Wednesday, August 7, 2013

Cord Cutting A Growing Problem

Cable operators are fighting to save their economic model.  The challenge is that the costs of business, from programming increases (including the current Time Warner Cable and CBS negotiation) and other expenses, require a continual increase the monthly subscription fees paid by consumers.  In the midst of saving consumers from a CBS fee increase, Time Warner Cable has already raised the monthly fee of renting a modem box.  Consumers have grown tired of these high cable subscription fees while embracing the wired broadband stream that these same cable operators also offer.  The result, cord cutting, or more specifically cable subscription cord cutting.  While broadband subscriptions rise, cable subscriptions drop.

"(Moffett Research founder Craig) Moffett estimates that 911,000 U.S. homes have cut the cord over the past 12 months, versus 258,000 in the 12 months ending a year ago." And the rate of drops are only increasing.  Some cable operators hope to remain competitive through a strategy of merging operations.  And so we hear of a possible Dish-DirecTv combination as well as Charter with Cox or Time Warner or Cablevision.  Bigger operations, more synergies, more cost efficiencies including possible lower programming fees.

But it may not be enough.  The cable business model, while providing a valuable aggregation of content, has become too limiting and too expensive.  Consumers have sought other options; some have found cheaper packages from overbuilders like the telcos, FIOS and U-verse.  Others have dropped cable altogether for broadband services including Netflix and Amazon.  With new players including Aereo, some consumers have been able to get broadcast and cable channels at a much lower price.  And some are even going back to over the air, digital antennas. 

The model is a convoluted one.  As networks have found new revenue streams from OTT platforms, they risk losing substantial revenue from the traditional models.  The short term solution of raising license fees to maintain revenue of a shrinking base will ultimately cause the cable business to crash.  Unfortunately, it appears to be headed down a path of no return.  Ala carte cable pricing won't help consumers; the difficult but necessary path for cable operators might just be to offer a smaller selection of channels at a much lower price point.  That seems to be a path Time Warner Cable has started with the dropping of Ovation.  But it must require a more serious dropping of a large number of networks.  And for Time Warner Cable that might just extend even to a broadcast network like CBS.  If it leads to a healthy lowering of the cable fee, consumers might just be willing to retain their cable service.

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