Program costs growth will drive pay-TV margins to zero by 2023, analyst says

Gross margins for pay-TV operators on video services, which now average around 25 percent, will decline to zero by 2023 if current growth rates of expenses for things like programming continue, according to a Bernstein Research report, which leverages SNL Kagan data.

And those margins are expected to decline quickly, falling to an average of 17 percent by 2018, with affiliate fees rising from $45 per subscriber to $58. By 2023, at the current rate, those programming charges will reach $90 per customer, said the report, assembled by analyst Todd Juenger.

Disney, which currently commands an industry-leading $9.93, on average, from each subscriber, will be taking in a projected $14.67 per sub by 2023, Juenger predicts. Fox's take will grow from a current average of $5.09 per sub to $9.43.

Other expenses beyond programming, such as marketing, are projected to rise too — from an average of $16 per sub today to around $22 by 2023.

Meanwhile, the average price charged to pay-TV customers will rise from $82 to $112 by 2023, Juenger also predicts. But this won't be enough to keep up with the growth in costs. 

"MVPDs would lose money on every single network group by 2023," Juenger said in his report. "Obviously, current growth rates cannot continue."

These declines haven't been lost on captains of pay-TV industry. "The video product has lost a tremendous amount of margin," Cablevision chief James Dolan said an investor event last year, explaining his company's shift in priority to broadband services.

Similarly, Cable One said video services accounted for 64 percent of its profit in 2005. They expect that number to fall to just 30 percent in 2018. 

For more:
- read this Bernstein Research report (sub. req.)
- read this Mediapost story

Related articles:
AT&T says DirecTV deal will reduce programming costs by 20%
SNL Kagan: U.S. cord-cutting hit 1M in 2015 without Sling's 538K users factored in
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