March through July are typically the months cable companies implement their annual rate changes. Reading the comments generated by Nolan Lee’s article, This Is Why Netflix and Hulu Will Eventually Kill Cable Television, I think it’s safe to say that many opened up their cable bills and were met with sticker shock not understanding what drove up the costs.
To ensure you can watch your favorite show, cable and satellite providers have a complex business model with numerous costs (some outside of their control) built in. This includes network maintenance, upgrades, programming fees, broadcast fees, regulatory fees, taxes, and surcharges, etc. The following is a summary of costs that had the biggest impact on your cable bill this year:
1. Local Broadcasters increased their fees: Your local broadcaster pays the network to carry their programming. The networks increased their fees to your local broadcaster who then passed the increase onto your cable or satellite provider. These price lifts were then passed onto you.
2. Cable networks increased their fees: The cable networks also increased the fees they charge the cable and satellite providers. This increase was ultimately passed onto you.
3. People have been cutting the cable cord: Cable and satellite providers negotiate tiered pricing. The more subscribers (customers) to a particular channel or suite of channels, the more the programming fees go down. Each person who cut cable out of the budget put your cable provider into a higher price programming price range and, depending on attrition volumes, your cost went up.
4. Increased capacity build-out to meet over-the-top content demand: Over-the-top providers are services like Netflix, Hulu, etc. and they utilize a lot of band width. To ensure capacity is available to meet the never-ending thirst for alternate content sources riding the cable provider’s network, your cable provider increased capacity. This is not cheap and the cost is spread across all services and ultimately seen by you when you open your cable bill.
5. Reduced advertising demand: First of all, cable companies have certain slots they can fit ads into but most of the revenues belong to the networks. Secondly, the recession hit all areas and ad buys were no different. Networks transferred the loss of ad revenue onto the programming fees they charge the cable and satellite providers who then passed it onto you with a rate increase.
6. Taxes, fees, and surcharges are negligible in comparison to the overhead needed to keep a cable company up and running.
Items one and two seem to be the biggest cost driver from a channel availability perspective and you have some sway in programming cost containment. When you see the scroll bar telling you to call your cable company because the channel will soon go off the air, don’t call the cable company. Call the network and demand they work with your provider in bringing the costs down.
Additionally, over-the-top services like Netflix and Hulu have definitely made a dent in the cable and satellite world. However, cable providers with a broadband solution are combating this demand with capacity build-outs, new services, and pricing structures.
New products on the market include Comcast’s XFINITY® Online that provides instant on-line access to new releases and a few old favorites. Other companies have increased their speed based tiered internet pricing giving you a choice in how much speed you want and need. In the near future you’ll see another option as more broadband providers roll out net-metering and move to usage based internet - you will pay for a package or each gigabyte you use.
Networks will definitely struggle with the new competition. Your cable company, however, is adapting with new technologies and product subsequently passing the cost onto you.
Long term, wireless, not Netflix, will pose a bigger threat.