CBS vs. Time Warner Cable: A Fight Neither Wins

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Much has been made of the recent battle between CBS (NYSE: CBS) and Time Warner Cable (NYSE: TWC) over retransmission fees. Many financial pundits, lawyers, lobbying groups, and now even politicians and government organizations have opined on the subject. Some say that CBS, as the content holder, will ultimately come out on top. Others believe that Time Warner Cable, the operator of the content toll-road, will win the fight.

Few, however, seem to have considered the possibility that neither will ultimately win the fight. 

A silly fight leads to silly responses
The main point of contention between CBS and Time Warner Cable is over the previously mentioned retransmission fees; payments that Time Warner Cable (and other cable/satellite TV providers) pays to rebroadcast the free over-the-air network TV channels of CBS, ABC, Fox and others. This fight has been brewing for a while, and is certainly not the first fight between content owners and content providers. But, it has been one of the most public fights, which effectively went ‘nuclear’ on Aug. 2 when Time Warner Cable blacked-out CBS stations in some of America’s largest TV markets (Los Angeles, New York City, Dallas), affecting about 3.5 million customers.

Shortly after, CBS responded with a nuclear option of its own. A response which seemed shockingly short-sighted. CBS began to actively block Time Warner Cable internet subscribers from accessing CBS’ own content on Not just Time Warner Cable TV subscribers mind you, but Time Warner Cable internet subscribers (who may not even subscribe to Time Warner Cable TV). Given the sudden lack of legal options available to millions of customers who just simply want to watch a TV show, the news that piracy of CBS programming surged immediately after the cable blackout/internet blocking is not surprising at all.

I am of course not advocating for the illegal piracy of media content, but that is precisely one of the results of this silly little fight. In the immediate aftermath, the piracy rate of CBS’ popular new sci-fi drama “Under the Dome,” experienced a 34% increase in the specific blacked-out TV regions according to TorrentFreak, a file-sharing news site. It seems fairly obvious, but when two companies take away easy and legal avenues for customers to view content, those same customers become more inclined to access that content through less-than-legal means. 

The real winners
I am of the mind that the majority of media consumers are not interested in the illegal distribution of TV shows and movies. That given the option and ability to access content easily and legally at a reasonable price, most will choose to pay for that legal access. But this increase in piracy shows that consumers are savvier about their options. They want access to content in a time and manner that is convenient to them, not whenever it is convenient for the content holder or provider.

We are well past the days of families gathering around the living room TV at a specific predetermined time between 8:00 PM and 11:00 PM to watch the latest episode of whatever. In this increasingly on-demand world, consumers want options. But if the traditional old-media companies are not interested in giving consumers those options (and even going as far as taking current options away), consumers will look elsewhere. It is for these reasons that this, and other inevitable future redistribution fights, will only accelerate the transition away from old-media TV networks and cable/satellite TV providers toward new-media internet streaming-video providers.

If you have visited a college dorm room in recent years or the apartment of a recent college graduate, this transition is already evident. According to report by Park Associates, today, 14% of all U.S. households with broadband internet are using streaming media devices such as an Apple TV or Roku set-top box (which has doubled from just two years ago). Uninterested in cable subscriptions, network TV broadcasts or sometimes even actual TV-set ownership, today many young media consumers are viewing content exclusively online with an iPad-like device and a subscription to Netflix (NASDAQ: NFLX) or similar internet streaming-video provider.

This transition away from old-media can be seen in the subscription numbers. In the second quarter of 2012, Netflix’s total worldwide streaming subscribers reached 27.56 million, with 23.94 million in just the United States. During Q2 2013, Netflix’s worldwide streaming subscriptions grew to 37.6 million, with 29.8 million in the U.S. These Netflix gains come at the expense of Time Warner Cable and other old-media TV providers. During the same one year time period in which Netflix added 10.04 million worldwide and 5.86 million U.S. subscribers, Time Warner Cable had actually lost a total of 579,000 residential video subscribers.

The future is online and it is the Netflixes of the world that are the true winners of this rather silly fight between CBS and Time Warner Cable. Giving consumers something that old-media companies are unwilling or unable to offer, Netflix is willing and able to cater to the need for customers to consume media on their own schedules and on any number of internet-connected devices. Netflix and other internet video providers are also giving customers the content they want; such as the rescue of fan favorite shows like "The Killing" or the return years later of a show like "Arrested Development."

Yes, giving customers what they want, rather than forcing them to purchase channels they don’t even watch. Compare this to CBS-owned Flix, a cable/satellite channel the consumer is possibly paying for right now, but has likely never actually watched a single day in his/her life.

Foolish bottom line
How quickly this transition away from old-media happens is very much dependent on the actions of both companies. With the NFL regular season beginning in just three weeks, a protracted battle could cause enough customer anger that Americans will demand a change in the way media is consumed. If there is one thing you should never have a doubt about, it is Americans and their love affair with football (particularly in the blacked-out region of Dallas, Texas). However long this fight continues though, the writing is already on the wall. It is no longer a matter of if this transition will happen, but simply a matter of when.

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Matthew Luke has no position in any stocks mentioned. The Motley Fool recommends Netflix. The Motley Fool owns shares of Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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