[opendtv] The Motley Fool: How the Golden Age of Television and Baseball Ends

  • From: "Manfredi, Albert E" <albert.e.manfredi@xxxxxxxxxx>
  • To: "opendtv@xxxxxxxxxxxxx" <opendtv@xxxxxxxxxxxxx>
  • Date: Wed, 26 Nov 2014 01:53:12 +0000

This article from January 2014 explains much of what has been debated on here 
for weeks and months. Should be a must-read. As usual, the first part discusses 
what is the case today, and does this very well indeed IMO. The interesting 
part happens when the author looks beyond the mere status quo, i.e. how this 
will play out.

When explaining the "bundling" question, the author initially looks at it from 
the industry's point of view, not the consumers'. And when he uses the term 
"devastate the industry," of course, it means "devastate" the status quo of the 
industry. Including the fact that rarely-watched "the bundle" channels, like 
Food Network and HGTV, end up making higher profits (he claims) than Google or 
Microsoft. From a subscriber's point of view, a bit of a "boo hoo" devastation 
there, eh?

So to me, when economic models get way out of whack, and I think the existence 
of the Internet has done this now by eliminating the need for a monopoly pipe 
of TV content, things are bound to change. As usual, the interesting parts are 
toward the end: "mutually assured destruction." This is what The Motley Fool 
says.

Bert

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http://www.fool.com/investing/general/2014/01/12/how-the-golden-age-of-television-and-baseball-ends.aspx

How the Golden Age of Television and Baseball Ends

By Eric Bleeker, CFA
January 12, 2014

. . .

Where this will all go wrong

There is only one real way to describe the current world of cable: Mutually 
assured destruction. While no one in the broader pay-television landscape 
speaks happily about cable bundles, they all know that if any party left, the 
whole industry would see profits crumble.

Yet, with all parties so entrenched, what situation could lead to the cable 
bundle falling?

Simple: Excess, greed, selfishness, self-interest.

Right now, every piece of the cable bundle is exploiting the bundle's bizarre 
economics to maximize their own benefit. Sports is using its limited, yet 
fanatical fan base to charge huge affiliate fees. Largely unwatched RSNs are 
commonly the second-most expensive channel in cable lineups. Beyond baseball, 
other sports are cashing in as well. Realignment in college football is driven 
by new television contracts. In basketball, the Lakers are creating two RSNs 
that will charge affiliate fees. The list goes on.

Cable networks have created their own bundles of minor channels and required 
their inclusion in cable television packages. All these moves increase the 
price consumers pay while adding little benefit to cable TV as a product.

Each move is minor in isolation. An RSN charging an extra $1 a month in 
affiliate fees won't break cable, neither would the inclusion of an MTV3 that 
adds $1 a year. However, added up, they're all straining the limits of what 
consumers will pay for television.

In the third quarter of this year, the nation's fourth largest cable operator, 
Time Warner Cable, lost 306,000 TV subscribers. While companies have yet to 
report results, its expected that 2013 will be the first ever annual decline in 
pay TV subscribers. With streaming services becoming more varied and more 
content available online, there are real alternatives to television.

The good news is that as long as all the cable networks hold firm, only 
remaining on pay TV, television cancellations will remain a relative trickle.

However, that's unlikely.

The slow doomsday scenario

Fox recently canned its lightly watched Speed channel and instead created Fox 
Sports One to compete with ESPN. NBCUniversal refocused Versus into its more 
pre-eminent NBC Sports channel. The companies want to cash in on juicy sports 
affiliate fees, and have the money to buy programming. In the end, this will 
lead to larger affiliate fee demands from Fox and NBC, and more pressure from 
sports programming on cable prices.

With sports fees - and the number of sports channels - continuing to increase, 
the tension is growing with other non-sports channels. Those channels commonly 
rely more on advertising, which is harmed when customers cancel cable. Not only 
that, but affiliate fees shifting toward sports will lead to cable operators 
pushing back against the fees they pay to non-sports programming.

