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A Desperate Move By Cable Companies That Could Turn Ugly

Two new deals inked this week prove that momentum for streaming video services continues to build…

  • Amazon just landed a contract with News Corp.’s (Nasdaq: NWS) 20th Century Fox, which boosts its instant video service by 22%.
  •  And Dreamworks Animation (Nasdaq: DWA) announced this week that it’s selling the rights to stream its current and upcoming movies to Netflix (Nasdaq: NFLX). This represents “the first time a major Hollywood studio has chosen an internet streaming player over a traditional cable channel,” according to Reuters.

That’s great news for consumers trying to save money by cutting the cord on cable. 

But not so great for cable companies like Comcast (Nasdaq: CMCSA) and Time Warner (NYSE: TWX), who just lost a combined 1.2 million subscribers. Ouch!

Based on recent news, it looks like some cable providers are finally buckling under the pressure. Because word has it that a number of companies are preparing to make an industry-altering (albeit deceptive) change to their pricing model.

Let me explain…

A La Carte Prices on the Way?

News broke this week that cable providers are planning to offer a new pricing structure for subscribers: a la carte.

Essentially, this would allow consumers to choose the stations they want to watch and ditch the ones they don’t. In theory, the move would slash your cable bill considerably.

So does this mean victory for cable subscribers everywhere? Not quite.

Cable providers aren’t just making the switch because their customers are rushing out the door.

They’re doing it to cut their own costs.

Programming costs for cable companies have jumped between 6% and 10% annually for the past 10 years. 

Consider: For a cable operator to broadcast Disney’s (NYSE: DIS) ESPN alone, it needs to shell out over $4 a month per subscriber, according to SNL Kagan.

Not to mention that cable and satellite providers now need to pay for “free” networks like ABC, CBS, NBC and Fox.

So giving consumers the ability to opt out of these channels allows them to keep costs down.

Of course, no matter the motives, the idea of saving money each month is likely to inspire some potential deserters to stick around. Heck, if they offered true a la carte pricing, I might even consider plugging back in.  

But like all good things, this sounds a little too good to be true…

Don’t Fall for the Cable “Bait and Switch”

According to Reuters, Craig Moffett, of Bernstein Research, warns that “allowing customers to choose any station they want in any package would be economically unfeasible for both the consumer and the cable company.”

Moffett adds that “it could be a la carte, but not as people imagine it now.”

In other words, customers could simply end up with lower priced bundles instead of true pick-your-own-channel pricing.

I’m sorry, but when you’re promising an a la carte product, a discount isn’t going to cut it.

IT World’s Kevin Fogarty takes things one step further. He calls the plan a “bait-and-switch” strategy by the cable companies. As he puts it, the cable providers “want to be able to cut some of the channels that are now part of their normal packages and turn those into Premium channels, like HBO or Starz, for which customers have to pay extra.”

Like Moffett says, “With this many people living below the poverty line, and household incomes steadily decreasing, you can expect TV bills to be one of the first things to go. What are die-hard football fans supposed to do… [when choosing between] having a third meal or watching the game?”

Maybe I’m not a big enough football fan, but dinner wins in my book.

Bottom line: I’m convinced that this announcement is simply a way for cable providers to keep their subscriber base from falling off a cliff in the short term. But if they don’t deliver on the promise, and consumers realize they won’t be saving as much as they hoped, losing 1.2 million subscribers will be just the beginning.

Good investing,

Justin Fritz

Justin Fritz

, Executive Editor

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