The Achilles Heel of the Cable Networks

In Betting Against the Cable Bundle, Emily Steel captures some of the fault lines that exist in today’s mass media ecosystem.

A cable TV provider, Suddenlink Communications, is in a dispute with Viacom, the media conglomerate that owns several cable networks, including MTV, Nickelodeon and Comedy Central. Viacom wants more money for its channels. Suddenlink has said no and for six months its subscribers have had no access to all of Viacom’s myriad channels.

Of course, each side has publicly argued that they have been wronged.

While the details of the dispute are interesting, what is most fascinating is the real world impact of the dispute. As pointed out by Steel,

“Viacom networks were removed from Suddenlink’s offerings on Oct. 1. During the following three-month period, the cable company lost a total of 32,600 video customers — about four times the 8,600 video customers it lost during the same period a year earlier.”

At first glance, this doesn’t look good for Suddenlink, the seventh-largest cable operator in the United States with about 1.4 million customers.

Yet, if you look more closely, the picture improves.

“But most customers who dropped the video service because of the dispute with Viacom continued to pay for Internet and other services, with Suddenlink retaining 99.7 percent of its customer relationships, the company said. Net income for the quarter was $7.1 million, up 65 percent from the same period the previous year.”

While some people stopped paying for the pay TV (or video) side of their bill, they continued to pay for broadband Internet access.

The broadband side of the cable business is much more profitable than the pay TV side. Here, the cable company does not have to pay for any content. All it has to do is provide a fast, dumb pipe through which content flows. And

“Unlike the video business, where customers can switch to satellite and other offerings, cable companies can have an advantage in the broadband arena, because there is less competition for selling Internet service in the markets where they operate…”

Most cable companies are the only company in your town or city that provides broadband. Nothing better than monopoly status combined with low cost. You add the two together and you get high profit margins.

Some smaller cable companies are beginning to realize that they do not have to pay whatever the cable networks demand from them. They can refuse to pony up and still maintain a loyal customer base—for their broadband service.

And by doing so, have an even more profitable business.

The only question is, when will the larger cable companies follow suit?

Will the Achilles Heel of the cable networks be finally revealed?