Time Warner Cable, the second largest cable carrier in US after Comcast and Fox Broadcasting company, a unit of News Corp., have recently reached an agreement whereby Fox will charge Time Warner Cable a monthly fee that we estimate to be around 70 cents for every Time Warner Cable subscriber that receives Fox's programming.
This marks a significant change in the TV landscape since broadcast networks like Fox, ABC, NBC and CBS have historically made money solely through advertising. Fox demanded subscriber fees as a result of declining ad revenues which are attributable to general macroeconomic weakness in the ad market as well as the on-going shift from TV ads to internet ads. The subscriber fees will help make Fox even more profitable in the future when the ad market recovers.
We believe that the costs of paying subscriber fees to Fox will be absorbed by Time Warner Cable. Fox is available to about 14 million Time Warner Cable subscribers and we estimate that the fee will amount to an additional direct cost of nearly $120 million annually for the company thereby reducing gross margins slightly.
Subscriber costs could add up if broadcast networks ABC, NBC and CBS follow Fox in demanding fees as well. However, Time Warner Cable is likely to mitigate significant margin declines by passing on the additional subscriber costs to you.
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