February 17, 2014 6:57 pm

Television: More power to the cord

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Comcast’s bid for Time Warner Cable is raising consumer concerns over broadband pricing
Comcast Time Warner©Alamy

Marshall Maher is wreaking havoc on the media business. The 38-year-old Manhattan marketing executive is an avid television watcher. He is a fan of the Netflix original political drama House of Cards, keeps up with the HBO series True Detective and calls Sunday Morning, the weekly news programme on broadcaster CBS, “like church for me.”

But Mr Maher has not paid for a traditional television subscription for two years. After subscribing to a Time Warner Cable video package for several years, he cancelled the service, cutting his bill from about $140 a month to the $45 he pays the cable operator for high-speed internet.

Losing ground

Losing ground
US video poviders

While the cable company used to provide him with CNN, sports network ESPN and dozens of other channels as part of the monthly package, Mr Maher has customised his own programming menu. He is able to watch the programmes he wants to watch when he wants to watch them using a Google Chromecast digital media player, an $8 a month Netflix subscription, the Amazon Prime streaming service, his parents’ password for the HBO GO TV app and a digital antenna for free, over-the-air broadcasts.

“The proliferation of options just started to reach a tipping point,” he says. “There just seemed to be so many tools that you could use to cobble together a similar or even better experience without all the fat. I’m opting out of a broken system.”

Mr Maher is not the only one. In the past two years, about 1.4m customers cut their video subscription with Time Warner Cable, the second-largest cable operator in the US. Millions more have cancelled their video services with other providers. These so-called cord cutters, along with a broader transformation in how people watch television, are a growing threat to the foundations of the media industry, upsetting the balance of power between television distributors, programmers and viewers.

Last week, Comcast, the cable industry leader, made a move to win that power back, announcing a $45bn deal to acquire Time Warner Cable. The combination of the top two US cable operators would control about a third of the country’s video and broadband customers. It is expected to face close regulatory scrutiny.

The tie-up could help the cable group regain leverage over programmers, which have seen the value of their content surge with the proliferation of new outlets such as Netflix. It would also give it a national platform to create a stronger competitor to Netflix and Amazon, as well as more control over the broadband networks that the online streaming services need.

The companies are all fighting to secure their piece of the $143bn US television market and $387bn global television market for today and the future. The fallout is likely to have broad ramifications on TV and internet innovation in the US that are likely to ripple across the world.

“The world changes very rapidly with technology. Over the last 25 years we’ve seen that, and it’s accelerating its pace of change,” Brian Roberts, Comcast’s chief executive, said last week. “Our company wants to evolve and help lead that change. I think we’re uniquely in a position to do that and to accelerate.”

Consumer advocates fear that a Comcast-Time Warner Cable tie-up would place too much power in the hands of one company. (Comcast also owns NBCUniversal, the entertainment group.) They fear that the combined company would push up the prices of video and broadband services and exert more control over television networks and internet connectivity speeds.

Some analysts question whether the deal as it is currently structured would receive the green light from regulators. Already, some lawmakers have expressed caution.

“Of course, the threshold question must be whether the creation of an even larger video and broadband juggernaut results in greater choice and lower rates for consumers. This has not been my experience with previous mergers of this size,” says Senator John Rockefeller, chairman of the commerce committee.

When Mr Roberts’s father Ralph Roberts founded the company in Tupelo, Mississippi, in 1963, the cable industry comprised tens of thousands of local franchises that did not overlap. The technical infrastructure required to lay cables meant that cable operators were the only show in town for people who wanted to pay for television subscriptions.

The cable industry gradually consolidated. Comcast emerged as the largest, amassing almost 22m video subscribers. But the cable companies retained their monopolistic hold over local regions, barely competing in the same towns and cities. Comcast and Time Warner Cable, for instance, do not operate in any of the same postcodes across the US.

That dynamic has changed. Cable companies now face competition from satellite providers, such as Dish and DirecTV, and telecoms, such as Verizon and AT&T, that are now offering video. At the same time, the cable companies are battling the rise of cord cutters.

That rivalry has been a boon for television programmers. Each new television service is seeking to lure customers with an ever more robust line-up of programming, increasing the demand for quality content. Programmers are telling distributors to pay up.

Content costs for distributors are soaring, increasing 8.9 per cent across the cable industry in the third quarter, according to Nomura. This is putting pressure on the profit margins of cable operators, which are raising subscription rates and emphasising broadband to keep growing.

“This is the golden age for content companies that have the best programming,” said Leslie Moonves, chief executive of CBS, the media group, which last week announced that its revenues rose 8 per cent in 2013. Record growth was fuelled through digital streaming deals and international syndication, among other sources.

People are watching more television than before, but not just on a couch with a remote control in hand. The average American spends a total of 37.9 hours a week – or more than 1.5 days – watching video on traditional televisions, the internet and mobile phones, according to Nielsen, the measurement group.

“The good news is that we are just beginning to find a whole new set of ways to monetise our programming on new platforms” such as Amazon, Netflix and Hulu, Mr Moonves said.