Put yourself in the position of Scripps Network. If in the coming years cable 
subscriber numbers are slowly falling and cable operators are beginning to 
resist affiliate fee increases, would you decline an incremental revenue 
opportunity to move television-like programming off of cable?

Let's say such an offer was from Google. The company now receives an estimated 
$5 billion a year from advertising on YouTube and sells its popular $35 
Chromecast device, which bridges mobile devices, PCs, and the television. If 
they offered guaranteed money upfront, and a revenue-sharing deal for 
subscribing to online channels similar to what you already offer on television, 
would you decline that offer? There is little doubt a company like Google is 
interested in television - it's an ad company, and television is the largest ad 
market in the world. They've already begun pushing different channels as the 
central focus of YouTube in an effort to make it more "TV-like."

One cable network alone wouldn't have a watershed impact, but if several 
companies began testing moving more content away from cable and into online, 
the trend of cord-cutting could escalate quickly. None of them would be 
endangering their cable revenue in the near-term, all immediate revenue would 
be "incremental." The damage would be done by slowly chipping away at the 
advantages of the television ecosystem. Moving enough programmed content away 
from TV to make consumers more comfortable not paying for bundled television.

While cable's reign might seem a given today, entrenched industries can fall 
fast to rapid external change. While it might be easy to look back and know 
newspapers died the day the web was born, in reality, the rapid decline of 
print advertising didn't begin in earnest until late 2006, and within three 
years the industry was half its size. Give consumers a "good enough" 
alternative, and the speed at which they'll adopt it has surprised many 
once-thriving industries.

Remember, television companies are used to impressive growth rates. In the past 
five years Scripps has grown sales at 10% annually. Discovery Communications 
has seen its sales grow across the same period at 15% annually. If advertising 
growth slows or affiliate fee increases are pushed back on, they'll be looking 
for opportunities like I described above to incrementally increase their 
revenue. To satisfy shareholders with lofty expectations. 

The cable bundle stands to falter because it's a tremendous deal for all 
included, but they're helpless to not continue pursuing better deals that are 
increasingly straining the bundle proposition itself. 

Microsoft-like profit margins can't last forever.

. . .

Has it already begun?

Last Sept. 27, the Astros were surprised when the RSN they owned 46% of 
declared bankruptcy. It was just a year old. The RSN was seeking a reported 
$3.40 per month from cable operators to carry its channel. With the Astros 
having a league-worst payroll, cable operators balked at the high cost and 
refused to carry the channel. Astros games are currently only on Comcast, a 
co-owner of the RSN. 

With only 40% of households in Houston able to see the games, the channel 
couldn't collect enough affiliate fees to pay the Astros agreed upon annual 
fees. There isn't an uproar from customers of other cable operators because 
there is little demand to watch Astros games. 

The Astros are seeking to dismiss the bankruptcy, claiming it's a "transparent" 
attempt by co-owner Comcast to take control of the RSN. Yet, the fact is, this 
deal is just a year old and already failing. 

With the Astros among the worst teams in baseball history, it'd be easy to 
dismiss the struggles of their RSN as an isolated incident. Yet, there are 
other troubling signs on the sports landscape.

Time Warner Cable is refusing to carry the Padres' RSN. DirecTV has refused to 
carry the Pac-12 Network. These disputes aren't new - in 2002 CableVision 
refused to carry Yankees games when their new RSN premiered. 

However, it is concerning that there are so many disputes when cable television 
is still in its golden age. After all, every year before 2013 saw increases in 
the number of pay television subscribers. With baseball television contracts 
stretching out for decades, will these disputes become more common if 2% of 
customers cut their cable? What about 5%, or 10%? Cable operators will feel far 
less need to pay the high prices to pander to a sliver of fanatical sports fans 
if other customers are leaving in droves to pursue cheaper viewing options. 

Ten years down the road, as a 41-year-old Robinson Cano wraps up the final 
playing days of the contract he just signed, will anyone be watching?

 
 
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