Tuesday, August 18, 2015

Video Rate Increases are Nearing a Potential Death Spiral

Annual increases in linear video subscription prices are routine. Virtually every year, video distributors raise rates, citing higher programming contract costs.

For many decades, that worked. The problem now is that consumers are showing resistance to buying the product. That creates a different dynamic.

Increasingly, higher prices drive more customers away, raising the overhead to be borne by fewer remaining customers. That is, in microcosm, the whole problem with dwindling customers for every traditional product sold on fixed networks.

There are, every year it seems, fewer customers to carry all of the overhead of the whole business. Sooner or later, unchecked, that becomes a death spiral.

The video subscription business, for most small providers, is nearing such a danger point.

WideOpenWest  programming costs for the first quarter were up sequentially by 9.8 percent on a per basic subscriber standpoint, the company said. On a year-over-year basis, programming costs climbed 15.2 percent over the first quarter of 2014 on a per customer basis, for example.

The interesting conundrum shaping up is that, as economics would suggest, buyers respond to price hikes by buying less. So, one might argue, every price hike drives incrementally more subscribers to disconnect.

Up to a point, suppliers will behave rationally by hiking prices, to maintain gross revenue in the face of unit declines. That works so long as key competitors also raise their prices, and so long as viable substitute products do not arise.

The former might well be the case. The latter almost certainly will not be the case.

The difficulties arguably are highest for small distributors. WideOpenWest, for example,  “saw an overall decline in subscribers and RGUs” in the first quarter of 2015.

Total customers were down about 9,900, while total revenue generating units were down about 54,000. Some 28,000 of those losses came from subscription video units.

WideOpenWest video average revenue per user increased 15 percent year over year, for example. Prices up, subscribers down, just shy of covering the increased programming costs.

For most--if not all small linear video providers--profit margin is the issue. That has been true even for the largest telcos, such as Verizon and AT&T. That is one reason--not the only reason--why AT&T acquired DirecTV.  

On top of that, most small telcos have a tough time eking out a profit under the best of circumstances.

The point is that the strategy of raising video subscription prices already is becoming counterproductive.

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