Saturday, December 20, 2014

When Cable Dies, It Will Die Fast

As I said in the last post, I realized fifteen years ago that Internet TV will replace cable as the primary delivery mode.  It was a radical claim then,  but verging on obvious today.  However, I forgot to mention that its demise will be very rapid.  In fact, it could go into a dearth spiral at bay time.

The reason is the high fixed costs of cable.  It works like this.  Suppose a cable distributor has a service area of 200,000 homes of which 160,000 are cable customers.  It charges $45 per month for a total monthly revenue of $7,200,000.  This is comprised of $20 per month of variable costs, $1,000,000 of profit and $3,000,000 of fixed costs.

Now suppose that the cable distributor loses 20% of its customers.  Now, the $4,000,000 must be defrayed over 128,000 and the price must increased to $51.25 per month.  This increase in price causes another 20% to abandon cable and the price must be increased to $61.67.  This causes another 20% to leave which causes prices to increase again to$82.50.  This results in a death spiral of fewer subscribers and higher prices.

The distributors will realize that as people start relying on Internet TV, their basic 7 MBS Internet service will not stream multiple HD videos simultaneously and consequently they will upgrade to 25+ MBS service.  This is a net plus for them, so they won't fight the death spiral.

The losers will be the Networks who try to do Internet TV like cable TV.  The winners will be websites who can deliver a homogeneous market that will have a high density of visitors interested in a program.  Polymathica will be such a market.

The main message here is that Cable will die fast and will probably do so soon.  The corollary is that, with smaller audiences and crowd funding, it will provide many opportunities, especially in new markets like Polymathica.

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