Posted by: hdemott | September 15, 2010

Why Cable Is Out Of Touch With Reality

I got this headline from a friend of mine this morning

Charter Starts Itemizing Retrans Bucks In Taxes/Fees Portion Of Cable Bills

The full article is here

This is a complete asshat move by a company out of touch with its consumers.

Nobody likes higher rates: not consumers, and certainly not middlemen – and the cable companies are middlemen pure and simple. They are necessary middlemen, but make no mistake about it – they produce nothing with their cable plant and they have competitors – so they could be disintermediated.

Television networks have traditionally been free to those getting their signals with rabbit ears – and the cable networks have passed along their signals without compensating the networks. Recently, as the proliferation of cable channels has abated, the networks and local broadcasters have started asking the cable channels to provide compensation for the programming that drives the majority of the viewing on the system – particularly when some cable systems (most notably the satellite companies) have been charging directly for these signals.

The cable companies, who see programming expenses eating up between 30% and 40% of their video revenue, have pushed back hard – but can’t really win the fight – as consumers care only about the programming – and not the cable providers margins.

By starting to itemize these retrans fees, Charter is heading down a slippery slope – opening itself up to questions it doesn’t want to answer.

For example – if you are making 40% margins on your video business, why, as a consumer, should I be supportive of your fight against the networks? Are you entitled to a 40% margin by divine right? Why shouldn’t you have much lower margins like everyone else in the world – and make up the difference in lower prices to me?

If you are going to itemize, why not go the whole distance – and start showing line item by line item what you pay for each and every channel on the dial. Maybe people don’t know that they are paying over $4 per month to have ESPN. Or almost $1 per month for TBS, TNT and Fox News. In fact, as a consumer, you are paying a lot per month for programming you have no interest in watching.

Everyone argues that ala carte pricing in cable would be a disaster for programming diversity – and it might – but why should I have to subsidize any programming I don’t want to watch. Particularly in these days of IP Video (think Hulu, YouTube, TV.com etc…) – programming can find a niche audience anywhere, anytime. Perhaps people are just worried that most of the programming is not what people want to watch.

Cable could go even further and explain why they make 85% margins on broadband – amazing considering that the US broadband product is generally considered far inferior to most of the rest of the world.

Or they can explain the 95% margins on VOIP telephony.

Charter can demonize the networks all they want – but at their best networks make something like a 20% margin  – and never consistently – as shows go in and out of favor. CBS, which is pretty much the best network in the US and has been for a while will likely make an 11.5% margin this year (including syndication of its hit shows). Of course a lot of retrans $’s go to the station group – so if I include this number in the total – the margin rises to 17.5% including high margin radio stations (they are grouped together) and about 15% without these.

In my opinion, Charter should keep its bills simple – instead of opening itself up to questions that it doesn’t want to answer.

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Responses

  1. “Everyone argues that ala carte pricing in cable would be a disaster for programming diversity – and it might – but why should I have to subsidize any programming I don’t want to watch. Particularly in these days of IP Video (think Hulu, YouTube, TV.com etc…) – programming can find a niche audience anywhere, anytime. Perhaps people are just worried that most of the programming is not what people want to watch.”

    That’s entirely driven by the networks… they demand their offerings are bundled.

    “Cable could go even further and explain why they make 85% margins on broadband – amazing considering that the US broadband product is generally considered far inferior to most of the rest of the world.”

    Harry, this is just not true…. your surfing experience is driven mainly by distance of content to your PC. the top 20K sites or so, use CDNs, the remaining 10M exist on a single origin server.

    The “long tail” sites will not get to you any quicker on a 20Mbps instead of a 10Mbps, or 5Mbps.

    The same largely goes for the short tail. Take for instance YouTube, when you see glitching and pausing – this isn’t your broadband connection. That’s capacity reached on the CDN where you are pulling the file from…. Odds are it has been replicated into your immediate media market, and your last mile pipe is sending them s fast as they are coming.

    • Oh, I completely understand that the networks want to bundle their offerings – they are able to get $ for useless networks buy packaging them with the ones people need. You really need ESPN Classic? No, but you’re going to take it if you want ESPN – and you have to have ESPN. If the cable companies pay $4 for ESPN and $0.50 for ESPN Classic – I would rather have them ask me to $4.50 for ESPN and put ESPN Classic on a PPV platform – or on the web as a VOD offering.

      That I can understand.

      My comment on the inferiority of US Broadband is really just a comment on the average connection speed offered by the providers. There is no possible reason why a Docsis 3.0 modem running at 100 Mps should cost $99 – the incremental cost to the broadband provider is infinitesimal – but they know early adopters will pay it – so revenue maximization rules the day. they are in business – and have spend billions on infrastructure – and have public securities – I do understand all of this – but average broadband speeds – particularly on cable pipes where the bandwidth is available – are way low compared to similarly priced services around the world. The lag on YouTube is certainly an Google issue or an Akamai issue – depending on the CDN.

