Market Insight

US pay TV operators rethink pricing as programming costs increase

January 29, 2013

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US pay TV operators struggling to alleviate the burden of rising programming costs have a found a solution: passing along some or all of the costs to the customer.

Verizon announced that it will be implementing a $2.42 monthly fee to customers with regional sports networks (RSN) in February. This will be in effect for new FiOS TV customers and customers on month-to-month plans. Additionally, Verizon has also announced a sports-free package, Select HD, to appease customers that wish to forego sports channels for a lower price and cut the number of channels available. DirecTV is also trying to manage programming costs and has recently imposed a sports premium fee of $3 a month to customers in markets that have multiple regional sports networks.

While Verizon and DirecTV decided to implement a surcharge on RSNs, Dish decided to follow the more traditional route and increase the prices on most of its TV packages. Dish is set to increase prices across its packages in 2013, after keeping prices frozen since the start of 2011. The majority of Dish's English packages will increase by $5 and will now range from $19.99 to $74.99, while its top-tier 'Everything' package will jump by $15 to $119.99. Latino packages will also see an increase of $2 to $4. The popular Hopper DVR lease price will remain the same.

Time Warner Cable (TWC) has taken the stance of dropping channels from its line-up that have not performed to the operator's standards and has dropped the arts channel, Ovation, citing increasing programming costs and metrics that Ovation did not meet. Ovation reached 51m homes before the drop.

Additional pressure will be added as Time Warner Cable will be the advertising and affiliate sales agent for the Los Angeles Dodgers' newly-formed RSN, SportsNet LA. This comes months after Time Warner Cable launched two RSNs, SportsNet and Deportes, successfully locking in carriage deals from several major pay TV providers in the southern California region.

Pay TV operators continue to be under pressure from increasing programming costs, which have risen at an average six per cent CAGR over the past five years for the top cable networks. While, pay TV operators have been pushing back, it regularly results in stalemates in carriage negotiations and sometimes channels being dropped. These renegotiated channels come with a higher price and to offset these costs, the operators pass some of those costs down to their customers.

 

Dish is the latest to announce price hikes for the upcoming year, and will most likely not be the last. In 2012, IHS Screen Digest estimates that monthly average pay TV video ARPU was nearly $74 and will continue to increase. Pay TV customers are still constantly faced with a decision - to keep paying ever increasing costs, or try alternative options to cut back on costs.

IHS Screen Digest is taking the long view of the situation. On one hand, the total disruption of the pay TV business sounds plausible, but a counter argument is easy to make too. ARPU is rising. It is also of note that according to IHS Global Insight, disposable income for US households is declining. The argument for a complete collapse of the business relies upon the premise that there will be a tipping point where ARPU will get too high and customers will flee in droves.

More rationally it seems likely that pay TV operators will find ways to bring creative bundles to the table which will allow customers to have a 'more a-la-carte' experience, while still retaining the bundled structure of the business. Examples of creative bundling can be seen with Dish's Multi-Sport Pack which bundles the many league channels, minor sports channels, and many RSNs for $9.00 per month. Ultimately there are some channels which are too big to drop from basic tiers, IHS Screen Digest believes this number to be around 40 in the USA.

Beyond the core 40, attrition is going to be the buzz word. The profound reduction in the number of channels in basic tiers is likely to lead to a significant reduction in the number of niche cable networks, but will anyone care? 

Geography
North America USA
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