Is Cable TV Tuning In Its Own Obsolescence?

Cable TV may be in for a rude awakening from the dream-like hold it has managed to keep over consumers all these years. Recent content provider disputes among DirecTV and Viacom, along with legal decisions allowing websites like Aereo to stream broadcast TV, are putting the industry’s revenue model in serious risk.

Content Wars Make Customers the Losers

Three factors are bringing this disruption to a head. First is the increasing friction between cable companies and content providers, the most recent example being DirecTV's decision last week to drop Viacom content on its satellite TV network - a move that blocked nearly 20 million customers from up to 26 channels of content (if you count HD channels).

At issue are the ongoing fees Viacom charges DirecTV to deliver its content, centered around the issue of cable bundling. DirecTV wants to give its customers an à la carte type of arrangement for Viacom channels, so that they can buy only the channels they want. Viacom, fearing the potential loss of revenue from channels people don’t want to pay for, would like to keep the current bundles of cable channels.

Customers are increasingly demanding à la carte programming, and cable and satellite providers are definitely feeling the pressure. But they’re squeezed from both sides: The actual content providers, like Viacom and Disney, are scared to death of à la carte.

For example, Disney charges an affiliate fee of $5.06 per month for every user that gets ESPN, according to AllThingsD. “And, by some estimates, only about 25% of cable customers actually watch ESPN on a regular basis. So if you unbundled ESPN, the per-subscriber cost might shoot up to $20 or more, to account for the 75% drop in its customer base.”

Content providers' insistence on the bundle, however, is starting to wear thin, as last week’s fight with DirecTV and Viacom demonstrates.

The Surprising Relevance of Broadcast TV

A second area where cable TV is facing trouble comes from the unexpected area of broadcast TV. Last Wednesday a federal judge blocked an injunction against Aereo, a new video streaming service that uses tiny antennas to rebroadcast over-the-air channels to its subscribers' mobile devices, even recording broadcasts.

Local broadcast stations and their corporate parents, who also have long enjoyed a cozy deal with fees from cable companies, are fighting Aereo tooth and nail. They had hoped to kill it off quickly by requesting the injunction, but U.S. District Court Judge Alison Nathan spiked it, indicating that issues would best be sorted out in a trial. 

The broadcast networks are planning to appeal the decision for an injunction, citing Aereo as a copyright infringer. Meanwhile, Aereo investor Barry Diller has plans to expand the Aereo service beyond the New York City area where it now operates.

If Aereo prevails - and there is little doubt that, should it survive these injunctions, this will be a long, nasty court battle - it could do serious harm to broadcasters, who rely on cable affiliate fees to supplement advertising revenue. Cable providers could get hit, too, since customers may decide that they don’t need cable if they can watch and record broadcast TV shows without the big monthly bill.

New Alternatives to Cable 

Both of these events add up to real trouble for cable and satellite companies because of the third factor in this pile on: Customers now have alternatives. Even before Aereo came along, the practice of cord-cutting cable has become much more prevalent, thanks largely to the pervasiveness of broadband Internet.

With more and more programming available on the Internet through services like Hulu and Netflix, cable companies know full well their customers can now do something they could never do before: vote with their feet.

Aereo just makes the alternatives more attractive, since it helps fill a key gap for cord cutters: live sports.

Online users can enjoy professional baseball, football, basketball and hockey through subscription-based seasonal passes (although often at significant expense and under Byzantine blackout rules). There is also the very real problem that not every service is available on every streaming-TV device, so consumers may have to use multiple approaches to get the content they want. By delivering broadcast sporting events to customers, Aereo makes it easier for sports fans to cut their cord.

And of course, it doesn’t help that consumers consistently say they hate their cable companies.

This triple threat adds up to cable TV’s business getting whittled away from every side, and forcing the entire sector to face some hard choices if they want to keep their customers much longer.