Aug. 27 (Bloomberg) -- Beth Brodkin pays Comcast Corp. more than $200 a month for television and Internet services. The stay-at-home mom says it’s a bargain.
“My kids use the Internet for homework, we can rent movies without going to the theater, and I can use the DVR to watch all the shows I’ve missed during the day,” said Brodkin, 46, who lives in Voorhees, New Jersey, with her three teenagers. “When you put it all together, it’s actually a pretty cheap form of entertainment.”
The slowing U.S. economy is prompting some Americans to cut back on eating out and name-brand goods. Consumers like Brodkin are instead spending on home entertainment, providing a boon to a cable and satellite industry struggling to find new customers.
“Cable system operations have long been defensive when it comes to economic pressures on consumers,” said Tom Eagan, an analyst at Collins Stewart LLC in New York. “Subscribers may spend less money dining out or going to the movies, but they watch more cable TV.”
Cable bills climbed about 8 percent on average in the second quarter to $123 a month on demand for digital video recorders and premium channels like Time Warner Inc.’s HBO, according to researcher SNL Kagan. By comparison, consumer prices rose 1.1 percent in the year ended June, according to figures from the Labor Department.
Year to date, cable and satellite stocks, on average, have outpaced the S&P 500 by more than 15 percent, Eagan said. Free cash flow at the three largest publicly traded cable operators, Comcast, Time Warner Cable Inc. and Cablevision Systems Corp., has reached record levels, spurred by declining capital spending and increased sales.
Comcast is enticing customers with a campaign called “Xfinity,” which offers faster Internet speeds and more than 70,000 hours of on-demand content. It has also introduced a DVR service that lets users watch a recorded show in any room. The company charges an extra $15.95 a month for the DVR, and at least one additional high-definition box is required, costing an extra $8 a month.
Time Warner Cable introduced a premium bundle in May geared toward high-income individuals in New York City. For $245 a month subscribers can get more attention from customer-service representatives, and the company’s most advanced services, including wideband Internet.
“In the pay-TV market you’re seeing a greater focus on driving price rather than adding new customers,” said Rich Greenfield, an analyst at BTIG Research in New York. “There’s a big opportunity to go after higher-end subs, and there seems to be a more concentrated effort around it.”
NFL Sunday Ticket
DirecTV, the largest U.S. satellite-TV company, has attracted high-spending customers through exclusive offerings such as NFL Sunday Ticket, which lets fans watch football games even if they aren’t shown on local television. Last quarter, the company’s churn, or monthly rate at which customers left, was the lowest of all publicly traded pay-TV providers that report the figure, with its average customer spending $87.90 a month.
Ryan Dunn, a political consultant who lives outside of Richmond, would be willing to spend all of his money left after housing and food on DirecTV’s service, if his economic situation worsened. In addition to the company’s base service he pays $250 for the NFL Sunday Ticket, plus an extra $140 for a Major League Baseball package and about $30 a month on high-definition boxes.
“I’m a Cowboys fan in Virginia -- what I spend on DirecTV far outweighs anything else I would want to spend my money on including going out to dinner or to a sports bar,” said Dunn, 30. “It’s really the greatest form of entertainment, and I don’t even have to leave my house.”
Netflix, Hulu Competition?
Cable and satellite companies depend on customers like Dunn and Brodkin to boost video sales. Increased video revenue is necessary for them to maintain their mid-30 percent profit margins, as programming costs escalate. Content expenses, which represent about half of pay-TV carriers’ operating costs, have increased about 10 percent for the past several years.
This willingness to pay more may not last, said Craig Moffett, an analyst at Sanford C. Bernstein & Co. in New York.
“The consumer’s wallet isn’t infinitely expandable, so cord-cutting will become a reality,” he said. “Cable prices are rising faster than consumer’s disposable income. No one can predict exactly when or what the breaking point will be.”
Cord cutting, or replacing cable TV with Web services like Hulu or rental services like Netflix hasn’t happened yet in a meaningful way. Still, the threat continues to loom if cable companies continue to make annual price increases, and as more alternatives, like Web-video startups Roku Inc. and Boxee Inc., continue to pop up, Moffett said.
This year all the major pay TV providers had annual video price increases. Comcast boosted its prices 3.9 percent, Time Warner Cable 7.1 percent, Cablevision 3.7 percent and DirecTV 5.5 percent, according to Moffett.
Some bearish economic indicators may lead investors to believe consumers are on the brink of cutting the cord or at least paring back their cable expenditures, said Moffett.
The U.S. Federal Reserve said this month high unemployment, lower housing wealth and tight credit are restraining household spending. That, coupled with stagnating incomes and the highest consumer savings rate in 18 years could, at last, choke off cable expenditures, Moffett said.
Sue Vincent, a Comcast subscriber in Spokane, Washington, has already started to feel the pinch. She says her phone, Web and TV bill totaling $177 last month was the final straw.
“We reached our tipping point -- it just wasn’t worth it anymore,” said Vincent, a secretary for a technology firm in Spokane, Washington. She and her husband are looking to substitute Comcast’s TV product with lower-cost service from Dish Network Corp.
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