Needham & Co: Unbundling Cable Could Cost Industry Billions

NEW YORK: A new report from Needham & Co media analyst Laura Martin outlines the economic consequences of unbundling pay TV and assesses that à la carte pricing could result in up to $113 million in lost value and cost 1.4 million jobs.

The report estimates that for every $1 paid by consumers to fund content creation, advertisers pay $1.24. This implies that programming is twice as good (or plentiful) as it would be without ad revenue. Unbundling would then make many channels “sub-scale” and would require higher consumer payments to offset the cuts in ad revenue, according to the report.

Based on average wage and TV viewing data, the firm estimates that consumers are paying around 3 percent of what their TV-viewing time is actually worth to them. The average TV household watches around 4,400 hours of TV per year and pays about $720 annually. This $0.16 per hour of TV viewing that consumers pay is a 97 percent discount to the average value of an hour of consumers’ time, based on their average earnings power.

Providing an estimated cost of around $280 million annually to run an entertainment cable channel, Needham & Co says that an average of 165,000 viewers over an entire year are needed to break even. Based on 2012 viewing levels, about 56 channels would survive and 124 channels would disappear from unbundling. “Our calculations conclude that $80 billion to $113 billion of U.S. consumer value would be destroyed by this shrinking channel choice,” said Martin.

Also, 90 percent of total U.S. households pay to receive up to 180 TV channels. Paying homes rise as the bundle size grows because, the firm believes, a household subscribes only after there are 16 to 20 channels they want to watch. This conclusion is based on the facts that average channels viewed have remained constant at 18 for the past several years, while channel choices and multichannel penetration levels have risen.

Since the U.S. has the largest TV ecosystem funded predominantly by public capital markets, rather than the government, "the direct value destruction to consumers is compounded by millions of jobs lost and billions of lost debt and equity investment value," argues Martin. "In addition, tax rates on consumers would have to rise to offset falling taxes paid by companies within a shrinking TV ecosystem."

Martin concludes: "Because consumers lose so much value through unbundling, we expect no policy change in the U.S. All content companies benefit from TV bundling, as well as from new digital platforms that are driving record free cash flows from content creation globally."