The Fastest-Growing Cost for Cable Companies

Getty Images Cable Tv Watching
Image Source: Getty Images

Cable TV prices keep going up, but cable companies may not be entirely to blame. A big part of what determines the price consumers pay for TV is how much media companies -- the network owners -- charge distributors for their channels.

And those costs are increasing quickly. Comcast 's(NASDAQ: CMCSA) programming expense, to cite one example, increased 8.4% in the first half of the year and the company said it expects programming expenses to continue to increase."

But one group of media companies are increasing their prices at an outstanding pace. The average cable system paid traditional broadcasters -- CBS (NYSE: CBS) , Twenty-First Century Fox (NASDAQ: FOX) , Disney 's(NYSE: DIS) ABC, and Comcast's NBC -- 63% more in retransmission fees during 2014 as compared to the previous year, according to a recent FCC report . And the spike didn't end there. Analysts expect retransmission fees to increase faster than they had originally projected through the rest of the decade.

A brand-new revenue stream for broadcasters

Most broadcasters have only started ramping up their retransmission fees in the last decade or so. For example, when Comcast took over the broadcaster in 2009, NBCUniversal CEO Steve Burke said it had practically $0 in retransmission revenue. It's since grown it into an $800 million revenue stream.

CBS grew retransmission and reverse-compensation fees from its affiliate broadcaster 44% this year, and it expects to bring in over $1 billion. ABC is growing its revenue faster than Disney's strong catalog of cable networks.  And Fox increased retransmission revenue 20% through the first nine months of fiscal 2016.

Broadcasters are still in the relatively early days of growing revenue from retransmission consent fees, so the growth is still strong. Total retransmission fees are expected to hit $7.7 billion this year, according to SNL Kagan analysts. Still, that represents just a fraction of total programming expenses for distributors like Comcast despite the fact that broadcast networks make up the majority of total viewing hours.

But there's a lot more growth ahead still

CBS expects to grow its retransmission revenue about 150% by 2020, to $2.5 billion. Fox CFO John Nallen told anlaysts at the MoffetNathanson Media & Communications Summit earlier this year, "We've got great confidence in retrans continuing to rise." NBCU CEO Steve Burke had similar sentiments at the Bank of America Merrill Lynch Media, Communications, and Entertainment Conference.

Overall, SNL Kagan expects retransmission fees to climb 38% by 2020 to $10.6 billion. That's up from its original 2020 expectation of $9.3 billion, which it forecast in 2014. And with high expectations for growth from all the major broadcasters, that number may need to be revised yet again.

What it all means for investors

Retransmission fees represent a high-margin source of revenue for broadcasters. CBS CEO Les Moonves said, "These are dollars that fall straight to the bottom line," during the company's second-quarter earnings call last year. That should result in strong increases in operating income for the broadcast television segments of CBS, Disney, Comcast, and Fox.

For distributors, it means there are still significant increases in programming expenses yet to come. With consumers ever more conscious of the price of cable (especially compared to some of the cord-cutting alternatives), raising prices every year is increasingly difficult. That's exemplified by the faster increase in programming expenses versus consumer pricing.

Comcast has taken to separating out retransmission fees on customers' bills, allowing it to advertise lower overall prices. Even so, video subscriber revenue increased just 3.3% through the first six months of 2016.

As the trend continues, traditional distributors will feel more pressure on their operating margins, and may look to increase extraneous fees. It will be a tough balance between raising prices and keeping subscribers from leaving.

Still, there comes a point when broadcasters can't continue raising their prices without experiencing declines in subscribers that outweigh the retransmission fee increase -- but they (and analysts) seem to think that's still a long way away.

A secret billion-dollar stock opportunity
The world's biggest tech company forgot to show you something, but a few Wall Street analysts and the Fool didn't miss a beat: There's a small company that's powering their brand-new gadgets and the coming revolution in technology. And we think its stock price has nearly unlimited room to run for early in-the-know investors! To be one of them, just click here .

Adam Levy has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Walt Disney. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Personal Finance , Stocks
Referenced Symbols: DIS , FOX , CBS , CMCSA

More from Motley Fool


Motley Fool

Motley Fool

Market News, Investing
Follow on:

Research Brokers before you trade

Want to trade FX?

Find a Credit Card

Select a credit card product by:
Select an offer:
Data Provided by