Video’s Wounding (but not yet killing) the Pay TV Model

When MTV played the Buggles’ “Video Killed the Radio Star” in 1981 it launched a new era of pay television. Cable TV was no longer Community Antenna TV (CATV); now there were—or soon would be—as Bruce Springsteen put it, “57 channels and nothin’ on.”

Today there’s a music video channel for any taste. Dozens, perhaps hundreds, of local, regional and national sports nets have joined pioneer ESPN – presenting everything from college basketball to rodeo. And “Superstation” WTBS has been joined on the channel lineup by a seemingly unending bevy of other specialty channels all vying for the consumer eye and, importantly, the service provider dollar.

At this time of the year, perhaps more than any other, the cost of all this content bubbles to the surface. Multichannel Video Programming Distributors (MVPDs) whine in their beer mugs about ever-spiraling content costs while announcing their latest rounds of “pass-through” rate increases to cover those costs so they won’t impact bottom line revenue figures that continue to climb.

One would think that push coming to shove — ever-increasing prices for Pay TV during a never-ending economic slump — would foment a video death spiral for an industry threatened by over-the-top “free TV.” However, looking at cable’s competitors paints a different picture. Verizon FiOS, AT&T U-verse, and old competitors like DirecTV keep adding subscribers and even the MSOs appear to be staunching the flow. From the look of 2011 subscriber numbers now being announced, no one’s leaving the pay TV universe; they’re just moving to a different neighborhood. In fact, the total number of video subscribers among the top level of MVPDs has actually increased over the last 24 months.

Still, when the biggest pay TV provider, Comcast, predicts that retransmission fees will be in high single digit percentages in 2012 and the second biggest provider, DirecTV, concurs, it looks like video cost is wounding, if not killing, the pay TV business.

It’s not as if this is something new. Every year someone suggests that pay TV is dead, that subscribers won’t open their checkbooks every month when the MVPDs come asking for more; and every year more subscribers sidle up to lay down their dollars and cents.

For their part, the MVPDs take any potential subscriber revolt seriously and have devised multiple ways to try to contain the costs. The latest trend is to try to lock in long-term retransmission deals with major programmers and stress the value of double and triple play bundles as subscriber bargains that, not coincidentally, mask ongoing video costs among charges for broadband data, voice and, not to be forgotten, taxes and transmission fees. Only an accountant can truly love a cable bill. Of course, the best way to sugarcoat a rate increase is to deliver a package of video content that people want to watch.

So far, at least, while they might be fingers in a dam about to burst, it looks as if the MVPDs are staunching the subscriber floodgates. Comcast still lost 18,000 subscribers in the fourth quarter but that was only a sliver of the 125,000 subs that fled in the third and execs are confident things will be even better in 2012. AT&T U-verse pulled in 208,000 new video subs while Verizon gained 200,000 and even satellite provider DirecTV tacked on 125,000. A good package of programming and, importantly for cable, good customer service keeps subscribers queuing up to the pay window.

Still, maybe it’s just the time of the year, but it seems like the Buggles might want to start tuning up for a new take on an old tune: “Video Killed the Pay TV model” … because every year costs get a little higher, subscribers get a little angrier and other, outside-the-box options for getting content get a little better.