One of the driving forces that’s supposed to be behind the urge to merge affecting cable companies is the idea that a bigger distributor would have more leverage to control increases in programming costs. But one analyst says not so fast.
Todd Juenger, senior analyst at Sanford C. Bernstein, has issued a new report with the headline: “Will Cable Consolidation Slow Down Affiliate Fee Growth? We Say ‘No.’”
Juenger argues that even if cable companies like Charter and Time Warner Cable combine, the market dynamics that push up programming costs remain in place. Most customers will still have alternatives to cable in the two satellite companies and the telcos. Some also have a cable overbuilder to turn to.
“Consumers are much more loyal to their favorite TV networks than they are to their distributor,” Juenger says. “Every time a distributor has tried to fight back by dropping the content from one of these [big programming] companies, it has ended badly for the distributor because consumers will switch distributors, not TV networks.”
The economics are that if a cable operator drops, for example, Viacom’s networks, it saves $2.75 per sub. But for every sub it loses, it costs the distributor $40. “The break-even for the Viacom example is 6.4% of subscribers,” Juenger says. “History has show there are many more than 6.4% of subs who care enough about Viacom that they will switch distributors in the event of a sustained blackout.”
Juenger notes that there are some savings that come when one cable company acquires another as the larger company’s lower rate gets applied to the smaller cable company’s subscribers. But he says “the total impact to affiliate fees would be pretty small (and one-time), because the new rate would be applied across the smaller distribution company’s sub base.”
And if Comcast comes into the mix, as is being reportedly considered, the impact on fees would be smaller because of the agreements Comcast made with the U.S. government in order to acquire NBCUniversal. “The main concern of the consent decree governing Comcast’s rules of conduct post-NBCU was to prevent Comcast from wielding its market power to reduce competition,” Juenger said. If Comcast were to drop networks, those networks parent company would appeal to the FCC that Comcast was showing unfair preferential treatment to the NBCU channels.
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