Some might’ve expected Tom Might to bemoan the cost of programming this week, after his Phoenix-based cable company reported that its pay TV subscriber base has plummeted by 36 percent in the last three years.
A few years ago, Might would often dedicate a chunk of each earnings call to lambasting antiquated retransmission-consent regulations, or insisting that cable operators would generate better margins if they were allowed to kick expanded basic networks into niche tiers.
But with Cable One managing to grow cash flow by 11 percent in the third quarter compared to the same period in 2012 — thanks to growth in broadband customers — Might has a reason to smile as Cable One’s legacy pay TV business slowly evaporates.
“Bundle math is changing,” said Might, explaining Cable One’s shift from focusing on growing PSUs (primary service units – a triple-play household equals three PSUs) to single-play broadband customers.
Triple-play subscribers aren’t always desirable. Many are attracted to steep discounts. It costs money to send technicians to their homes to install expensive gear like high-definition DVRs. And they tend to jump ship when promotional discounts expire.
“Without them we make more money,” Might told analysts Thursday.
Cable One may be the portrait of the future cable MSO. It will grow cash flow by investing primarily on recruiting and retaining broadband subscribers. And with single-play broadband subscribers becoming its fastest growing segment, it will profit from building a better platform for over-the-top video providers ranging from Netflix to CBS All Access to deliver content to IP-connected TVs and mobile devices in subscriber homes.
Cable One will need fewer installers, fewer set-tops and eventually it won’t need personnel to negotiate contracts with programming suppliers.
Threat to Programmers?
With CBS growing retransmission-consent revenue in the third quarter, and the Eye Network touting the upcoming launch of an original Star Trek series on its CBS All Access online subscription service, CEO Les Moonves and COO Joseph Ianello seemed to suggest earlier this week that their business model was bulletproof.
“We are set up to grow no matter how the bundle changes. In fact, any move towards a skinny bundle or à la carte service will only reset the monetization of our content higher, and as a result, we will make more money sooner,” Ianello said.
Added Moonves: “As time progresses, I think you’ll see much more activity or they [distributors] will skip right to a la carte, in which case we’ll do better either way.”
So Cable One’s chief says he’ll make more money without video subscribers. And CBS leadership believes they will make more money sooner if distributors and consumers embrace smaller programming bundles, a la carte packages and TV shows and movies sold over-the-top of broadband pipes.
Can both Cable One and CBS be right? No.
CBS has relied on FCC rules that require cable operators and telcos to carry broadcast networks in basic cable tiers. Subscribers are not allowed to order expanded basic networks like FX and USA without paying $20 or more monthly for a basic cable tier that includes local broadcast networks and PEG (public, education and government) channels.
CBS saw revenue from retransmission-consent fees jump 50 percent in Q3, and it expects retrans revenue to crack the $1 billion mark in 2016.
But what happens to CBS retransmission-consent revenue if more cable operators follow the path of MSOs like Cable One and Cablevision, and embrace growth in single-play broadband customers and the defection of bargain-hunting triple-play customers? Over-the-top products like CBS All Access and subscription-video-on-demand services like Netflix, Hulu and Amazon can deliver more than enough content to satisfy broadband subscribers that don’t pay for basic cable.
How many $5.99 monthly subscriptions to CBS All Access will Moonves need to sell if Tier 1 cable MSOs like Charter and Time Warner Cable make a business of speeding the delivery of over-the-top content to subscribers using streaming video devices like Roku? How will CBS investors react if Moonves fails to hit his aggressive retransmission-consent revenue projections, and CBS OTT products like All Access and Showtime apps fail to sustain revenue growth?
Katy, bar the door!