Video Killed the Radio Star… And the Internet Killed Cable

Untitled1By Tyler Quillin

This article began with an interest in the disparity between last year’s SEC Network and Pac12 Network revenue yields. However, research led to an even more disruptive evolution in cable television delivery – the end of cable bundling. As the internet continues to reshape the way we consume content, cable-bundling continues to decline.

Most of us still access cable television via the traditional bundling model, which functions through consumer subscriptions for desired channel lineups. Each of the channels provided by the service provider costs a fee to provide. These are called affiliate fees, which are licensing fees agreed upon between each service provider and the respective network. These affiliate fees are a growing influence on the pricing of service provider lineups in an evolving market where the internet provides the direct access to clients these networks never had before. Before the internet, networks needed cable servicer providers to disseminate their products to consumers, but now consumers can go straight to the source for targeted consumption of their desired programming via streaming subscription models. For example, remember the big splashes Hulu and Netflix made in the mid-2000s by providing streamed content? The Networks began offering content for free via Hulu while cable service providers were paying hefty affiliate fees. The cable service providers were unhappy, and Hulu became a subscription-based service. This marked the beginning of the end.

Essentially, the advent of streaming content marks doom for cable bundling because these cable service providers bundle expensive affiliate fee network offerings with cheaper ones and put together a lineup of as many channels that will entice a consumer, yet charge more than the sum of each affiliate fee in order to make a profit. This model forces sports enthusiasts to also maintain access to TMC and Lifetime, while the daytime television fan gets Oprah’s network while also being forced to receive Spike and MTV. The new growing trend allows consumers to cherry-pick their desired content, effectively eliminating the need for cable service providers. The question then becomes whether consumers will haggle with the effort to subscribe to each network they desire access, each for their own pretty penny.

In particular, due to an increase in online streamed content, ESPN has lost 7.2 million subscribers in the past two years, and ESPN’s parent company, Disney, is at a new “52 week low” in share prices. Could this sports entertainment giant be in trouble? Clay Travis from Fox Sports hypothesizes that streamed content will end the cable bundling business model because networks do not earn the revenue they desire, and cable providers do not want to pay inflated affiliate fees. A new poll showed only 20% of consumers want to pay a direct subscription service with ESPN of $20 per month.

ESPN’s affiliate fee trounces all other network affiliate fees at $6.61 per month. The runner-up is TNT at $1.65 per month. Fortunately, ESPN also holds the highest number of home subscriptions at 94.5 million. Consider a very near reality when those 94.5 million subscribers cease their cable bundle and inflated month rates for channels they do not want and only subscribe to ESPN. ESPN’s fee escalation has changed network business models; networks now have one flagship program that attracts the cable service provider’s attention, but then fills the rest of the airtime with cheap content to not escalate their affiliate fee. Online streaming has also created new pressures for intellectual property practitioners.

Another large contributing factor (too large to tackle in this blog article) to this subscription streaming shift is piracy. These networks know that individuals illegally take and share their shows online. In addition to affiliate fees, piracy has driven networks to subscription models geared toward authenticating and monetizing streaming. In exchange for direct-to-consumer subscriptions, consumers get access to large back catalogs of their favorite show’s various seasons. These subscription-practices present various challenges. Creating individual business relationships with each consumer and providing attractive plans for their needs are tall orders. For instance, the SEC will have a difficult time holding onto subscriptions after football season.

Image source: factoll.com.

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