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Behind the TV channel blackouts: stalling profits
Question of the Day
LOS ANGELES (AP) - Channel blackouts such as the one that resulted from the recent spat between Viacom and DirecTV have become far more common over the past three years. Consumers can thank the changing dynamics of the entertainment industry.
Media companies such as Viacom and Disney have become steadily more profitable since the gloom of the recession lifted in early 2010. But the cable and satellite providers that pay to carry their channels have seen profitability virtually stagnate as they fight each other for subscribers.
The squeeze has prompted distributors such as Dish and DirecTV to revolt against higher programming costs. Consumers are left in the crossfire.
DirecTV subscribers haven’t been able to view Viacom channels such as Comedy Central, MTV, Nickelodeon and VH1 since Tuesday, when the two companies failed to reach a contract agreement over content fees. The companies are still negotiating, but the channel blackout for consumers has continued through the weekend.
The industry’s cost pressures mean such fights are likely to continue.
“I think this is the new normal,” says Barton Crockett, an analyst with Lazard Capital. “It’s getting to be a little bit more of a battle between life and death for these guys.”
The rising number of disputes is largely the result of the stagnant market for pay television. Simply put, there aren’t many new households being formed in the sluggish economy, and those who want to pay for TV already do. Some 101 million American households subscribe to cable or satellite service. That’s about 87 percent of homes, a proportion that has remained unchanged since 2009, according to Leichtman Research Group, which studies media and entertainment.
TV distributors pay media companies a few cents per channel per subscriber each month. In turn, they try to sell packages of channels for more. As costs for those channels rise, so do monthly service bills, but not always by enough to offset the increasing fees cable and satellite providers are paying to media companies. In addition, distributors spend money on special promotions to woo subscribers from competitors. As a result, some companies’ expenses are rising faster than revenue.
That has prompted cable and satellite service providers to fight back against cost increases, even when it means blacking out channels until they can eke out a better deal. Satellite TV companies like Dish and DirecTV are in an even tighter squeeze than cable companies because they can’t make up for higher costs by providing Internet or phone service.
Major cable and satellite TV distributors DirecTV, Dish, Time Warner Cable, Cablevision and Charter have increased profitability over the last few years, but that’s tapered off, according to an Associated Press review of FactSet data.
Back in December 2009, they kept 15 cents of profit after subtracting operating expenses from every dollar of services they sold. That grew to 19 cents last September. But since, cable and satellite companies haven’t found a way to wring more profitability from their business.
Meanwhile, prominent media companies that produce and bankroll the shows _ Disney, Time Warner, News Corp., Viacom, Discovery, CBS and AMC _ have kept expanding their profit share. They grew operating profits from 16 cents to 19 cents per dollar over the same period. That kept climbing to 20 cents per dollar by March.
Media companies have posted gains in part by extracting higher fees from distributors in bare-knuckle contract negotiations. Those gains have come directly at the distributors’ expense.
To be sure, each company is different. Disney, for instance, has assets such as theme parks that skew the analysis.
But distributors are no longer enjoying a post-recession bounce. The media companies are. These diverging fortunes have coincided with an outsized revolt by distributors.
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