|Forget Cord-Cutting. Big Threat to Cable Is Disappearing TV Profits |
The threat that TV subscribers will cut the cord on their cable service has dominated discussion about TV’s future in recent years. But what isn’t widely appreciated is that rising programming costs could force cable operators out of the TV business within the next decade, well before cord-cutting does.
Cable firms would be fine, as they make a lot of money from selling broadband—already some people buy only broadband from them. But it would have far-reaching ramifications for the major entertainment companies that make much of their profits selling channels to cable and satellite firms. It is almost certainly one reason why Disney and others are launching streaming services, preparing for a world where they will have to sell channels like ESPN directly to consumers instead of going through cable and satellite firms. But in that world, those companies will have a tough time replicating their existing profits.
These entertainment companies have basically killed the golden goose. One statistic shows why: As programming expenses charged by entertainment companies have risen, the average profit margin from video for the two biggest cable operators, Comcast and Charter Communications, fell to 10% from 18.7% between the start of 2014 and the third quarter of this year, estimates S&P Global Market Intelligence. (That number is based on estimated earnings before interest, taxes, depreciation and amortization by business segment.)
If that rate of decline continues, video profits will disappear in about five years. In contrast, cord-cutting has sliced the percentage of households subscribing to pay TV delivered by cable, satellite TV or telephone companies by about 10 percentage points to 75% since 2008, S&P Global estimates. It predicts that number will drop to 56% by 2026, suggesting it will still be a significant business for many years, if pay TV operators stay in it.
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