The Wall Street Journal.
A growing group of small cable-TV providers are realizing that both they and their customers can live without expensive TV channels.
Of the 100 million homes in the U.S. that subscribe to pay TV, about 14% are served by smaller companies that have a million or fewer customers. In some cases, they serve fewer than 100. Faced with rising programming costs, some of those companies—such as Ringgold Telephone Co. in Georgia and BTC Broadband in Bixby, Okla.—have pulled the plug on TV service altogether, preferring to simply focus on Internet and phone service.
Others, meanwhile, are dropping major groups of channels to manage their costs. The latest is Suddenlink Communications, an operator that serves about one million customers, which says it plans to dropViacom Inc.'s TV channels, including Nickelodeon and MTV, at midnight Tuesday. Suddenlink says it has already signed long-term contracts with other channels to fill the Viacom channels' slots.
The shift poses a potential threat to big media companies. These cable providers are tiny compared with industry titans like Comcast Corp., but the fees they pay media companies for rights to carry programming add up. Cable channel owners—which include major media companies such as Walt Disney Co. and Time Warner Inc.—this year will collect a total of $35 billion in license fees, according to SNL Kagan. But that figure could erode if more small players give up on offering customers the big TV bundle.
After seven years of selling customers cable-TV services, BTC Broadband got out of that business late last year and now provides just broadband and phone services. The Oklahoma company, which had been serving about 420 TV subscribers, decided it simply couldn't afford to keep paying rising fees to carry a basic lineup of channels including ESPN, TNT and MTV.
BTC President Scott Floyd estimated that if the company continued to pass on rising programming costs to consumers and maintained its thin profit margins, by 2016 cable-TV bills would rise to $130 from about $60.
"I think the TV model is broken," said Mr. Floyd.
In five years, operators representing about 5 million pay-TV subscribers—5% of current pay TV households—will "no longer be doing business the way they do today with video," estimates Rich Fickle, chief executive of the National Cable Television Cooperative, a consortium that negotiates programming deals on behalf of about 915 small cable-TV providers.
A loss of 5% of households in a few years could shave off about $2.4 billion in revenue for basic cable networks alone, which by 2018 would be raking in about $47 billion in carriage fees, according to SNL Kagan estimates.
"The change in the market is going to come from the bottom," said NCTC's Mr. Fickle. Bigger pay-TV companies like Comcast and DirecTV aren't likely to make similar moves away from pay-TV service, he said, because they enjoy better profit margins and are busy pursuing big mergers.
Some operators say they are gradually being pushed out of the TV business as subscribers drop their expensive TV subscriptions and watch shows on cheaper Internet video services.
Those who have exited completely say that while many customers switched to satellite service, a growing number simply migrate to online video.
Missouri-based Boycom Cablevision Inc. has sold cable-TV service since the early 1990s, but now counts only 1,000 TV customers out of its total 5,000 subscribers. "We have truly morphed into a broadband-only provider in a lot of our markets," says Patty Boyers, co-founder of Boycom.
Tom Might, chief executive of Graham Holdings Co.'s CableOne, which serves nearly 700,000 subscribers in 19 states, says reducing emphasis on video service in favor of broadband has led to higher profits, even though some customers were lost in the process. The "trends are kind of hard to fight," he said. "Better to join them and make your profit where the business is growing."
Since 2008, small telecom companies representing about 53,000 customers have shut off cable-TV services or gone out of business, according to the NCTC. Over the last three years, the number of customers affected by such decisions has accelerated.
At least one midsize operator, Cablevision Systems Corp., which serves nearly 3 million TV customers in the New York metropolitan area, has said it can imagine a day when it no longer sells television and makes broadband its primary offering.
Some media executives shrug off the threat, saying that cable-TV providers have been complaining for a decade about programming costs. They say their businesses don't face any real risk from the small companies that have been disconnecting service thus far.
Media companies could get ahead of any broader decline, cable-TV executives say, by changing their model of selling full bundles of channels to operators, and instead selling just their popular channels in smaller bundles or on an a la carte basis—something they have so far resisted doing.
Many small operators are cutting back on expensive TV channels they don't view as vital to include in their packages, as Suddenlink says it is planning to do. Earlier this year, providers representing some 900,000 households opted out of an NCTC-brokered carriage deal with Viacom, choosing instead to drop its channels.
Those operators had braced to lose as much as 10% of their customers, but overall they have lost less than 2% of their base, according to the NCTC.
Mr. Fickle says other members are emboldened by the Viacom episode and may take a similar approach in deals with big programmers that are coming up for renewal with the NCTC, if the terms don't make sense for them.
Operators' shift away from TV could accelerate if more customers fed up with rising bills "cut the cord" themselves. Last year, the pay TV industry contracted for the first time, losing 167,000 customers as people disconnected service, according to MoffettNathanson research.
Several small operators believe the pay-TV model will splinter and reset itself online, with TV channels and big distributors such as Comcast or Dish Network Corp. selling programming directly to consumers through apps, much like Netflix does today.
Such a reality has long been considered a threat, but executives like Steve Weed, CEO of WaveDivision Holdings LLC, a West Coast cable company, envision a new business opportunity for small cable operators to supply customers with Web TV boxes and manage a storefront of streaming-video apps.
Dealing with customer complaints about TV service—which account for most service calls—would be a thing of the past. "We'll go from being the bad guy to the good guy," Mr. Weed said.
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