There’s a narrative in media circles that Netflix, Amazon and other technology companies are killing cable companies. Cord cutting is accelerating! No one watches cable TV anymore! The end is nigh!
The quieter truth is that many cable companies — maybe even most — don’t really care.
Pay-TV aggregation is a worse business than high-speed broadband distribution, and it’s been this way for years. In 2013, James Dolan, then CEO of Cablevision, told The Wall Street Journal “there could come a day” when his company stopped offering TV service altogether, relying on broadband for its revenue. Dolan would later sell Cablevision to Altice for $17.7 billion in 2015.
In recent months, Charter, the second-largest U.S. cable company, has offered low-margin video packages to give consumers more choice.
And one cable company you may have never heard of — Cable One — is proving that moving away from TV can be good for investors.
The old way: Bundles all the way down
Here’s how the pay-TV business works: Traditional distributors such as Comcast (which owns CNBC parent company NBCUniversal), Charter, Altice and Cox — the largest U.S. cable TV distributors — pay a per-subscriber rate for the right to broadcast a channel. Little-watched networks don’t cost much — say, 5 cents per month per subscriber. The popular broadcast networks and cable stations, such as ESPN and Fox News, cost more.
The owners of these channels also own other channels, which they bundle in with their popular networks, leading to bloated cable TV packages and increasing prices. ESPN’s four most popular networks cost more than $9 per month per subscriber, according to research firm SNL Kagan back in 2017.
After the pay-TV operators add up all of the networks in the bundle, they tack on a little more and sell it to consumers.
After years of programming rate increases, the cost of the bundle has become so high that pay-TV packages are low-margin or sometimes even negative-margin offerings. The business is even worse for new digital video providers such as Google’s YouTube TV, which are starting from a base of zero and must keep prices low to attract new subscribers. As Bernstein analyst Todd Juenger explained, YouTube TV loses money on its digital bundle. Google’s hope is to eventually raise prices after taking subscribers and making enough money on advertising to make up for the losses.
Cable companies stay in the TV business because they have millions of legacy customers who are willing to pay about $100 for their bundle, instead of the $40 per month YouTube charges. And if people threaten to cancel their TV packages, operators have cheaper packages they use as sweeteners for customers to pay up for high-speed broadband.
But now, this traditional coupling of TV and internet may be losing its efficacy.
A stunning admission from Cable One
Chances are you’re not too familiar with Cable One. It’s the seventh-largest U.S. cable company, serving customers in Idaho, Texas, and other states, with its headquarters in Phoenix, Arizona.
But if you’re interested in the future of media, you may want to pay attention.
This week, Cable One CEO Julie Laulis said bundling TV with internet is not a particularly effective method to hold on to customers. That’s because people aren’t canceling internet to begin with. As a result, offering bundled video wasn’t really moving the needle one way or another.
“We don’t see bundling as the savior for churn,” Laulis said. “I know that we don’t put time and resources into pretty much anything having to do with video because of what it nets us and our shareholders in the long run. We pivoted to a data-centric model over five, six years ago, and we’ve seen nothing to derail us from that path.”
Read that again. We don’t put time and resources into pretty much anything having to do with video.
The CEO of a cable company is saying she doesn’t care about television!
That’s because a whopping 70 percent of Cable One’s subscribers buy only its broadband Internet service rather than bundling it with video, and churn is “low and getting lower,” Laulis said. And Cable One charges more for its residential broadband service than its peers. Average revenue per user for home internet was $69.90 this quarter, the industry’s highest, according to Craig Moffett, a telecommunications analyst with MoffettNathanson.
As a result, Cable One has been shedding cable TV stations for years, refusing to pay increased programming costs on certain channels it has deemed replaceable. Cable One hasn’t offered any of Viacom’s channels, including Comedy Central and Nickelodeon, for nearly five years.
Even more extreme, if customers call to cancel their cable TV service, Cable One doesn’t try to talk them out of it. Instead, Cable One sales representatives offer over-the-top video services like YouTube TV, Hulu with Live TV or other services to help inform customers what their options are, said Moffett.
“Cable One is a post-video cable business,” Moffett said in a research note issued Wednesday. “That means that video subscriber metrics don’t matter much (even if we, and everyone else, will continue to track them, if only to illustrate that an operator can prosper without video).”
What has all this meant for Cable One?
It’s the best-performing cable company among its peers since it first started trading publicly in 2015. Shares are up about 136 percent.
Video revenue is declining. Last quarter, it dropped about 5 percent from the year-ago quarter, to $82.6 million. But profit margins and earnings before interest, taxes, depreciation and amortization have improved. In the fourth quarter, adjusted EBITDA increased almost 9 percent from last year to $127.6 million. Adjusted EBITDA margin increased 180 basis points (bps) year over year to 47.3 percent -— again, the highest in the industry, Moffett said.
It may never make sense for a large company such as Comcast to ditch video completely because keeping a big balance sheet allows for bigger acquisitions and increased financial flexibility.
But pay-TV distributors see the writing on the wall. It’s not just that digital video providers are offering competitive bundles. It’s that nearly every large media company has a direct-to-consumer streaming service that, if aggregated, replace the need for large bundles of channels. This is part of why AT&T, which already owns a giant pay-TV provider in DirecTV, is retooling WarnerMedia, leading to the departure this week of long-time Warner executives Richard Plepler and David Levy.
Maybe it won’t be Netflix, Amazon or any outside force that kills cable TV. Maybe it will be the cable companies themselves.