1/22/2010
By David Urani, Research Analyst

Like newspapers, CD's and DVD's, there's another form of media that's going to slowly bite the dust, and that's cable TV. These days, it is becoming less and less necessary to have a cable plugged into the back of your TV, because the internet is becoming increasingly able to transmit television and in many ways, it's making the television industry far more user friendly. What's more, cable currently transmits to only about half of all households, each of whom pays on average $71 a month ($852 a year); that's a whole lot of money to lose. The losers will be the cable companies and the dish providers like Time Warner Cable (TWC), Comcast (CMCSA), and DirecTV (DTV) and the winners will be the networks like Discovery (DISCA) Viacom (VIA) and Scripps (SNI).

Basically, cable TV was invented as a high-quality method to get several TV stations to one's home. However, high speed internet can replace your cable while offering so much more as well. There has already been a push towards internet TV programming over the past few years, and this development is only in its infancy. These days, most network and cable TV stations offer some kind of online streaming content, which of course you don't need a cable subscription to view (or that stupid box that sits on top of your TV). As online viewership grows, it will translate into fewer cable and satellite subscribers and therefore fewer cable advertising dollars. The advent of DVR's (television recorders) has been another detractor of advertising dollars as well. Many viewers are likely turned off of the idea of watching television on a computer screen, but by now you likely have a couple of tech savvy friends who have rigged their TV's to work as computer monitors. Heck, thousands are already running TV through their mobile phones already. For television studios, the switch to internet viewership could be as simple as connecting that cable from the computer to the television, and/or the absorption of web-enabled sets.

Online video advertising increased by almost 130% in 2008, and is expected to represent more than 2% of television advertising spend in 2010. Meanwhile television, which accounts for one out of every four dollars spent for advertising, is likely to lose more than 5% of its market share in that same timeframe. Furthermore, it is estimated that advertisers pay approximately $0.17 per hour of online video viewership versus $0.13 per hour for television. One reason advertisers are willing to pay more for an online ad is that the ads are clickable, and can take you directly to a page where the consumers can instantly order the product. One of the biggest giants in the corporate world, Google (GOOG), makes the vast majority of its revenue simply from those advertising dollars, and it is not a stretch to imagine broadcasters doing the same.

The change would also iron out a number of conflicts we already see in the cable TV and satellite industries. One such conflict, which has seen a number of lawsuits, is the practice of bundling TV stations into packages. Why should the consumer be forced to buy a package of channels, most of which they never even use? The same argument goes for the broadcasters, who become underappreciated when they are bundled with other less desirable channels. Take for instance Scripps (SRI), who recently pulled the Food Network and HGTV from millions of Cablevision subscribers; it was looking for a $0.25 per month share per subscriber from Cablevision, whereas Cablevision was only giving $0.08 per subscriber (they have since settled an undisclosed deal). Conflicts like these are becoming more frequent these days. News Corp had threatened to take the Fox network of channels away from Time Warner Cable (during the college football bowl season no less). Scripps could easily sell a subscription to Food Network for more than $1 per month if we had to guess, assuming customers could pick and choose their networks instead of buying a package through Cable; that's in addition to the aforementioned potential for advertising. By taking out the middle man, the studio, the consumer, and even the advertiser can benefit.

While it will likely be more than a decade before the majority of television viewers are using the internet, the cable box and the satellite dish are slowly going the way of the newspaper. Most television providers do also provide internet service, which will prove to be their saving grace. However, the further we get into the internet age, the more cable companies will have to butt heads with the likes of Apple (AAPL) and Google (which are competing for the same customers but are doing so with fancy new gadgets and new interfaces like iTunes and YouTube), and the less they will be able to rely on television subscriptions. Look for broadcasting networks to gain leverage over the television providers over the next several years.

David Urani
Wall Street Strategies