Analyst: If Cable Companies Lose Set-Top Box Money, They’ll Just Charge More For TV

Image courtesy of (Steven Depolo)

U.S. pay-TV companies rake in an estimated $20 billion a year in rental/lease fees for set-top boxes, but the FCC’s recent decision to draft rules to increase competition in the set-top box market could put that dependable revenue stream at risk. But one analyst says that if cable companies lose money from competing devices, they’ll just make up for it by charging more for TV.

In a recent report [PDF] for New Street Research, industry analyst Jonathan Chaplin seeks to allay investors’ concerns about the possible loss of set-top box (STB) revenue.

“STB revenue is just video revenue in disguise,” writes Chaplin, who notes that if the industry has to recoup that lost income, it “would simply reclassify revenue.”

“Cable companies aren’t in the STB business; boxes are just a cost of doing business,” he explains in the report. “If this revenue stream is threatened, we assume the cable industry will simply shift the revenue from boxes to service as they go through their annual rate adjustment process. After all, box revenues just go to help pay rising content costs.”

More bluntly, Chaplin states that the industry “has used set top box rental fees as a creative way to hide price increases over the years.”

As for implementing higher rates to account for the lost STB revenue, he argues that cable companies would not have any real problems raising prices “since they change the bill essentially every year as the initial discounts and promotions unwind.”

Chaplin also contends that, even though STB fees account for around 11% of industry revenue, cable companies “don’t make money on boxes” because of all the costs associated with installing and maintaining the boxes.

However, saying they “don’t make money” may be a bit misleading. By his own estimate, pay-TV operators are generating $5 in free cash flow per subscriber each month from these devices. For a company like Comcast or DirecTV, each with more than 20 million subscribers, you’re talking about $100 million per month — $1.2 billion per year — for each of of those providers.

The report raises a substantial potential roadblock to set-top box competition, and it’s one we’ve been mentioning since the new rules were first mentioned — that consumers might just not care.

Third-party set-top boxes have — through the use of Cable Card technology — been available for more than a decade, but Chaplin points out that that they represent fewer than 1% of boxes currently in use. One of the reasons for the lack of adoption — aside from the fact that many consumers may not know they have a choice — is the upfront cost of these devices.

Why pay $150 or more for a set-top box when you can get one from your cable provider for a monthly fee? Obviously, going the third-party route could save you money in the long run, but consumers have simply not done it. For new STB devices to compete, they’ll have to either be priced at a more reasonable rate, or provide other benefits not found in models offered by the cable companies.

Thus, argues the report, pay-TV operators may be better off creating an STB platform that fully integrates their video content into streaming services.

“If they do, they would have some data on household viewing across all content; not just Cable content,” explains Chaplin. “This would be valuable data that Cable can monetize.”

[via FierceCable]