Cablevision Chief Executive James Dolan was quoted in the Wall Street Journal as saying that he could foresee a day when his company might not provide TV service. Perhaps more shocking than this was that TWC recommended its customers use Aereo to watch CBS. Has the cable world gone mad? A cable executive getting out of TV, while others point their customers at a service reviled by the broadcasting industry? No, the industry has not gone mad. Perhaps some hard business realities are coming home to roost.
In his interview, Mr. Dolan went on to say that he is focusing the company on broadband. Pay-TV operators talking about broadband as their lead service is certainly nothing new. TWC said in 2011 that broadband was becoming the anchor service. However, Mr. Dolan is taking this one step further in suggesting Cablevision might one day stop providing video service. One of the reasons he suggested this might be necessary is because of the pay-TV industry’s reliance on selling big tiers of content. He sees this as out of step with the Internet generation.
However, the real reason is profitability. And to understand why we need look no further than TWC’s dispute with CBS.
Broadcasters such as CBS are seeking increased license payments from pay-TV providers for their channels. TWC has cited escalating content costs as the main reason pay-TV subscriptions have been going up so fast. My analysis concludes that pay-TV subscription charges have not been going up as fast as content costs. The result of this is that pay-TV services are getting a lot less profitable for operators.
At the same time as pay-TV is becoming less attractive, broadband is doing great. It is selling well and, since it is not burdened with content costs, is a lot more profitable than pay-TV. If these two trends continue I can understand why Mr. Dolan might decide to pass on providing TV service.
However, this raises an interesting question: could Cablevision sell its pay-TV business but retain broadband? When a part of a business starts to decline and becomes a lot less profitable, companies often sell off that business line to focus on more profitable pursuits. This is exactly the situation cable finds itself in with TV, but this isn’t like Motorola and cellphones. Can pay-TV and broadband be separated?
In short, yes. A cable operator could retain all the network infrastructure, sell off the TV business and simply lease back delivery services on its network to the purchasing company. In effect, the cable company becomes a communication company and the company purchasing the TV business is a new customer.
Of course, this is very easy to say and a lot harder to do. It’s not just the technical challenges involved, there are contractual and legal issues as well. Selling off pay-TV goes to the heart of the legal definition of a cable service: by definition, the network and TV service are linked together. However, these definitions are likely to be challenged anyway by new services such as virtual operators delivering pay-TV over the Internet (as Intel Media is planning to do later this year.)
The hard fact is that pay-TV just isn’t the business it used be. Cable operators face declining video subscribers and dwindling margins. With each content dispute and price increase, selling the business becomes that much more attractive.
Why it matters
Cable TV margins are eroding fast as content costs escalate, while subscriber numbers continue to fall.
Broadband sales continue to grow and the margins, in comparison to cable TV, are great.
For the first time operators are considering getting out of the TV business.
This raises the possibility of a cable company selling the TV business, but retaining broadband and the network.