Robert Gessner, president of MCTV: “When you consider how the costs of a cable TV network and basic cable TV programming have changed, it is clear that the network cost has increased by slightly less than the rate of inflation and programming cost has increased by about five times inflation.”
Programming Costs Drive Cable Bills Higher
No one disputes that retail cable rates have gone up considerably over the years. But who is primarily responsible, the cable operators or their broadcast and cable programming content suppliers?
Is there an empirical way to show how the two elements of multichannel video programming distributor (MVPD) service have changed over time? I think there is. And the evidence clearly shows that the content side has raised its prices far in excess of inflation, creating a cable affordability crisis that likely explains why millions have flocked to such low-cost, over-the-top services as Netflix and Hulu.
Let’s go back in time, setting our sights on the distant past of 1979. I use 1979 as my price index start year because it is, for most consumers, the last year cable TV service included zero programming cost.
In 1979, virtually all cable TV channels were local broadcast TV stations. Almost the entire cable bill was for the wires, people, trucks, gas, electricity, electronics, buildings and all the other things required to build and operate the network. There were a few distant TV signals that caused some common carrier fees and a few pennies per customer for copyright.
In 1979, the consumer cost for typical 12-channel cable TV service was about $7.75. So, let’s say $7.60 for network and $0.15 for content.
Now, fast-forward to 2014. The consumer cost for typical 100-channel Basic Cable service is about $68 (excluding equipment, premium channels, etc.). The cost of the programming is easy to calculate. The programming for a typical 100-channel TV offering costs about $44 a month. Everything else (about $24) is for the network.
Now, we know two sets of facts. In 1979, the network cost $7.60 and content cost $0.15. In 2014, the network costs $24 and the content costs $44. Knowing those two fact sets enables us to calculate the compound annual growth rate (CAGR) for both and compare.
Using the standard CAGR computation, the cost of the network has increased by an average of 3.34% per year. The cost for program content has increased by an average of 17.62% per year.
Now, before you start sputtering about quality, quantity and such, let’s consider how both elements have changed. The content has changed significantly. A hundred new TV networks have joined the dozen over-the-air TV channels. Quality has been improved with color, high definition and 5.1 audio. Consumers are served with niche networks, special feeds for time zones, foreign languages, closed captioning, radar and helicopters. The program content is available 24 hours a day. And new technology is providing video on demand, TV Everywhere, streaming TV and more.
The network has changed significantly, too. Capacity has increased from 216 MHz to 1,000 MHz. It is more robust and reliable because of fiber optic cable and small service groups. The cable, hardware and electronics have been replaced at least twice. Call centers, customer service centers and emergency service technicians are available around the clock, and these people are better trained.
Cable TV service has progressed beyond Basic to include more than 350 TV channels and incorporated the same enhancements for color, HDTV, 5.1 audio, VOD, TV Everywhere and streaming TV, and added other technical improvements, like whole home DVRs. While I am addressing only basic cable TV, the network also now includes high-speed Internet and phone service.
Clearly, both the network owners and content providers can claim their product has improved significantly over the years. But, that’s not the point. The question still is which of the two elements is contributing more to the increase in consumer cost. It is clear from this analysis that the cost of the network has risen by about 3.3% per year for the past 35 years, adding about $16 per month overall. Program content has risen by about 17.6% per year during that same period, adding almost $44/month overall.
Finally, let’s consider how the data compare with the U.S. Consumer Price Index. The CPI was 68.3 in January 1979 and 233.92 in January 2014. Using the same CAGR computation, the U.S. CPI has grown by 3.58% per year for the past 35 years.
The answer is obvious. When you consider how the costs of a cable TV network and basic cable TV programming have changed, it is clear that the network cost has increased by slightly less than the rate of inflation and programming cost has increased by about five times inflation.
I am not making any claims about the relative merits of the network or the programming — that’s apples and oranges. Each has progressed and improved in its own way, with each bringing its respective benefits (and cost) to consumers.
However, it is very, very clear that the cost of programming has increased far faster than the cost of the network and is contributing more to the increase in consumer prices.
Robert Gessner is president of MCTV, an Ohio-based MVPD serving the Massillon area for 48 years.