With the caveat that 15 years is a time horizon too great to yield meaningful projections, Jason Bazinet, Citi Research analyst believes linear video distributor profit margin could fall to zero in 15 years.
That would be quite a shock in an industry segment used to 37 percent profit margins , as estimated by consulting firm EY.
Cable networks like AMC Networks, Discovery and Starz are projected to be among the networks whose present margins are in the 37 percent range.
Cable operators had 41 percent margins by the end of 2014, but not on the strength of their video entertainment operations, it appears. Cable operator margins “continue to remain the highest” among media and entertainment sectors.
But the key is the “continued growth in high-margin data and business-to-business services.” It isn’t so clear how well linear video might fare, if more consumers abandon the service. Zero profit margins are a possibility, some claim.
By about 2020, smaller U.S. cable TV companies are going to experience zero profit margins on their linear video programming businesses, according to the American Cable Association.
Internet bandwidth, despite all worries about the “dumb pipe” implications, arguably is the highest-margin product most ISPs can sell. Mobile operators might also have relatively high profit margins on voice and messaging, but with low gross revenue in some cases, and declining gross revenue in other cases.
Only the high speed access product has both high gross revenue and high profit margins.
One issue is precisely how high profit margins might be, for various providers.
Smaller ISPs, as you would guess, tend to have lower margins than some tier-one ISPs. One study of smaller Australian and New Zealand ISPs estimates gross profit margin between 26 percent and 39 percent, for example, before adding in overhead and other costs not directly related to access, transit costs or backhaul.
Some might claim cable’s broadband gross margins are about 95 percent, versus 60 percent for video, according to Craig Moffett, Sanford C. Bernstein & Co. analyst.
That is not so. That figure by Moffett applies only “cost of goods sold” against revenue.
Moffett’s cost of goods sold takes into account only the day-to-day costs of running the network, as opposed to building it. In other words, COGS includes only out of pocket operating and marketing expenses, for example, not amortization of the network construction.
This produces gross profit margins that make cable companies’ profits look artificially high.
Net margins are another matter, since gross margin does not include all other overall and allocated costs.
Many estimates now suggest that net profit margin for video entertainment services now routinely are as low as 20 percent, where once net margins were about 40 percent. The same is true for broadband access, which estimates now suggest are about 40 percent, not the 97 percent “gross margin” figure.
Whatever you think the relevant percentages are, there is no question but that, for cable operators, Internet access bandwidth increasingly is more valuable than video entertainment bandwidth, as the profit margins are roughly double those of video entertainment service.
The point is that video distributors, in most cases, do not make profit margins higher than 20 percent, and the direction of change is lower. Competition, declining sales and higher marketing expense are among the reasons why profitability arguably is dropping.
So even if a 15-year time horizon is too far away to be meaningful, profit pressures are growing.