John McCain may be better known for beating war drums, but he’s now taking on the cable industry. His complaint? High cost cable services are the direct result of a bundled service. He wants to push the industry to move to an a la carte model where consumers can pick and choose the channels to which they want to subscribe.
He believes such a solution would result in lower cable bills.
McCain’s proposal does little for consumers, less for cable companies
The Senator’s biggest beef is with ESPN, a sports channel operator known for extracting some of the highest subscription fees in the business. John McCain’s source, a 2012 Newsweek article, cites a figure of $4.69 per month per customer.
McCain says that this price is too high. Many cable subscribers have little to no interest in sports, yet spend $4.69 per month on a cable channel they do not watch. He prefers a system where cable subscribers pay only for the channels they wish to subscribe to.
However, let’s take a look at the simple economics of the business. Whereas ESPN may take in $4.69 per month from millions of subscribers with no interest in watching sports, it also takes in the same money from people who do enjoy it – people who would likely pay $10 or even $15 per month to get sports programming.
Certainly, there are millions of beer-belly toting men in this world who would be happy to pay more for ESPN if they didn’t have to pay for Lifetime, or O, channels that are geared toward women.
Why content creators won’t lose even if this bill passes
Premium content producers won’t lose from an a la carte transformation. The Walt Disney Company (NYSE:DIS) owns 80% of ESPN, which some analysts say justifies half the company’s valuation. Its focus on sports, leadership in the space, and history of delivering high-quality content will keep it in millions of homes, even if it has to up its subscription fees to meet current revenue numbers.
Likewise, a company like Time Warner Inc (NYSE:TWX), which owns the second most valuable property, TNT, which earns $1.16 per cable subscriber, would likely find no difficulty in justifying a higher price per subscriber while tolerating a smaller base of subscribers. Those who want high-quality news will likely continue to pay for CNN, another Time Warner Inc (NYSE:TWX) channel.
The firms that will lose the most are those at the margin – the cable channels that simply allow for better marketing in that a cable company can claim 1000 channels instead of 100. Let’s be honest: few people watch even 10% of the cable channels they have on their TV.
The biggest loser, though, would be internet TV companies like Netflix, Inc. (NASDAQ:NFLX). Much of the draw to Netflix, Inc. (NASDAQ:NFLX) is that customers can receive a low cost “cable” subscription and have access to thousands of streaming movies and TV shows. For those who subscribe to Netflix, Inc. (NASDAQ:NFLX) for only one or two shows, a la carte cable would effectively displace the draw for Netflix, Inc. (NASDAQ:NFLX).
In contrast, a la carte cable could be a boon for Amazon.com, Inc. (NASDAQ:AMZN), which sells individual episodes of very popular shows online. Rather than pay each and every month for a full channel just to access a single show on a network, Amazon.com, Inc. (NASDAQ:AMZN)’s instant, no-advertising, pay per view model looks much more attractive.
Media isn’t going anywhere
I’ve identified several content creators that are trading cheaply, and investing significantly in their own stock. Content creators are leading a buyback binge, purchasing their own stock at multiples lower than the broad market.
Content creators will continue to hold economic power regardless of the subscription method. Premium operators like Time Warner Inc (NYSE:TWX) and The Walt Disney Commpany (NYSE:DIS) would likely have more to gain than to lose from an a la carte cable model.
The power is in the hands of the high-quality cable operators. McCain’s legislation would be a boon, not a bust, for the biggest cable companies.
The article McCain’s A La Carte Cable Will Make Content Creators Richer originally appeared on Fool.com and is written by Jordan Wathen.
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