  2. Oh my Harry, you blog! Might I humbly request Disqus.

    I need to leave post haste but have instapapered this article for later enjoyment. I’d like to add I pay only my local cable company for internet access, $50/month. They provide wifi nearly everywhere when I’m out and about. I use wifi to power google voice and gizmo for my phone and text messaging needs. Now I have home internet, streaming video (8 bucks more a month to Netflix), and mobile internet and phone for $50 bucks a month. My wife can use the phone trick too if I can figure out a way to integrate google talk on iphone/ipods (my newest “phone” is the latest gen iPod touch)

  3. Just read the article, cable company’s are going to make their coin on providing dumb pipes faster and cheaper than big telco mobile providers. It’s landlines and wifi vs. 3G/4G, a beautful bit filled battle.

  4. Regardless of the industry companies become insulated from any consumer reality once they attain quasi-gov regulators. One extremely hot (113F) day a line between transformer and meter dropped into very dry, high grass and the wildfire was on. First CDF report pointed directly at above and put fault on utility. This document was immediately buried and now requires a court order to read. Utility did give us $20k USD to help repair/replace 2+ miles of barbed wire fence where all wood posts burned at ground level. Pretty decent of them considering the 2nd report went for “accident.”

    Cable system has the fastest ‘pipes.’ GB to TB, amazing speeds. Their customers payed build costs and all customers will pay a monthly amount levied by whichever commission regulates the area(s). Instead of ‘Caveat Emperateur’ think ‘Et nolte carborundum est.’

  5. Harry,

    There is actually plenty of reason that 100Mbps should cost $99 – in fact in any normal pricing structure it usually cost far more.

    Normal pricing follows a variant of the 80 / 20 rule:

    You can buy 80% of premium functionality X.
    You can buy 100% premium functionality for 5X.

    A cheap phone is $100 sans promos
    An iphone is $500.

    A cheap car is $14K
    A premium BMW is $70K

    Cheap jeans $20
    Expensive jeans $100

    Cheap cheese is $5 lb.
    Premium cheese is $20lb.

    The reality is that 15-30Mbps is still a premium product, priced very competitively – I pay $40 a month in Austin, last year the same $40 bought 10-15Mbps, two years before that the same $40 bought 5-10Mbps.

    In this regard we’d say bandwidth is priced much more like storage… you’ll always pay $75-100 for a HDD, the question over time is just how big that drive is going to be.

    —–

    I’ve had this discussion at length with Fred, I’ve even gotten him to bend a bit on NN – cable is best chance we have for a strong ad competitor to GOOG.

    Cable does a pretty damn good job of dealing with the competing interests of all concerned.

    Did you just see them threating to unbundle if content keeps charging more?

    • I think that they will unbundle sooner or later. It is really up to the content guys to as to when and how they get this done. For some people it would be a godsend – for heavy video users (and I am one) it is easier to buy the bundle.

      In terms of the premium – you are right – you are paying a premium to subsidize the far higher margins of Apple, BMW, True Religion or 7 for Mankind jeans, and Chattam Cheese.

      What gets me about the cable guys is that the incremental cost to deliver the premium product is not that much at this point – they already have 86% margins with the low end product. I do understand the business rationality of it all – get the early adopters to pay – and then ride the curve down – but if they are truly competitive with the Verizons and ATT’s of the world – they would simply bite the bullet now – and get people locked in.

      This is why Cablevision, as much as people hate the Dolan family in teh public security markets, is the bset run cable company out there. Rather than gouge the customer – they charged $99 for 100 Mps – rather than $150 or more. Then they gave you more speed on the basic product – and gacve you wi-fi in the cities where they operate.

      In my town, I get a great wifi signal all over town courtesy of Cablevision – now why would I want to change to ATT (who is the competitor there)?

  6. Let me flip that over… the premium is actually to fund the next gen… meaning yes it gets ridden down, but the true costs are the early changes, once that stuff is figured out, adding extra capacity for more 100Mbps users is not big deal.

    Here’s where I think it gets interesting… a friend of mine has been working with TOT (Thailand) to bring in the first 3G network.

    Now this is behind the curve stuff, price of radios have already fallen etc – but still they are using pro-grade big name equipment…

    Cost of unlimited? 200 baht. like $7-8 per month.

    And thats a profitable endeavor. Of course in the model we see the real cost is all labor… they pay technicians $5K year for climbing towers installing radios, etc. Girls selling phones make $2,500.

    Here that $100 starts to look pretty funny. The bleeding edge on equipment isn’t most of the cost.

    This is actually where i get my politics from… I’ want the Fed to stand at 1% inflation, and force us to make really changes on sticky wages.

    But thats another subject.


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