Is Cord Shaving More Destructive to Comcast and Time Warner Than Cord Cutting?

Before you go, we thought you'd like these...
Before you go close icon

Disney's ESPN is both the most expensive channel and the channel with the largest subscriber decline. Those two things are related. Source: ESPN

The most-discussed trend in pay TV has been no-pay TV. The number of those abandoning pay TV -- those dubbed "cable cutters" -- has recently jumped from 4.5% of U.S. households in 2010 to 6.5% today according to an Experian Marketing survey. However, a more insidious trend is also afoot: cable shavers. This term denotes those who keep pay TV, but have traded down in terms of packages and now have fewer channels.

Not only that, but the trend among cable shavers is just as pronounced: a recent Nielsen survey reported in the The Wall Street Journal finds the top 40 most widely distributed channels in 2010 have lost an average of 3.2 million subscribers, or 3% of their distribution. And while it is important to note that this figure includes cable cutters, it doesn't fully account for the entire loss of distribution.

According to the article, a growing number of customers are opting for cheaper, sports-free packages without popular and widely bundled channels like Disney's ESPN or Time Warner's TNT, USA, Fox News, and CNN. Should investors in these channels and legacy cable providers Time Warner Cable and Comcast view this as a risk to their businesses?

ESPN and TNT are expensive for a reason
Leading the pack among channels with the largest subscribers drops are ESPN and TNT. And that makes sense: on a monthly basis these are the most expensive channels, according to media insight firm SNL Kagan. According to the firm, ESPN costs $6.04/month per subscriber and TNT costs $1.44/month per subscriber. And there's a reason for this: sports-related programming.

For perspective, ESPN and TNT recently signed a deal with the NBA to continue their long-standing partnership to broadcast NBA games. The new deal is shocking in its total price tag; kicking in during the 2016-17 season and running for nine years, it will cost these two channels $24 billion in total, or $2.67 billion per year. Right now, the deal costs the channels $930 million. So for the rights to continue broadcasting the NBA, ESPN and TNT paid nearly three times what they currently pay.

The channels then monetize that content in two ways: ad-based revenue and affiliate fees. Ad-based revenue is paid by third-party advertisers that pay for valuable commercial time. However, nearly 50% of the revenue from those two channels' respective operating divisions come from affiliate fees -- portions of your cable bill passed on by the pay TV providers.

Pay-TV providers are stuck between a rock and a hard place
This puts pay TV providers like Time Warner Cable and Comcast in a difficult position. In the past these companies have been able to pass these increased programming costs, plus the channels' profit margins, plus their own profit margins on to the consumer by adding more channels or bundling "near-loss leader" services (think: wireline phone), or just muscling them through -- an option they had due to the absence of real competition.

However, those days are now in the past. Led in part by streaming-based services like Netflix, Hulu, and the Roku streaming box, many consumers are consuming content differently than before. The pay TV market appears to have gotten the memo and is now going through a furious, mature-industry type merger-fest, with AT&T seeking to acquire DirecTV and Comcast attempting to acquire Time Warner Cable (FCC and DOJ pending).

Perhaps these large mergers will allow the combined companies to better negotiate with channels and force content partners to accept lower affiliate fees, but due to geographical near-monopolies pre-merger and the cord-cutting and slimming trends I don't think this will be enough to change the cost/benefit relationship that exists between subscribers and pay-TV providers.

Final thoughts
The media has done a lot of reporting on cord cutters, but appears to have missed out on this bigger trend. Pay TV providers need to face the fact that their business model is becoming increasingly unsustainable. Last year, pay-TV lost 166,000 subscribers according to Moffett Nathanson -- its first annual decline ever. And now we've found that many of those who haven't cut the cord entirely have slimmed down their costs by eschewing large packages. Eventually consumers will force cable companies to change. It's a good idea to get in front of this trend before being forced to do so.

Your cable company is scared, but you can get rich
You know cable's going away. But do you know how to profit? There's $2.2 trillion out there to be had. Currently, cable grabs a big piece of it. That won't last. And when cable falters, three companies are poised to benefit. Click here for their names. Hint: They're not Netflix, Google, and Apple.

The article Is Cord Shaving More Destructive to Comcast and Time Warner Than Cord Cutting? originally appeared on

Jamal Carnette has no position in any stocks mentioned. The Motley Fool recommends Netflix and Walt Disney. The Motley Fool owns shares of Netflix and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2014 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Read Full Story

Sign up for Finance Report by AOL and get everything from business news to personal finance tips delivered directly to your inbox daily!

Subscribe to our other newsletters

Emails may offer personalized content or ads. Learn more. You may unsubscribe any time.

People are Reading