To hear executives at America's No. 4 and No. 10 cable companies explain it, television is a dead business.
Speaking in New York this week, Cablevision (NYSE: CVC) CEO James Dolan told media investors that his company's broadband and associated data/connectivity businesses now have better margins than its video services--by a factor of seven to one.
Reiterating what has become mantra for the Bethpage, N.Y., MSO, Dolan said that high-speed data has become Cablevision's "No. 1 product," and added that "the video product has lost a tremendous amount of margin."
Dolan's perspective on where the cable business is going--or, better, where it's moving away from--was corroborated by Phoenix, Ariz.-based operator Cable One a day earlier, during that company's investor presentation. Cable One CEO Thomas Might and CFO Kevin Coyle laid out the case for the company's declining video margins, noting that video services accounted for 64 percent of its profit in 2005. They expect that number to fall to just 30 percent in 2018.
Certainly, in emphasizing broadband and marginalizing video services, operators like Cable One are getting egged on by the investment community.
"Our work suggests that cable companies have room to take up broadband pricing significantly and we believe regulators should not oppose the re-pricing (it is good for competition & investment)," wrote New Street Research's Jonathan Chaplin in a recent note to investors. "The companies will undoubtedly have to take pay-TV pricing down to help 'fund' the price increase for broadband, but this is a good thing for the business. Post re-pricing, OTT competition would cease to be a threat and the companies would grow revenue and free cash flow at a far faster rate than they would otherwise."
The video services picture does indeed become even duller from a cash flow perspective, Cable One points out.
With each video subscription contributing, on average, $81.03 to Cable One's bottom line, per-user program licensing costs break down to $45.85, the presentation said, leaving a margin of $35.57 per user. But, once indirect costs per user are accounted for, Cable One says it's left with an operating cash flow of $10.61 per user. And finally, accounting for capex, the company says it's left with a free cash flow of 96 cents per user--or about 1 percent of overall revenue.
"The video subscription model is broken and cannot be fixed," read one presentation slide.
I agree with the first part. But I'm not sure about that second part.
Cable One's Might and Coyle are right to tie their declining video services margins to new distribution models like Netflix, Sling TV and HBO Now. But in a world in which a marginally-sized online renter of DVDs can grow to a global streaming-media powerhouse with a $40 billion market cap in just seven short years, is the video subscription model--in the broader sense--really so broken?
After all, Cable One was the first cable operator of any size to permanently eschew Viacom channels. That, of course, relieved the MSO's balance sheet of huge licensing burden, but it also spearheaded a massive decline in video subscribers: The company lost fully 103,232 video customers during the past 12 months, ending the first quarter of this year with 421,331 video customers.
In today's competitive multichannel environment, can you really not compete with satellite and IPTV, not to mention SVOD and OTT, on technology and programming, then turn around and say video is not a business anymore?
The lack of faith in the video business exhibited by operators like Cablevision and Cable One is in direct contrast to the belief demonstrated by that most derided of cable companies, Comcast, which has unholy amounts of cash deploying its advanced, cloud-based X1 platform.
With pay-TV's most advanced user platform, X1, Comcast (NASDAQ: CMCSA) is boldly proclaiming its belief that it can beat back the disruptive forces of TV video distribution with a superior TV user experience. That means designing intelligent, intuitive user interfaces that can be constantly updated in the cloud. It means offering more content, not less, in the on-demand ways consumers have come to expect. Comcast's aggressive acquisition of VOD stacking rights to current season shows is just one more example of how it's getting a leg up on SVOD.
Comcast openly touts the 30 percent bump X1 is giving to its ARPU, but the platform has been an undeniably expensive gamble for Comcast. Who knows if it'll ever be deployed in enough homes, and if it'll really keep the company in the video business a decade from now.
But I have to at least credit Comcast with trying to stay in the video service market that put it into the cable business in the first place. --Dan