Founded in 2010

News & Entertainment for Mason City, Clear Lake & the Entire North Iowa Region

Soaring costs change the economics of cable TV

By Meg James, Los Angeles Times

LOS ANGELES — Cable television networks may be the most lucrative divisions of many large media companies, but the networks are beginning to feel the pinch of dramatically higher programming costs.

In 2006, TV sports giant ESPN spent $3.5 billion on programming for its flagship channel. This year, the channel’s content costs have mushroomed to $5.2 billion — a nearly 50 percent jump from five years ago, according to consulting firm SNL Kagan.

Programming expenses for Time Warner Inc.’s TNT channel have soared 55 percent since 2006 to $1.1 billion this year, propelled by sports rights fees for NBA and NCAA basketball as well as a lineup of original dramas including “The Closer” and “Falling Skies.” History Channel, which previously concentrated on history documentaries, has seen its programming costs increase by more than 50 percent to $283.5 million this year from 2006. It is now a top-five cable channel with gritty reality shows including “Pawn Stars” and “American Pickers.”

Inflation in programming costs is the new reality for cable networks. No longer able to simply stock their channels with reruns of “Seinfeld,” “Golden Girls” and old movies, cable programmers have ratcheted up spending in the past five years to distinguish themselves with marquee franchises such as ESPN’s “Monday Night Football” or provocative original shows including AMC’s “Mad Men” and FX’s “Sons of Anarchy.”

But while the spending increases are staggering, cable channels remain the most profitable divisions of many media conglomerates, including Walt Disney Co., NBCUniversal, News Corp. and Time Warner.

ESPN, for example, is Disney’s biggest profit engine, and News Corp.’s cable channels deliver more than half of that company’s operating income. Viacom Inc.’s children’s network, Nickelodeon, has the industry’s highest cash flow margin — a measure of how efficiently a company converts its sales dollars to cash — at nearly 65 percent, SNL Kagan’s report found. The margin for financial news network CNBC approaches 60 percent.

“Even during the recession these cable networks have done surprisingly well,” said SNL Kagan senior media analyst Derek Baine. “These channels are trying to poach viewers from the broadcast networks. And the way to do that is to invest in high-profile programming.”

Cable TV networks collectively spent $20 billion in content costs last year, according to SNL Kagan’s recent report. In the past five years, programming expenses industrywide have increased at an annual rate of nearly 9 percent.

The networks that televise marquee sports, including ESPN, TNT and TBS, have set the pace for the galloping costs.

Programming expenses for Comcast Corp.’s sports channel Versus have expanded 120 percent from 2006 levels, in large part because of a recent $200-million-a-year deal with the National Hockey League.

ESPN’s programming expenses soon will soar even more. In two years, ESPN will begin paying the National Football League $1.9 billion a year for professional football — a 72 percent increase over the network’s current fee. That’s part of the reason ESPN, with its pricey lineup of sports properties, has a lower cash-flow margin of about 25 percent.

The media industry is bracing for the next big hit as CBS, Fox and NBC negotiate their new NFL deals, contracts that could cost each network as much as $1 billion a year — a 60 percent increase over the current agreements.

General entertainment and news channels — including Nickelodeon, Disney Channel, History Channel and Fox News Channel — also have experienced huge inflation in programming costs.

So far, rising costs have been offset by rising returns. In the past decade, cable networks have increased their advertising revenue an average of 9 percent a year, according to SNL Kagan, which reported that annual programming expenses in the past five years have risen at the same rate.

Last year, cable networks collected $22.3 billion in ad revenue and nearly $25 billion in fees from their affiliates and cable and satellite television operators such as Time Warner Cable and DirecTV.

That brought cable networks’ total revenue in 2010 to nearly $48 billion.

But Wall Street is concerned that the media industry will be unable to sustain its high margins. Last month, Nomura Equity Research downgraded the entire U.S. media sector to “neutral” from “bullish.”

Some major cable TV channels, including TBS and Nickelodeon, have experienced lower ratings this year despite the increased investment in programming.

Another worrisome trend: home construction, which can mean new cable households, is down since the recession.
Competition has been increasing too. Telecommunication providers such as AT&T and Verizon offer bundles of TV channels along with phone and high-speed Internet service. Netflix, and Hulu provide TV shows for free or through a subscription that is a fraction of the cost of a monthly cable bill.

“Cable networks are more challenged than they have been in the last five to 10 years,” said Michael Nathanson, a prominent media analyst with Nomura. “You have these rising programming costs, and the other core issue is that there are fewer new TV households being formed.”

That may mean that viewers at home will end up paying more to keep cable companies profitable.

“Consumers have been getting the short end of the stick because there has been little effective competition in the cable industry,” said Corie Wright, an attorney for the Washington-based consumer advocacy group Free Press.

Noting that cable companies have, since 1996, increased cable TV prices at twice the rate of inflation, Wright said, “They are going to have to see the writing on the wall and give people more choices instead of continuing to pile on all the channels and services that people don’t want and can’t afford.”

©2011 the Los Angeles Times

Inline Feedbacks
View all comments

Even more news:

Copyright 2024 – Internet Marketing Pros. of Iowa, Inc.
Would love your thoughts, please comment.x