WhileTime Warner Cable waits to hear if the Federal Communications Commission will approve its planned $45 billion merger withComcast, the company has kept busy finding sneaky new ways to collect more money from its customers.
Effective January 1st, the company will be implementing a $2.75-per-month fee for sports programming, the Charlotte Observer reported. Customers won't have the option of opting out of any sports channels to avoid the fee, and they won't get anything extra for paying it. The company will also be raising a second fee -- the nine month old broadcast TV surcharge -- from $2.25 to $2.75 per month.
Continue Reading Below
Time Warner Cable, which saw its revenue climb by 3.6% and its OIBDA grow by 2.4%year-over-year in the most recent quarter, said increasing programming costs justify the added fees.
The sports fee and increased broadcast TV surcharge are the results of rising costs in how much local and sports channels charge cable providers, company spokesmanScott Pryzwansky told the paper.The cost to Time Warner for carrying sports networks has gone up 91% since 2008, he explained, and the fees the provider pays to show local channels have risen by 60% over the past two years.
The higher surcharges are only "a fraction of what we actually pay for broadcast TV and sports content," he said.
Time Warner Cable is attempting to merge with Comcast. Source: Time Warner Cable.
Fewer subscribers paying more
While Time Warner Cable has lost subscribers, the company has managed to increase profitability by squeezing more money out of its remaining customers.
In the company's residential division,video/cable revenue decreased primarily due to a yearoveryear decline in subscribers, but that was "partially offset by an increase in average revenue per subscriber," according to the quarterly report. "The increase in average revenue persubscriber was primarily the result of price increases and higher premium network revenue."
The company managed to raise profits in the residential division overall as it made up for a loss of $103 million in cable revenue (down to $2.49 billion) by adding $159 million in high-speed data (up to $1.62 billion).
Adding the sports fee and raising the broadcast surcharge will wipe out the deficit in the cable end of the business. Time Warner Cable, at the time the Comcast deal was announced, had approximately 11 million cable customers, and the chart below shows how much revenue the sports fee and the broadcast surcharge increase will produce.
Of course, the addition of these new charges will likely cause more customers to leave, which will require further ways to raise prices (even if Time Warner calls its price increases fees and surcharges rather than what they actually are). This ultimately leads to a smaller and smaller user base paying more, which in turn accelerates the pace of people exiting. It's a business model that eventually hits a breaking point well before the company has one cable customer paying $825 million or so a month.
Time Warner has a point
Time Warner is not wrong in stating that its costs have gone up as content fees -- specifically for sports -- have risen for all pay television providers, and they will continue to do so.
ESPN charges companies $6.04 a month per customer -- the highest fee charged by any of the 10 most expensive channels, followed by TNT at $1.44 per customer and the NFL Network at $1.22 per customer, Derek Baine, research director at media research firm SNL Kagan, told theObserver.That doesn't include ESPN 2, which SNL Kagan said charges $0.76 cents per customer.
Cable providers currently pay about $28 per customer each month for a dozen channels, but SNL Kagan expects that cost to jump 36% by 2018.
These increases have put Time Warner and other cable companies in a tough position, and it's reasonable to think that customers should foot some of the bill.
What's not right is Time Warner (and other companies to a lesser extent) attempting to mask rising prices by adding fees and surcharges. If an extra cost is unavoidable, then it's not so much an add-on as it is a part of the base price.
It's about transparencyIt's likely that part of the reason Time Warner is adding a sports fee is to deflect some of the consumer outrage toward ESPN and other sports networks. Yet, the company could do that just as well by raising overall prices and itemizing the portion of your bill which goes towards sports programming.
Tacking on fees and surcharges, so you can advertise lower rates than you actually offer (at least once any promotional deals expire) is sneaky at best and blatantly dishonest at worst. It also won't work in the long run as customers make their decision to keep or drop cable based on the bottom line. If Time Warner chose honesty and transparency, that might keep a few people on board, and it could give the cable company added leverage in making carriage deals with major channels like ESPN.
Cable seems to be fighting a losing battle to hold its current business model together. When the competitive landscape changes through the addition of a-la-carte pricing and digital-only competitors, the only way to keep a user base is to have a good relationship with customers. Adding sneaky fees and surcharges won't help Time Warner cable build those relationships and will likely lead to a continued subscriber exodus as more and more options for pay TV alternatives hit the market.
The article Time Warner Just Found a Sneaky New Way to Raise Your Cable Bill originally appeared on Fool.com.
Daniel Kline has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright 1995 - 2014 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
Continue Reading Below