Sunday, January 02, 2011

Pay more, get less

Two stories broke late last year that were seemingly unrelated, but in fact are closely related once you think about them. Last November, industry research company SNL Kagan announced that in Q3 2010, U.S. cable subscribers declined by their greatest amount, 741,000, since Kagan first started tracking the industry in 1980. Even with subscriber increases for IPTV and satellite television providers, the multichannel video provider industry as a whole lost 119,000 subscribers.

Cable prices have been going up for years, and IPTV prices, which had been kept lower than cable to provide an incentive for cable subscribers to switch, have also begun to rise. Plans by Time Warner Cable to increase its rates in 2011 first leaked in late November, and after a 2010 rate increase in most markets, Comcast announced late last year that it will raise rates again in 2011, by an average of 4.6%. On December 29th, AT&T announced that it would increase rates in 2011 for its U-Verse IPTV service from 2.4% to 10.2%, effective February 1, 2011.

Now, let's turn to another business--motion pictures. On December 29th, projected that total theatrical ticket sales revenues would be slightly lower than last year, but that the number of tickets sold would be down by 5.36%, the second-biggest drop in the decade. The only reason that revenues were as good as they were was the inflated price of 3-D tickets. According to the Los Angeles Times, 8% of ticket revenues in 2010, or $850 million, came from the $3 to $4 premium charged for 3D tickets. Without that premium, revenues would also have been down more than 8% year-over-year. Like the cable industry, ticket prices have been going up for years, and attendance has been in a long-term decline.

So, in both the cable and theatrical motion picture businesses, we have prices going up and the number of actual customers going down. No one is arguing that subscribers or moviegoers are getting more for their money--they're simply being forced to pay more for the same content and service. Time Warner, Comcast and AT&T have all essentially said that they're fine with that, and they'll raise prices even more. The LA Times quotes Jeff Blake, vice chairman of Sony Pictures, as saying: "Focusing purely on headcount is nice if you don't want to accept money. But if money goes up while bodies go down, I'm not sure it's necessarily a bad thing." (Can you show me ONE Sony division that knows what it's doing?)

So, Mr. Blake and the executives at the cable and IPTV operators, here's the problem: Price elasticity of demand. There's now a significant body of evidence that demand for both multichannel video services and theatrical motion picture tickets has become elastic, which means that price changes have a disproportionate effect on demand. So, as prices go up, an even higher percentage of cable subscribers will switch to alternatives, and an even greater number of consumers will wait to see movies via Redbox, Netflix, Amazon, Apple, cable, satellite, IPTV, etc. HDTVs bring the big-screen experience into the living room, and 3D HDTVs will eventually eliminate 3D as a big reason to go to the theater.

One other thing that Mr. Blake doesn't seem to understand: Theaters make most of their money not from tickets, but from sales of food and drinks at their concession stands. If 5.36% fewer people go to the theaters, that's 5.36% fewer people buying food. If ticket prices are inflated, that's less money that consumers will be willing to spend on food. Mr. Blake might not care if he's making the same money from fewer people, but theaters care greatly, and if price increases cause further concentration of the theater business, it will give the remaining theaters much more negotiating power against the movie studios.

Both the cable operators and the movie studios seem to think of their services and products as essential goods without reasonable substitutes; in other words, consumers have to purchase them, no matter what the price. Even before the Great Recession, evidence was mounting that the "essential goods" designation was wrong. Consumers do have substitutes: They can replace cable with satellite or IPTV, or even with over-the-air broadcasts that are, in many cases, of significantly higher quality than the signals provided by the multichannel video operators. They can replace a $10 movie ticket with a $1 DVD rental at Redbox. They can replace both cable and movie theaters with streamed movies and television shows from Netflix, Amazon and Apple.

It's clear that both the cable and motion picture industries will stay on their present courses. They'll continue to raise prices and lose customers, until they reach the point where they're no longer profitable, and even then, they'll stay on course while they expect things to "go back to normal." The problem is that there's no more "normal" to go back to. The "new normal" may very well turn into the worst nightmare of the cable and motion picture industries.

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