Quite a bit has been written in the media recently about rising sports costs, and how multichannel operators are unable to pass these hefty rate hikes on to consumers. Although there is no question that sports costs are part of the story, most media reports miss two other important points.
First, operators have been providing more channels every year, which adds to the bill. Second, retransmission-consent fees are much higher than many operators had hoped. By 2018, we estimate retrans will be costing cable operators $4.90 per subscriber per month — that’s wholesale, not what the consumer is paying. That’s almost on par with ESPN’s license fee of $5.13 in 2012.
The bottom line is that there are a lot more moving pieces to the typical cable bill. We went back and looked at programming costs by genre, historically, back to 1995, but we also looked at the growth in channel capacity. Operators in 1995 were delivering around 26 channels and paying about $7 per subscriber per month in license fees. By 2012, the number of channels had grown to an average of 95 and the associated costs to $34.
The average cost of a sports channel has grown at a compound annual growth rate of 3.5% over the past decade, compared with a 2.9% CAGR for all channels. However, the five- and seven-year CAGRs are actually smaller in sports than the overall growth, due to lower-priced networks such as Outdoor Channel and NHL Network. The flip side of the equation is that consumers are also paying for a number of new channels featuring content that previously aired on another channel.
There’s no question, however, that for the multichannel operator, costs are a growing concern. Back in 1995, we estimate that cable operators were getting a fat margin of 76.3%, looking at video revenue less basic, RSN and pay channels. By 2010, the margin had collapsed to 53.7% (including retrans payments). By 2012, it had fallen below 50%.
Will it get better? We think not, which is why Time Warner Cable and others are looking at dropping channels. Our forecasts call for video margins to fall another 10 points in the next four years if something dramatic isn’t done.
Derek Baine is a senior analyst at SNL Kagan.