First, operators have been providing more channels every year, which adds to the bill. Second, retransmission fees are much higher than many operators had hoped. By 2018, Baine estimates retrans will be costing cable operators $4.90 per sub per month — that’s wholesale, not what the consumer is paying. That’s almost on par with ESPN’s US licence fee of $5.13 in 2012.
The bottom line is that there are a lot more moving pieces to the typical cable bill, says Baine. SNL Kagan went back and looked at programming costs by genre historically back to 1995, but also looked at the growth in channel capacity. O in 1995 were delivering around 26 channels and paying about $7 per sub per month in licence fees.
Ten years later, in 2005, operators provided an average of 67 channels for about $20 per sub per month in programming costs. However, the cost figure increased more than 50 per cent by 2010, when consumers were getting 89 channels and operators were paying about $30 per sub per month. By 2012, the number of channels had grown to an average of 95 and the associated costs to $34.
Looking at the data by genre, in 1995, the average multichannel customer only received two sports channels, and by 2012 that number had jumped to 14. Of course, channel capacity exploded over that time period. Growth in sports, however, has grown disproportionately. Only 8 per cent of channels were sports in 1995, compared to 15 per cent in 2012.
The average cost of a sports channel has grown at a CAGR of 3.5 per cent over the past decade, compared to a 2.9 per cent CAGR for all channels. However, the five- and seven-year CAGRs are actually smaller in sports than the overall growth. This is due to lower-priced sports networks such as Outdoor Channel and Sportsman Channel being carried more widely, as well as lower priced sports networks debuting more recently like NHL Network and Universal Sports.
The flip side of the equation is that US consumers are also paying for a number of new channels that air a lot of content that previously aired on another channel. (I.e., NFL Network or the new Time Warner Cable SportsNet/Deportes featuring the Lakers, etc.)
There’s no question, however, that for the multichannel operator, costs are a growing concern. Back in 1995, SNL estimated that cable operators were getting a fat margin of 76.3 per cent, looking at video revenue less basic, RSN and pay channels (note there are some nominal costs left out of these spreads, such as pay-per-view). The margin shrinks further when you throw in retrans. By 2010, the margin had collapsed to 53.7 per cent (including retrans payments). By 2012, it had fallen below 50 per cent.
Will it get better? SNL Kagan thinks not, which is why Time Warner Cable and others are looking at dropping channels. Given the fact that research shows retrans payments will double from about $2 per sub in 2012 to more than $4 per sub by 2016, there are tough times ahead. SNL Kagan forecasts call for video margins to fall another 10 points in the next four years if something dramatic isn’t done.
We pointed out that average programming costs for the top four operators grew at 4x the rate of video ARPU in the third quarter of 2012. It appears that this trend will continue. Time Warner Cable’s costs rose 12 per cent, so it’s not surprising it is being so tough on programmers.
The latest breaking news on the sports network front is the reversal of recent trends. One media conglomerate is considering converting a sports network into an entertainment channel. According to a report this month in the Los Angeles Times, News Corp. may turn its FOX Soccer into a general entertainment network, a sister net to FX Network.
The move follows FOX Soccer losing the rights to the English Premier League to Comcast Corp.’s NBC Sports Network and competition from newcomer beIN SPORTS, which is bidding on soccer rights to build its channel. BeIN SPORTS is owned by Al Jazeera, which has plenty of money to invest in programming, as witnessed by its recent purchase of Current TV for $500 million.
FOX Soccer is in more than 40 million homes, but its economics are unimpressive. In 2012, it generated $108.4 million in revenue and $26.0 million in cash flow at a tepid margin of 24 per cent. Its rating has ranged from an unimpressive 0.05 to 0.06.
In stark contrast, FX Network generates more than $1 billion per year in revenue and more than a half-billion dollars in cash flow at a 52.4 per cent margin. If News Corp. can turn FOX Soccer into a mini-FX, it would be a superstar even with half the success FX has seen.
The soccer news comes on the heels of the announcement that SPEED will be relaunched this year as FOX Sports 1, a broad national sports channel. Therefore, some of the content which is now on FOX Soccer could be ported over to FOX Sports 1, which still needs to line up quite a bit of programming. This is likely to be an interesting year in multichannel, with sports networks remaining in the spotlight.