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Forecast increase in TV content fees spells big trouble for pay TV

Programming costs as a percentage of revenue at Directv

SNL Kagan forecasts high times for TV program providers through 2021 as TV content fees continue to escalate. Unfortunately, these huge increases in content costs could send pay TV into a tailspin.

SNL Kagan says that US TV station owners’ retransmission fees will increase to $10.3 billion in 2021, from a projected $6.3 billion this year. That’s equivalent to an average annual increase of 8.5%. Further, the company says cable channels will do even better. It anticipates ESPN boosting licenses fees from $6.55 per sub this year to $8.80 in 2018, an annual increase of 10%. TNT’s per sub license is expected to grow from $1.58 this year to $2.16 in 2018, an 11% annual increase.

What do these increases mean to the pay television industry and to its customers? Nothing good!

Let’s look at the impact on the pay television industry first. In particular, I have forecast how much more of DirecTV’s total revenue it will have to pay to content providers in 2021 than it does today. I have assumed total content costs will increase at 8.5% a year, Kagan’s projected growth figure for US TV station owners (which is considerably lower than the increases for cable channels.) I’ve also assumed DirecTV will maintain around 20 million subscribers for the next 5 years and that it will continue to grow total revenue as it has been doing for the previous 5 years.

In 2014, 47.5% of DirecTV’s US revenues went to pay programming costs. If the conditions I outlined above hold true through 2021 it will be paying 57.2% of its total US revenues to cover the costs of programming. In other words, DirecTV will be paying nearly $7 billion more in programming costs than it does today.

How much more will DirecTV customers pay for service in 2021? I have assumed the company will continue to win ARPU (average revenue per unit) increases as it has done over the last 5 years through 2021.* As before, I have assumed the number of subscribers will remain essentially flat at around 20 million over the period. In 2014, US ARPU for DirecTV was $107 a month. If the conditions I outlined remain true through 2021 US ARPU will increase to over $162 a month. This will have a big impact on the average US family.

ARPU as a percentage of household incomeMedian household income, corrected for inflation, has been stuck around at $53,000 for the last 5 years and is only just beginning to show signs of growth. If the economy remains strong it could grow to as much as $57,000 by 2021. In 2014, 2.41% of the median family income, $52,750, would have gone to cover DirecTV service.  In 2021, a family at the project median income level of $56,900 will need to set aside 3.35% to cover DirecTV service.

Many operators simply can’t survive the margin erosion that Kagan’s forecast increase in content costs will cause. Likewise, many families can’t afford the increase in pay TV subscriber fees it will generate. The inevitable result of this malfunction market will be massive change in the business of pay television by 2021.

Why it matters

Pay TV is locked in a cycle of diminishing margins and increasing subscription costs.

SNL Kagan’s forecast for the cost of content through 2021 indicates this situation will get much worse.

The trends are unsupportable and will lead to big change for the industry in the next five years.

* It should be noted that the increases in DirecTV ARPU over the last 10 years have been lower than the increases in content costs. In other words, DirecTV has been absorbing some of the programming cost increases, rather than passing the whole amount on to subscribers.

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(2) Comments

  1. With all due respect to Kagan, I don’t see this happening. Retransmission payments reflect the value stations bring to cable customers. This value is largely driven by the network programing stations carry. As stations lose their exclusivity to their network programming – because of its availability on Hulu, CBS All Access, etc, ABC.com… – the stations’ value to cable systems decreases. And while local programming is also important, a cable company doesn’t need to carry five or six stations in a market to fully serve the local news needs of its subscribers. I suspect retransmission fees have peaked and are only headed south. It will be based on the only exclusive programming stations have left – live sports. And should the leagues develop direct-to-consumer products, even that value will diminish.

  2. Worth noting: the TV rights contracts for the NFL, MLB, NHL, MLS, NASCAR, and the NCAA basketball tournament all expire in either 2021 or 2022. If cable networks continue losing customers at this rate, those negotiations could get really interesting.

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