. . .

The benefits of the new internet platforms for traditional programmers are neatly demonstrated by a decision CBS took in 2009. The company shocked the media world when it pulled Without a Trace, the successful police drama, from its primetime line-up.

The programme, which followed a missing persons unit, was attracting viewers and making money. Yet costs for the show, then in its eighth year, were almost $4m an episode. And CBS owned just half of the programme, which meant it made less money on syndication deals.

So CBS pulled Without a Trace and slotted in The Good Wife, a new legal and political drama series that cost just $2m an episode – and CBS owned 100 per cent of it.

If The Good Wife could attract comparable ratings, CBS executives would have a more profitable asset on their hands that would continue delivering revenues for years to come.

The bet paid off, but in more ways than most television executives imagined in 2009. At the time, the market for digital video had just started taking off. Netflix had launched its streaming service but it was largely a perk for its DVD subscribers. Amazon had yet to launch a rival streaming service. Apple’s iPad tablet had yet to hit the market.

Today, CBS makes money on the programme on traditional television and a web of digital outlets. The Good Wife attracts millions of viewers each week for its traditional television broadcast. CBS also streams the programme via its mobile app and sells the rights to subscription video and on-demand services, including Amazon and Hulu Plus, a basic cable network, local broadcasters and international distributors.

“A hit show for us goes on forever and continues to pay dividends,” said Joe Ianniello, chief operating officer at CBS. “It’s like a snowball rolling down the hill.”

Cable companies and other distributors are now trying to keep that snowball from turning into an avalanche.

“The history of the business is replete with the industry solving its Balkanisation and scale problem through joint effort. I think it can be done again,” said Liberty Media’s John Malone, who led a wave of consolidation in the 1980s and 1990s. (Liberty backed a hostile offer from Charter Communications to acquire Time Warner Cable until it was trumped by Comcast last week.)

Television distributors and programmers historically worked together to promote industry growth. But cable groups and programmers have fought increasingly frequent public battles over the rising price of content.

. . .

Last summer, a battle between Time Warner Cable and CBS led to the channel going dark for millions of customers in New York, Los Angeles and Dallas for about a month. Time Warner Cable lost 306,000 of its 11.7m residential video customers. It was one of more than 80 broadcaster blackouts in the past two years.

“The water is boiling now,” said Todd Juenger, a media industry analyst with Bernstein Research.

Industry executives say cable companies could have far greater bargaining power with programmers if they had a near-national US footprint, as Comcast-Time Warner Cable would. Comcast executives play this down, saying only a “distinct minority” of the $1.5bn in savings expected would stem from programming costs.

Scale would also help the company develop technologies to compete with digital, satellite TV and phone companies – and stem the advance of the cord cutters. Comcast now offers Streampix, a streaming service at $4.99 a month, that offers unlimited access to television programmes and films on TV, tablets and smartphones.

“They should be able to create a far more serious competitor,” said Rich Greenfield of BTIG Research.

But Mr Greenfield cautions that regulators might seek to limit Comcast’s ability to compete with rivals such as Netflix and Amazon Prime.

Some cord cutters worry that a Comcast-Time Warner Cable deal will lead to higher prices, fewer options and bad customer service. In an industry with a reputation for dismal service, Comcast and Time Warner Cable rank at the bottom of customer satisfaction studies.

“When two giant companies merge, in particular these two, I don’t think it has got to do with delivering better, more efficient programming to customers,” Mr Maher adds.

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Broadband speeds: US pays more for slower online access

In the US, customers are paying higher prices for internet speeds that fall far behind other countries across the globe.

Comcast subscribers in San Francisco, for instance, in 2013 paid $114.95 a month for download speeds of 105 megabits per second. By comparison, in Seoul, the South Korean capital, people paid $31.47 for download speeds of 1,000 megabits per second, according to the New America Foundation.

Industry observers attribute the slow speeds and higher prices to a relative lack of competition for broadband.

In many US markets, consumers have few choices for a provider other than their local cable operator. Research shows that in markets where more companies offer competing services – such as Kansas City, where Google is deploying a new fibre broadband project – prices drop and speeds increase.

As cable operators face dwindling numbers of video subscribers, they are becoming increasingly reliant on their broadband businesses, with many increasing prices.

“Many American consumers take high prices and slow speeds to be a given, but our data demonstrates that it is possible to have faster, more affordable connectivity in cities of comparable density and size,” the New America Foundation said in a recent report.

“Our data also shows that the most affordable and fast connections are available in markets where consumers can choose between at least three competitive service providers.”

The worry among consumer advocates is that a combination of Comcast and Time Warner Cable will reduce competition, not increase it. They also express concern that an industry behemoth would start charging more for access to the web, impose usage caps and slow speeds for online streaming outlets such as Netflix and Amazon.

John Rockefeller, chairman of the Senate commerce committee, says: “At a time when the future of video is increasingly online, policy makers have to weigh very carefully the ability of big companies to leverage their control of the internet to shape how Americans access and receive content and to limit new consumer-centric video services.”

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