An internet television revolution is sweeping across America! HBO will finally begin selling a standalone streaming service next year. CBS just launched an internet service of its own, allowing access to all of its shows—like Big Bang Theory and CSI, but not NFL games—on the web. Some pundits believe the cable industry is on its last legs. Or at least that the cable bundle, which forces people to pay for lots of channels they don’t ever watch, is dying.
Well, yes and no.
Take the new CBS service. As RBC Capital Markets explained this morning: “We don’t think there will be huge demand for this product on a standalone basis, but that’s probably not the point.” The point, it argues, is enabling CBS to get more in “retransmission” and digital fees, which are paid by cable companies (and telecom/satellite pay TV operators) to broadcasters for the rights to carry channels in their packages (and their own “TV everywhere” offerings).
At the moment, RBC estimates that CBS is getting $2 per subscriber from cable companies in “retrans” fees. The new service will cost $6 a month. If it gains any traction, CBS will have more leverage with the cable companies next time retrans negotiations come around.
Remember, barely a year ago, CBS was engaged in a monthlong standoff with Time Warner Cable over retrans fees. Time Warner Cable (or Comcast, Dish, etc) won’t be able to use that threat anymore, since CBS shows are now available through the web service.
Here’s RBC explaining the CBS plan again:
[W]e think this initiative is less about building a business of selling standalone subscriptions for $6/sub, but rather, driving the retrans fee to closer to $3/sub
HBO’s Go-It-Alone product is also, at least partly, about leverage with cable companies. The company admits it. As CEO Richard Plepler said this week at parent company Time Warner’s investor day (hat tip to Re/Code’s Peter Kafka). “Just the threat of going [over the top] gives us added leverage.”
From a Time Warner investor perspective, the big news this week was not Go-It-Alone, but actually HBO’s plan to better monetize its “non-revenue generating subscribers.” Under existing deals, once cable companies surpass a given level of HBO subscribers, they get to keep all of the revenue from additional customers. Now, armed with the threat of a rival internet service, HBO will look to restructure those agreements to keep more of this money, and according to Barclays, it could generate up to $270 million in extra operating income by doing so.
There’s a distinct possibility that consumers with broad tastes will be spending as much on content in an internet world (across myriad services) as they did under the cable bundle paradigm. And far from being at risk, cable companies, which are rapidly morphing into infrastructure-based broadband businesses, will be just fine. In short, the internet TV revolution is as much about satisfying consumer preferences as it is about entrenching, and strengthening existing businesses. Consumers might not be the biggest winners, after all.