Cable's Conundrum: Why Charging More Doesn't Work

Paul Davis

Cable companies are really struggling.

I'll start by sharing my own experience. Earlier this week, I received a letter from Time Warner informing me that my next cable bill would include a 17% rate hike. They tried to put a positive spin on the increase; the bill could have gone up by 41%.

I was so excited about my "great new rate," as the cable company's letter put it, that I finally decided to call Time Warner and cancel my cable altogether. Talk about great monthly savings!

I'm not alone. Based on data from SNL Kagan, a research firm in Charlottesville, Va., roughly 7.4 million people scrapped cable between 2007 and 2011. Cable operators, desperately in need of revenue, have responded by jacking up rates.

Over the same 2007-2011 period, residential revenue for cable companies increased by an average of 4% annually. Monthly revenue per customer, which I will loosely compare to an average bill, went from $63 in 2007 to $82 in 2011. 

Charging loyal customers more to make up for defections is a ill-advised strategy. Cable companies are attempting to add more products and services, but they are continuously losing ground to Internet sites, Netflix, etc. They are in danger of becoming as obsolete as Blockbuster.

I decided to crunch some numbers for the cable industry, using SNL Kagan's 2000-2011 data as a guide. Over that period, cable customers defected at a 1% average annual rate, with defections accelerating in the last few years. Using that number, along with the average rate hikes I mentioned earlier, I built a chart showing what the cable model would look like if those changes were constant:

The cable industry's revenue model looks quite precarious over the next decade.

If the cable industry fails to rethink its business model, monthly rates would have to top $160 by 2022 in order for operators to maintain the same revenue trajectory of recent years. My research also indicates that these retention numbers are generous; in the last decade each $1 rise in monthly rates has correlated with the defection of roughly 250,000 customers. So defections would likely accelerate even more in the next decade.

The cable model is clearly unsustainable and in need up an upgrade. Promotional rates are no longer a solution. Digital options and shows on demand are nice, but people will reach a point where they are unwilling to pay up for those types of services. Cable companies will have to find a way to provide more services as a free added value or reduce overhead.

The only real way to retain customers is to keep rates in check, and that just isn't happening. The good news for me is that I will likely spend more time blogging and less time watching senseless cable programming!