Editor's Corner—Coal mine canary Cable One signals exit of small birds from the video distribution business

Cable One's video base shrunk by 12.7% in the 12-month period ending March 31.

I’ve been in trade publishing long enough to remember large media companies kowtowing to small-time operators of Mayberry-sized regional video rental chains. I can recall a time before satellite TV when tiny regional cable operators held all the cards in negotiations with programming networks. 

The era of the little guy holding distribution sway in the big, ostensibly glamorous video business has, of course, been ebbing for some time, with cable operators either merging into monoliths, like New Charter, or combining forces into cooperatives, like the NCTC, to carve out vaguely affordable program licensing deals. 

Last week, that era finally succumbed. Call the time of death 11:05 a.m. EST on May 4, 2017. 

That’s when Cable One, which had long since given up on the prospect of pay TV being profitable without sizable, consolidated leverage, reported that its residential video subscriber base had dropped below 300,000 in the first quarter. 

In fact, the Phoenix, Arizona-based MSO’s video base shrunk by 12.7% in the 12-month period ending March 31.

It was also last week that Bernstein Research analyst Todd Juenger referred to Cable One as a “canary in a coal mine.” Juenger was actually referring to the operator’s 2015 decision to cease carriage of MTV, BET, Comedy Central and other Viacom channels—a bold, controversial move at the time, but one that foretold Charter’s fateful decision to kick Viacom channels out of its basic tiers this month. 

I think having a midsized cable operator like Cable One fall below the pay-TV Mendoza Line also has prophetic significance—especially given that it happened during the same week that Hulu entered the virtual pay-TV biz. 

The mom and pops just can’t get the margins anymore to make the video business worthwhile. We’re getting to the point at which, in order to play in the video biz, you either need to be owned by four of the world’s top programming conglomerates, as Hulu is, have one of the bigger market caps in the world like Google, or you have to consolidate into a massive, widely loathed telecom conglomerate, exceeding or approaching 20 million users, as AT&T, Comcast and New Charter all have. 

Holding the line on margins is challenging, even for those with leverage and scale.

Also last week, nScreen Media analyst Colin Dixon noted that despite the leverage of having over 22 million pay-TV users, Comcast can expect steep rises in programming costs in the near term. 

In the first quarter, Comcast reported average revenue per user for pay TV of $48.61. Of that ARPU, 57% went directly to cover programming costs, an increase of 13% over the first quarter of 2016. Programming costs increased just 9% year over year in the first quarter of 2016. 

“To put this in perspective, video ARPU was $66.40 per month in Q1 2010,” Dixon said. “Just $25.5, or 38%, was required to cover programming costs. In the last seven years, programming costs as a percentage of ARPU has increased 18.6%.”

Over the last six years, Dixon added, Comcast’s programming costs have increased 8.9% annually, outpacing both ARPU (3.4%) and inflation (1.6%).