Comcast Corporation (CMCSA), The Walt Disney Company (DIS): Consumers, Not Government or Analysts, Will Determine the Future of TV Unbundling

Growing calls for the unbundling of TV channels have resulted in a variety of entities weighing in on the issue in order to attempt to influence its outcome. Unbundling refers to customers being given the option for which channels they want to buy from content distributors.

Content providers and distributors want things to continue on as they have been, maintaining the status quo of offering large bundles to their customers. Some research firms such as Needham & Co. have attempted to reinforce that scenario, as in a recent report the firm asserted that unbundling content would result in a loss of 1.4 million jobs and $113 million in customer value.

On the other hand, Canada has demanded that companies offer a la carte programming beginning in 2014. This decision is expected to put pressure on TV companies to offer similar content options in the U.S.

A cursory look may make it appear that governments and media companies have control of this issue. However, a growing amount of consumer dissatisfaction, which includes dissatisfaction with price increases for content these customers don’t ever watch, has been driving the issue.

Music industry
What happened to the music industry when albums were unbundled and consumers bought only the individual songs they wanted? Some argue that the same thing would probably happen in the TV industry if its content was unbundled.

Comcast Corporation (NASDAQ:CMCSA)

There is no doubt there is some truth in that concern. Over the last several years people have watched on average only 18 of the many TV channels offered by distributors like Comcast Corporation (NASDAQ:CMCSA).

In other words, people were buying music albums for maybe two or three songs. Those who acquire TV content do so for the purpose of accessing only 18 out of the far more than 100 (in most cases) TV channels offered.

Effect on companies
It appears Comcast Corporation (NASDAQ:CMCSA) would be the company most affected by the unbundling of content, as the issue would have a disproportionate effect on Comcast’s revenue and earnings because of its size. Revenue at its cable networks unit increased by 4% to $2.2 billion in the 3rd quarter, according to its latest earnings report. Comcast lost 129,000 subscribers in the quarter.

Yet there is also the other side of the issue: lower costs associated with declining retransmission fees would fall because of the lack of interest in poorly-performing shows.

More interest might be generated from those consumers who drop cable or satellite TV because of low prices and desired content.

Some companies have already moved to offer smaller bundles in order to deal with the outcry against rising prices from Comcast Corporation (NASDAQ:CMCSA) and other content distributors. Most of these companies offer bundles that include HBO or similar content to make these bundles more attractive.

The Walt Disney Company (NYSE:DIS) has dual strengths in that it offers both sports and children’s content. That suggests that Disney will be much less affected by the decisions ahead than companies that don’t have those types of content options.

Since those who are not interested in sports don’t watch ESPN or other sports networks anyway, it’s unlikely that the decision will have a dramatic impact on The Walt Disney Company (NYSE:DIS) as far as its base users go. The decision will have some impact on Disney because if a consumer chooses to not include ESPN, The Walt Disney Company (NYSE:DIS) won’t receive a payment for the content from Comcast Corporation (NASDAQ:CMCSA) and other distributors.

The Walt Disney Company (NYSE:DIS) does have pricing power with ESPN so it could raise the price without too much fallout, as people are more than willing to pay for their sports fixes. Thus the company could make up for lower viewer numbers by raising prices. This is probably true with Time Warner and its HBO franchise as well. People who want HBO are willing to pay extra to get it.

The future of TV content
I don’t believe that the TV industry and its distributors will be able to hold back the rising demand for a la carte TV. It’s too big of an issue to ignore. If companies don’t do something about this issue in the U.S. market, the pressure will grow for politicians to make the changes as it did in Canada.

Rather than complain and fight, the industry should focus on creating great content like AMC Networks Inc (NASDAQ:AMCX) does. They churn out hit after hit, and people are more than willing to include the channel as part of their content option. In the end, this is a story about the business of content, not about how it is bundled.

If the content had the quality that consumers were looking for, the issue of bundling or unbundling wouldn’t even be on the table. What consumers are saying is that the content quality doesn’t justify the price of having access to the array of content options, so they want to choose what content they want to spend their money on.

I see AMC Networks Inc (NASDAQ:AMCX) as a great example of where the industry needs to go. It understands its core audience, and produces content that successfully targets this audience. That sounds easy, but the condition of the industry points to the fact that this isn’t being done at levels that can sustain the industry’s existing distribution model.

AMC has pulled back recently, but it’s still up 25% over the last 12 months. Revenue (trailing twelve months) is $1.52 billion, with revenue per share (ttm) of $21.37. It’s the successful development of content for niche audiences that drives the success of AMC, making it a good investment because of the consistent quality of content offered by the company.

Consumers have no interest in channels they don’t watch, and they, in the end, will determine what direction the market is going to take.

The article Consumers, Not Government or Analysts, Will Determine the Future of TV Unbundling originally appeared on Fool.com.

Gary Bourgeault has no position in any stocks mentioned. The Motley Fool recommends AMC Networks and Walt Disney. The Motley Fool owns shares of Walt Disney. 

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.


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