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Why cable is going to cost you even more

By Julianne Pepitone, staff reporter

NEW YORK (CNNMoney.com) -- Your cable bill is going up this year -- and next year, and the year after that -- with no end in sight.

The average digital cable customer already pays almost $75 a month, according to research firm Centris. And many subscribers pay more than $100 to tune in to everything from "The Daily Show" to "Jersey Shore."

Customers see an average annual price hike of 5%, analysts say -- which means that in five years they'll be shelling out more than $95 a month for TV.

"There will always be an increase in cable bills," said Miller Tabak & Co. media analyst David Joyce. "Times are changing and providers have to make up losses somewhere, so consumers bear the brunt of it."

The industry is getting squeezed on several fronts, and subscribers are footing the bill. Networks are suffering as advertising dollars fall. Cable providers are faced with competition from satellite providers and telecoms, as well as ballooning technology spending required to deliver extras like high-definition TV and programming on demand.

And every industry player is faced with the threat of Web-based television, with free or cheap content available on sites like Hulu.com and Apple's (AAPL, Fortune 500) iTunes store.

"Nobody likes prices to go up, and consumers are indeed paying a lot for cable," said Robin Flynn, senior analyst at SNL Kagan. "But they don't think about all that goes into it. No one wants to hear about fiber optics, but to get you that high-definition picture the cable company had to invest a lot in their plant."

Those pressures were reflected in the epic contract battle that raged between Time Warner Cable and Fox Network as existing agreements expired at the end of 2009. Fox parent News Corp. (NWSA) demanded $1 per subscriber for its broadcast network, and talks continued past the deadline as TWC (TWC) balked. Reports indicate the cable outfit agreed to pay Fox more than 50 cents a subscriber.

Broadcast TV not 'a God-given right'

In the past, most providers have paid only for cable networks, but broadcasters are looking to make up for plummeting ad revenue. Now that precedents have been set, analysts say more broadcast networks will strike similar deals with cable companies.

"Most people view their broadcast networks as if they're a God-given right, but they cost money to produce," said SNL Kagan's Flynn. "Somebody has to pay -- it's not going to stay on Hulu forever for free."

As cable providers are saddled with broadcast carriage fees, the shortfall is passed on to consumers. But it isn't as simple as an extra line on the cable bill, said Miller Tabak & Co. media analyst David Joyce.

"They can increase prices a little bit for services across the board, like video on demand, to make up for the extra charges," Joyce said.

In fact, Joyce noted, Time Warner Cable already announced an average 5-7% increase for 2010. Of course, a hike probably would have gone into effect even without the Fox deal as other providers are also raising rates. Reports say Cablevision (CVC, Fortune 500), Comcast (CMCSA, Fortune 500), and DirecTV (DTV, Fortune 500) subscribers will see prices rise about 3.5%.

"The way things are headed, all cable providers are going to have to pay for all broadcast channels," Joyce said. "They're going to have to make up for these new charges, as well as the recession's effect."

Time Warner Cable likely raised rates slightly more than necessary to cover the charges, in preparation for similar broadcast deals in the future, Flynn said.

Internet killed the cable star?

Cable companies also have to make up for the subscribers they're losing to Web-based TV. Viewers can now watch many of their favorite shows from online services like Hulu.com, which offer Fox, NBC and ABC programs. The iTunes store offers a wide range of downloadable shows, and DVD options are available from Netflix (NFLX) to Amazon (AMZN, Fortune 500). All of these options siphon off cable's subscriber base.

But now that broadcasters are beginning to receive fees for that network content, it remains unclear whether they will continue releasing shows online for free.

"Networks were doing that to maintain loyalty to the shows, but content has to be paid for somehow at some point," Flynn said.

Advertisers are also unhappy about Internet TV, as sites like Hulu offer very limited commercial interruption, noted Steven M. Rogé, portfolio manager at R. W. Rogé & Company. The future of commercial time on Web-based platforms remains unclear, as the nascent medium continues to develop.

Of course, that endless stream of innovative technology will continue to disrupt the cable industry -- and affect customers' bills.

"As technology becomes more advanced, we'll soon have stuff on our screens that we can't even conceive of," Rogé said. "The big game-changer could be something we don't even know about yet." To top of page

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