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Is the pay-TV industry crying wolf about programming costs?

On Monday, I looked at how pay-TV companies fared in 2012 from the perspective of gains and losses in video subscribers. For cable, it is clear that the industry has been losing video subscribers at a steady clip for some years. Yet the industry remains relatively mute on the subject. I speculated that perhaps this is because broadband is more attractive because its profitability is much higher due to the lack of programming costs. I thought I should check out my assertion and, in the process, I confirmed another widely held belief about the cost of programming.

I consulted financial fillings from ComcastDirecTV and Time Warner Cable and tabulated what data I could find on video revenue, programming costs and broadband revenue. The company with the most complete data available was Comcast, so I will focus on them first.

Comparing Increases: Video Revenue VS Programming Costs

Despite declining subscriber numbers, Comcast managed to grow video revenue from 2008 to 2011 by increasing subscription fees and getting customers to upgrade to higher packages. However, even this wasn’t enough to spur growth in video revenue, which has slowed to a crawl. In 2011, growth was just 1.3% with even poorer performance in the previous two years.Unfortunately, over the same period growth in programming costs beat revenue growth considerably and consistently in every year. For example, in 2011 programming costs increased nearly 6%, compared to a revenue increase of just 1.3%. Comcast has seen programming costs go from 34% of video revenue in 2008 to over 40% in 2011. In other words, Comcast has been absorbing a sizable portion of the programming cost increases over the last few years.

It is the same at DirecTV and TWC. DirecTV saw video revenue increase a healthy 7.9% in 2011 but programming costs increased a whopping 13%. TWC’s video revenue was flat between 2010 and 2011 but programming costs still increased over 3%. Payments to content providers now consume 45% of video revenue at DirecTV and 41% at TWC. With increases in revenue failing to keep pace with increases in programming costs, pay-TV service profitability has declined significantly over the last several years.

What do the dynamics look like for broadband? The Internet service has been growing fast. Comcast has seen broadband revenues grow at over 8% a year, on average, for the last 6 years. In Q4 2012, broadband earned $2.44B versus video’s $5B. As well, the broadband revenue isn’t burdened with huge programming costs. Of course, the cost structure of broadband is different to pay-TV but a lot of the plant and equipment is common as well as the most costly part of all, the last mile connection to the home. Given that programming costs are 40-45% of pay-TV revenue, it’s hard to see how any broadband costs can come even close to that sort of expense.

With a dynamic and profitable service like broadband, little wonder operators are way more interested in acquiring Internet subscribers than hanging on to less profitable video customers.

Why it matters
Broadband is the engine that is driving cable revenue now.

While increases in pay-TV revenue slow to a crawl, or even decline in some cases, broadband continues robust growth and at a much higher profit margin.

Increasing broadband revenue is the reason cable companies have not been screaming about slowing video revenues and falling subscribers.

As well, the evidence confirms that programming costs are going up faster than pay-TV revenues.

This lends credence to operator claims that they are not passing along all the increases to their customers.

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