Cable mergers try to break power of content providers

Wednesday 27 May 2015 | 14:47 CET | Background

A major cable merger has been announced in the US. Charter is bidding for Time Warner Cable as well as continuing its earlier announced bid for Bright House Networks. This will create a new group with 23.9 million customers in 41 states, second on the cable market only to Comcast. The FCC recently rejected Comcast's proposed takeover of TWC, saying it would concentrate the market too much. Charter had earlier tried to buy TWC in early 2014. It offered then USD 132.50 per share and is now willing to pay USD 195.71. In the background John Malone is pulling the strings. Not only does he control European operator Liberty Global, he also has Liberty Broadband in the US, the largest shareholder in Charter. In the latest deal Charter has agreed to pay USD 2 billion to TWC if the takeover does not secure regulatory approval. 

And so the consolidation continues - not only in the telecom sector, but also in the media industry (which also includes cable). The most important driving factor is cost savings. When revenues start to stagnate, something needs to be done on the cost side. One of the most important costs is content, and this is a key area where the larger the operator, the better the negotiating position. Every cent saved on the cost per channel per customer translates directly into profit. Increasing scale also brings a number of synergy benefits. 

The cable sector continues to grow its ARPU thanks to the transition to digital TV, higher broadband speeds and premium TV services. Nevertheless, the sector faces threats. Mergers help reduce the cost base, but the main benefit is enhanced power vis-a-vis the content sector. Live TV is still the unique selling point of cable, but its importance is diminishing as an ever-increasing amount of OTT content becomes available. If broadcasters, hardware producers and OTT providers start providing live TV, then the (cable) operators will lose their USP in content completely. This underlines again how broadband has become the most important source of revenue in the sector.

Negative trends

Despite still growing ARPU, the cable sector cannot avoid completely the malaise in the telecom sector. The drive to create economies of scale can be seen in part as a defensive strategy against a number of negative trends in the sector. Whether these scale and synergy advantages benefit customers via lower prices is another question. For example, Dutch operator Ziggo recently increased its prices after merging with UPC. The cost advantages will first be used to compensate the slowdown in sales and then go towards investments and dividends.

There are three negative trends to note in the sector. To start with, the rising cost of content, which cable operators complain about every quarter as their margins come under pressure. Second, the continuous loss of customers to other platforms. In the US, this is mainly IPTV and satellite. While the numbers are still small, the risk of 'cord-cutting' is increasing. This results in lower network utilisation and a declining gross margin. Third, there is the competition from over-the-top (OTT) services, delivered directly over the internet to consumers. This includes a range of players:

  • Broadcasters, with their online services such as Hulu.
  • Hardware providers, such as Samsung and its smart TVs or Microsoft's Xbox.
  • 'Pure-play' OTT providers such as YouTube and Netflix.
  • Operators with 'TV Everywhere' services.

It's often said that OTT services are complementary to traditional cable or pay-TV offerings and not a substitute, but an hour watching Netflix is still an hour not watching cable. At the same time the range of OTT content available is expanding continuously. For example, US sports leagues are starting their own online channels and subscriptions for live matches, and Apple is reportedly preparing its own video service with live TV.

Content is king

The content sector traditionally determines what the viewer sees, when and on what kind of device. Viewers are served up a large number of channels, with sport especially driving up the cost. The content sector aims to maximise its revenues by assembling these large cable packages and also through the use of 'windows' (a film appears first in the cinema, then for purchase/rental, then on TV, etc.). The TV operators profit from this, but it also means they have less control over their own strategy to stop the loss in customers. An important risk remains piracy, through sites like Popcorn Time, as consumers look to take control of their own viewing. The operators are trying a number of things to try and maintain their position:

  • TV Everywhere is an important step towards putting the customer central and keeping the OTT sector at bay. This started out as VOD services over the home Wi-Fi network but increasingly includes access over any broadband connection as well as live channels. 
  • US satellite TV provider Dish started in January Sling TV. This is a 'skinny bundle': a limited number of live channels (first 12, now 20) for a low price (in US standards) of USD 20 per month. Additional channel packages can be added for USD 5 per month. The downside is possible cannibalisation of the provider's own services and lower margins.
  • Verizon is challenging the content sector (allegedly in violation of existing contracts) with relatively smaller TV packages (35 channels) and add-on packs (7 genres). ESPN, the sports channel owned by Disney, is already suing Verizon.

It's difficult to break the power of the content sector. Only the threat of piracy or government intervention could give operators more freedom to provide more customer-friendly content packages: on-demand, any time, any device. An end to geo-blocking (national content rights, rather than say EU-wide) is already part of the EU's Digital Single Market plans.

Another way to approach the issue is to enter the content market. Comcast did this by buying NBC Universal, and Liberty Global is also investing increasingly in production companies and content.

Live TV is still the distinguishing factor for broadcasters and operators. However, it's only a matter of time before broadcasters start going direct to consumers, as HBO is doing with its new online subscription service. An aggregator like Apple could also put together an attractive OTT package including live TV. When this happens, operators' problems will only get worse. The content sector still has a lot of power in this area though. Without the OTT rights to a certain TV services, screens will go black for a time. This is already a problem for Dish's Sling TV service.

Can the threat of piracy, regulation (like the EC) and greater negotiating power for the aggregators break the power of the content sector? For the moment, the content providers are still playing off the cable sector and other aggregators against each other via the selective attribution of rights.

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