How The Pay-TV Business Keeps People Hooked

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Glenn Britt Time Warner Cable

AP

From left to right: "Weeds" actor Justin Kirk, Time Warner CEO Glenn Britt, Showtime CEO Matt Blank, "Nurse Jackie" actor Peter Facinelli

The pay-TV business is finally starting to show some cracks in its facade.

In the last twelve months, pay-TV lost 80,000 subscribers. This is the first loss of its kind, and it can be partially attributed to the rise of the web.

While this could be the start of the end of the pay-TV business, it won't mean the collapse of the traditional TV industry. The traditional TV businesses — cable, satellite, TV show producers — have created a number of ways to defend their turf even as competition heats up.

Bloomberg recently reported Time Warner Cable is actively trying to stop media companies from licensing content to web-based TV alternatives, c ompanies like Intel, Google, Microsoft, and Apple who have all kicked around trying to do their own version of TV.

Time Warner Cable, the second biggest cable company in the country, doesn't want to see that happen.

Rightfully so, since it generated $2.67 billion in revenue from its residential customers last quarter. That's close to half of its total revenue for the quarter, which was $5.5 billion. It also had $661 million in free cash flow.

With money like that, it's naturally going to be willing to spend a little extra to keep content away from companies like Intel, which is working on its own cable alternative. For some context, Intel reportedly burned through $100 million in six months just working on its own version of pay-TV. And that's before it nailed down key agreements with content companies.

While Intel has a plenty of money to spend — it had first quarter revenue of $12.6 billion and earned $4.3 billion in cash from its operations — its investors aren't going to let it waste hundreds of millions trying to go into an entirely new business like pay-TV.

Other tech companies have been skittish to enter the TV fray. They see a low-margin business that's deeply entrenched.

So, smaller companies like Aereo are trying to take on the big boys.

Aereo is a startup funded by billionaire Barry Diller. Diller, by the way, got his start at Fox. Aereo wants to sell you broadcast TV via the Internet for $12 a month. Aereo has raised $63 million in funding, and presumably a big chunk of that has gone to lawyers. Because since it launched, Aereo has been sued by companies like CBS, whose broadcast signals it's sending to users.

Broadcast signals are free with bunny ears, but when Aereo sends it through the web to users and charges, broadcast companies think it's stealing.

"I think Aereo is wrong, it is illegal, and it is opportunistic piracy," Anne Sweeney, president of ABC television, said. "It's taking advantage of our content, of our creative community, and using it for their own gain. That's why we're prosecuting it, and we will continue to do so."

Whether the lawsuits work or not remains to be seen. In the meanwhile, ABC is doing something much smarter to kill Aereo. It's offering its own competitive service.

As long as you have a cable subscription (and live in New York or Philadelphia), you can get a stream of ABC on your iPhone or iPad. ABC is owned by Disney. Disney also owns ESPN, which offers the same service.

In this way, cable companies and content providers are working together to offer users a better product to keep them hooked into cable subscriptions.

But, there are those undeniable cracks in the pay-TV business. What happens as they get bigger?

Cable companies have a back-up plan — broadband Internet.

Time Warner Cable generated $1.4 billion in high-speed residential data services last quarter. That was up 17% compared to the video revenue, which was down 1.5% on a year-over-year basis.

If things were to truly collapse for Time Warner Cable, and all of its users dropped video for services like Aereo, or Netflix, then you can bet the price of high-speed Internet will go through the roof.

As for the content companies that make lots of money from Time Warner Cable ... They would probably find plenty of money from services like Netflix.

Netflix, which was once seen as a threat to the traditional TV business, is increasingly just another player in the game.

It is reportedly paying $4 million an episode to produce original TV shows to compete with HBO and Showtime. For now, Netflix can keep its subscription fee low. But if it continues to invest in original content, then there's a chance it would have to raise its rates.

And at that point, a consumer who would consider something like Netflix plus Aereo to replace traditional pay TV would look at an inflated Internet bill and ask, "Is this worth it?" 

So, yes, there are some cracks in the traditional pay-TV business. But, cable companies are working to keep you hooked, and keep its competition from ever even entering the industry. 



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