbid Sky, the UK satellite giant, to win the deal.

Reason #3: Programmers do not need pay TV as much

Programmers are beginning to explore life outside of the pay TV world, and the experience is an increasingly positive one. Head of CBS Les Moonves sees more value outside of pay TV than inside. He says that CBS stations generate “something like $2 plus a sub” from pay TV operators. The virtual MVPDs or skinny bundles as he calls them, pay “something like $4 a sub”. However, the most valuable viewer of all comes from CBS All Access, which yields $6 per subscriber.

With pay TV delivering the least value for the content of all, CBS has no incentive to exercise any of the “fiscal discipline” Mr. Rutledge expects.

Reason #4: Virtual MVPDs provide real competition

Since programmers get paid more by vMVPDs for their content, the online operators are a better outlet for their content. As already mentioned, CBS gets twice as much from a vMVPD than a traditional pay-TV operator. Bob Iger, Disney’s CEO, says that the license fees he sees from vMVPDs like YouTube TV are slightly higher than for regular pay TV operators.

Signs are that vMVPDs are beginning to resonate with consumers. DirecTV Now, the vMVPD service from AT&T, just reached the 1 million subscribers level. Sling TV, the category leader, reportedly has over 2 million subscribers. Even smaller players like FuboTV are picking up steam. The sports-oriented service recently announced it had past 100,000 subscribers.

This growth looks set to continue. Services are spending heavily on marketing. For example, YouTube TV was the presenting sponsor for the 2017 World Series between the Astros and Dodgers. Moreover, company’s like AT&T are providing customers with very aggressive bundling options for its DirecTV Now service.

Why it matters

Charter’s CEO believes that we are entering an era of fiscal discipline in the television industry.

All the indicators are that the opposite is more likely to occur.

The increased online competition will continue to drive the cost of content higher.

Increased programmer exposure online will reduce their reliance on the pay-TV industry.

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