Breaking Finance News

CBS and Time Warner Are Fighting the Wrong Battle and These Stats Prove It

If you are monitoring the ongoing drama between CBS (NYSE: CBS) and Time Warner Cable (NYSE: TWC) and thinking to yourself, “Are You Serious?” you’re not the only one. Everybody from Time Warner customers to media analysts are wondering why the two sides don’t seem to understand that the battle they’re fighting is unwinnable. In the end, they’ll both lose. Here’s why.

This week, The Washington Post (NYSE: WPO) was sold to (NASDAQ: AMZN) co-founder Jeff Bezos who promises to “transform” the publication. Investors wondered what Bezos would want with a newspaper. Business Insider said this:

“Amazon is already in the content production and distribution business — and news is just another kind of content. Amazon distributes massive amounts of print and digital content. The content The Washington Post publishes and distributes could be bundled or distributed with that content. And, similarly, the content that Amazon produces — mainly commerce-related, but increasingly media — could be integrated with The Washington Post’s content, offering more choices for customers and consumers.”

This is transformation in a big way and The Washington Post is far from the first or last newspaper that will transform into something vaguely resembling what it was.

Then there’s the music industry. Remember what companies like Napster (although illegally) and Apple (NASDAQ: AAPL) did to the traditional album? When was the last time you went to a record store to purchase a CD?

According to Nielsen, from 2011 to 2012, CD sales fell 13.5 percent while digital music sales rose 14.1 percent. The music industry tried to fight but technology and consumer demand won out in the end

Execs: Cable Companies Don’t Get It!

If you believe Jim Dolan of Cablevision (NYSE: CVC), the pay-TV industry is delusional. Dolan Told The Wall Street Journal that Cablevision may stop offering pay-TV services and focus more on broadband because of changing consumer demand.

He went on to say that the cable industry was living in a “bubble” as it continued to focus on subscription packages that forced consumers to purchase a package of channels, most of which they’ll never watch.

Disney (NYSE: DIS)-owned, ESPN, for example, charges more than $5 per subscriber but only about 20 percent of subscribers actually watch prime time sports let alone all of the other programming ESPN and the other sports channels like Fox Sports provide. Consumers don’t want to pay for the opportunity to watch lacrosse.

Then there’s Dish Network (NASDAQ: DISH) Chairman Charlie Ergen who said Tuesday,

“All the content revenue in the industry is probably at risk. I don’t think the industry quite understands how the Internet works.”

Industry watchers are asking, why is it that companies like Cablevision and Dish get it but the bigger companies do not?

The Model is Changing

Consumers are demanding a change in the TV business model but cable companies want an expansion of the current structure.

The average household now pays about $84 per month for cable but most of the channels, more than 100 in most cases, they will never watch. Cable networks will keep about $44 billion of the subscriber fees along with another $24 billion in advertising revenue. In recent years, broadcasters have demanded a bigger piece of profits as evidenced by the latest Time Warner/CBS battle.

Cable executives acknowledge that these fees aren’t sustainable going forward but they aren’t ready to change the model. Even as the household cable bill continues to rise to what will soon be unaffordable levels for the average family, there is little acknowledgement of this fact by the big media companies.

It’s not as much about affordability as it is technology. The percentage of young subscribers, up to age 33, who are subscribing to pay-tv fell from 85 percent in 2010 to 76 percent in June 2013, according to The Wall Street Journal. They can find most of what they want online and new services like Aereo and Google Chromecast are offering viewers more options for cord cutting that they haven’t had in the past.

And let’s not paint the grim picture only for the cable companies. The New York Times reported Tuesday that advance ad sales for the 2013-2014 television season aren’t looking so good. Although not as bad as predicted, the article said that in the 2012-13 season, networks suffered their worst drop in viewership since 2007-08 but the latter was the year of the big writers’ strike. There was no writer’s strike last year.

The networks are seeing a change too. Companies like Netflix (NASDAQ: NFLX) are producing content that is securing the same major awards nominations normally reserved for network channels. Then there’s Hulu and the many other small providers who are finding an audience online.

The CBS/Time Warner Cable Drama

Which brings us to the current CBS/Time Warner Cable battle being waged. Both sides acknowledge that the industry has to change. The marketplace is pressuring the cable industry just as it did the music and newspaper businesses and once the pressure starts, it doesn’t let up.

Regardless of how deep the pockets of these companies, technology, and consumers wishing to take advantage of that technology in order to save money will win in the end, if history is any guide.

Read More: CBS Went Black in Key Markets Last Night and People are Mad!

For now, both companies are giving consumers more reason to be angry. The battle has escalated to the point where 3.5 million viewers in Dallas, New York, and Los Angeles cannot access CBS content through Time Warner Cable and Time Warner Internet subscribers can’t access CBS’ online content. Analysts like BITG’s Richard Greenfield believe that the blackout could last six weeks or more. Others said, until the NFL returns.

The latest negotiations involve Time Warner Cable sending a letter to CBS detailing an offer that includes exploring a la carte programming (which most watchers say was nothing more than a ploy to make Time Warner look a little better in the public eye). CBS sent a letter back saying, “no thanks.” The full text of Time Warner’s letter is here and CBS’ letter, here.

Reading each letter reveals the depth to which talks have broken down and more importantly, two companies that simply don’t get it. They don’t seem to understand that they aren’t negotiating with each other as much as they are with a changing industry and a customer-base which, with increasing frequency, is telling both sides, “you no longer have what we want, and we’re about done paying you for it.”

Disclosure: At the time of this writing, Tim Parker was long Apple.

Receive News & Ratings Via Email - Enter your email address below to receive a concise daily summary of the latest news and analysts' ratings with's FREE daily email newsletter.

One Comment

  1. Patrice Parker

    August 7, 2013 at 8:45 pm

    What an awesome article!