Americans love watching TV. TV-watching accounts for more than
half of a typical person's leisure time, according to the Bureau
of Labor Statistics. In fact, in recent years, surveys by Nielsen
have repeatedly shown that on average, Americans watch about 35
hours of TV each week! This rises to more than 50 hours per week
for senior citizens.
Considering the amount of time we spend glued to the TV, it's
no wonder cable and satellite firms make lots of money delivering
huge bundles of channels to our homes. Cable firms also have huge
revenue streams from providing Internet and phone services. As a
result, investing in cable and satellite can be very rewarding --
but the industry is not without its risks.
What is the cable and satellite industry?
Traditionally, cable and satellite have been the main conduits
for TV service in the U.S. and elsewhere. Cable systems were
originally built in the U.S. in the late 1940s and 1950s to
provide better quality TV service to people who could not get
good reception of free broadcast TV.
Cable operators typically offer TV, Internet, and home phone
service. Photo: The Motley Fool
Over time, cable systems began to offer programming that was
not available through free over-the-air broadcasts. For example,
Ted Turner created the TBS "superstation" in the 1970s, offering
programming from an independent Atlanta broadcast station to
cable subscribers nationwide.
Today, large collections of channels are packaged together for
sale to customers (although some premium TV channels are sold
separately). Most cable operators also offer Internet and home
The satellite industry sprang up later in a bid to break the
market dominance of cable firms. Satellite companies primarily
offer stand-alone TV service, although some also offer limited
How big is the cable and satellite industry?
Total annual revenue for the North American cable and
satellite industry as of 2013 was about $170 billion, according
to Bloomberg, and growing gradually. The vast majority of that
goes to cable companies, largely because they generally offer
high-speed Internet and phone service -- and sometimes other
services such as home security -- in addition to TV. .
Despite being a large industry by revenue, there are only a
few major players in the cable and satellite industry. Cable and
satellite firms enjoy huge economies of scale: the marginal costs
of adding new subscribers are relatively low compared to the
fixed costs necessary to operate a cable or satellite system.
This is because the cable and satellite infrastructure -- one
of the biggest expenses for cable and satellite companies -- is
already in place to deliver TV and other services to
How does the cable and satellite industry work?
Technologically, cable and satellite have significant
differences. Cable companies build wired ("cable") connections to
homes and businesses. They negotiate bulk deals with the owners
of TV channels to pay a set fee per subscriber for each channel.
The cable companies then package those channels into different
tiers of service at various price points. (More expensive
packages have more channels, particularly for sports.)
Cable companies can also transmit data over their wired
connections. This allows them to offer high-speed Internet and
voice services. Cable companies typically try to boost their
revenue and margins by signing up customers for combinations
of TV, Internet, and phone services..
Satellite companies offer TV service, competing with cable
providers. Photo: The Motley Fool
By contrast, satellite companies own (or lease space on)
communications satellites that orbit the Earth. These satellites
transmit TV signals that can be picked up by satellite dishes
that are installed on each customer's property. Like cable
companies, satellite companies negotiate deals with TV channel
owners to carry those channels as part of various TV
Satellite companies can also offer Internet service, but
satellite Internet tends to be slow and has high latency (a delay
in sending or receiving information) because of the long distance
between the satellite and the user. Satellite Internet is
improving, but it is still primarily used in remote areas where
wired broadband is unavailable or prohibitively expensive.
What are the drivers of the cable and satellite
Cable and satellite companies aren't immune to economic
conditions, but they tend to have fairly stable subscriber bases.
But the cable and satellite industry is being affected by secular
shifts in the market for TV and Internet services.
For cable companies, one significant long-term challenge is
"overbuilding." This challenge essentially amounts multiple
cables companies being able to provide service in a specific
geographical area, with each company having its own proprietary
cable lines. The result has been that most
maintain wired connections to most houses in the U.S. Over
the past decade or two, they have upgraded many of these
connections to support TV service and faster Internet
Cable operators refer to this entry of telecom companies into
the pay-TV market as overbuilding. The entry of a telecom
competitor into a new geographical market can often spark a price
war with the local cable company.
Meanwhile, satellite companies are being affected by the trend
toward bundling TV, Internet, and phone service into discounted
packages. Satellite companies today can only deliver TV service
efficiently. Sometimes they can partner with local telecom
companies to offer Internet and phone service -- other times they
have to compete on price alone.
The whole cable and satellite industry also faces a long-term
threat from the rise of subscription Internet video services. An
increasing number of people have found that they can find all the
video they want online, and are dropping their pay-TV service (or
never signing up in the first place).
For now, it's unclear whether millennials who have never
had pay-TV service will sign up for cable or satellite TV when
they get older. If cable and satellite TV service becomes less
ubiquitous in the future, then cable and satellite companies
could be in for a lot of pain.
Fortunately, cable companies are more diversified due to their
Internet, home phone, and other service offerings. As Internet TV
grows, people may trade up to more expensive, higher-speed
Internet connections. By contrast, satellite companies' fortunes
are tied much more to the health of the pay-TV market.
More from The Motley Fool:
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Cable and Satellite: Investing Essentials
originally appeared on Fool.com.
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