[opendtv] Analysis: The Real Winner in the TV Wars

  • From: Craig Birkmaier <craig@xxxxxxxxx>
  • To: OpenDTV Mail List <opendtv@xxxxxxxxxxxxx>
  • Date: Mon, 6 Dec 2004 08:00:57 -0500

  Why are the media conglomerates vertically integrating around 
content? Perhaps this line from the following story provides a clue...

>Why are rates rising in an era when inflation is so low? The cable 
>and satellite industries are paying dearly for programming, which 
>accounts for about 50% of their operating budgets.

And I question the author's conclusion that consumers are the big 
winner here. How can this be true when rates increase more than the 
inflation rate year after year...

Consumers are the big losers, as they are forced to pay more and more 
for advertiser supported content.


DECEMBER 1, 2004

   By Steve Rosenbush

The Real Winner in the TV Wars
  As satellite outfits and cable operators duke it out, consumers 
stand to benefit most from the increasingly cutthroat competition

Satellite TV is turning out to be a more formidable rival for cable 
than some analysts anticipated. The satellite business is expected to 
add more than 3 million subscribers this year, bringing the total to 
nearly 25 million. For cable, however, the number of subscribers is 
projected to decline slightly, to just over 73 million.

  And satellite's ability to sign up subscribers is showing no signs 
that it will slacken anytime soon. While the number of cable 
customers is expected to remain more or less flat, satellite 
operators are expected to add a further 2.9 million viewers in 2005 
and 2.7 million in 2006, according to analyst Rob Sanderson of 
American Technology Research.

  "The satellite market is on a tear -- it's not even close," 
Sanderson says. He also expects the growth period to last until the 
end of the decade, a few years longer than many investors have been 

BROADENING GAP.  Satellite's growth has been fueled in large part by 
its value-priced services. Echostar (DISH ) offers 60 channels of 
digital programming for $29.99 a month, and consumers can double the 
number of channels for just $10 more. While cable prices vary widely 
from market to market, a comparable cable package with 120 channels 
will often cost $45 or more.

  Also, cable rates are rising faster than satellite's. The price of 
cable-TV service, excluding features such as high-speed Internet 
access, phone service, and digital video recorders, is expected to 
rise 2.5% to 5.9% in 2004, according to major cable operators.

  Comcast (CMCSA ) is expected to raise rates 5.9%, although the 
average bill will rise at half that pace because many customers take 
advantage of discounts on higher-end offerings. Time Warner Cable 
(TWX ) is expected to boost the rates of its expanded basic services 
by about 4%, according to spokesman Mark Harrad.

  Satellite companies haven't yet announced prices for 2005. They 
usually wait for cable companies to go first, then raise their rates 
by a smaller margin. Unlike satellite companies, cable operators are 
required by law to announce their price increases. The net effect is 
that the price difference between satellite and cable gets a little 
wider every year.

THE ANALOG HANDICAP.  Why are rates rising in an era when inflation 
is so low? The cable and satellite industries are paying dearly for 
programming, which accounts for about 50% of their operating budgets. 
The cost of programming is increasing almost 10% a year, according to 
Bobby Amirshahi, a spokesman for cable operator Cox Communications 
(COX ).

  And cable companies are at an added disadvantage because they need 
to recoup their investment in new networks, especially as they make 
the transition to the digital era. Comcast, for example, has spent 
$39 billion to upgrade its systems since 1996.

  More than half the cable customers in the U.S. still receive an 
analog signal. Since these systems don't have as much capacity, they 
can't transmit as many channels as satellite systems. Also, analog 
can't support a variety of pricing plans because the pipes go only 
one-way, broadcasting the same service to everyone. If cable 
companies want to maintain the edge in the mass market, "they're 
going to have to make a faster transition to digital," Sanderson says.

  Satellite operators, whose networks are all digital, have made huge 
gains at the lower end of the market, where customers are most 
price-sensitive. Also, satellite offers a bigger selection of 
channels for less money, and it has more pricing flexibility.

WIN SOME, LOSE A FEW.  Cable companies, on the other hand, have been 
content to focus on the sale of higher-end services. And that's not a 
bad strategy. The profit margin for add-ons such as broadband and 
phone service is around 45%. That compares quite favorably to the 
margin for cable-TV service, which is about 35%.

  Video-on-demand is also proving to be popular. During the third 
quarter, Time Warner added 100,000 subscribers for this service, 
bringing the total to 1.4 million. The gain far outstripped the loss 
of 11,000 basic cable subscribers.

  Cable operators can't afford to be sanguine, though. Satellite 
companies are figuring out ways to offer pricier services such as 
broadband and video-on-demand, according to Sanderson, so cable won't 
have the higher end of the market to itself forever. It's clear that 
the battle between the cable and satellite companies is really just 
getting under way -- and the real winner will be consumers. 

  Rosenbush is a senior writer for BusinessWeek Online in New York
  Edited by Patricia O'Connell

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