Cutting the cable cord might not save you as much as you think

After years of complaining about being locked into expensive pay TV plans, the American viewer is now being bombarded with choices, as media companies and gadget makers invite them to “cut the cord” and go “over the top” by pulling in more “a la carte” video programming.

Apple Inc. (AAPL) is planning to offer a trimmed-down package of popular broadcast and cable networks to stream over Apple devices for a reported $30 to $40 per month.

Sony Corp. (SNE) has a broader assortment of cable channels and some on-demand playback capabilities – though no broadcast networks – over its PlayStation game console for $49.99 a month.

DISH Network Corp.’s (DISH) Sling TV has about 20 channels for $20 in its core service.

And, of course, Netflix Inc. (NFLX), Amazon.com (AMZN) and numerous networks such as HBO and CBS Corp. (CBS) allow viewers to subscribe to an array of content of their choosing.

All this competition is delivering a welcome degree of flexibility for viewers to tailor their TV menu to their tastes and make their entertainment portable across devices and locations. 

Yet the new packages might not deliver great savings to consumers once all the necessary services and devices are included. 

For instance, all of these offerings require a broadband connection, which typically costs at least $60 per month, depending on the provider. And each of them uses a device of some kind that replaces the typical cable or satellite set-top box, such as the $69 Apple TV router box. 

If we assume a $60-per-momth cost of broadband-only (without data caps), then the Apple service will take the all-in expense above $90. Add HBO at $15 and perhaps Netflix at $7.99, and the cost approximates that of many cable packages. A typical 200-channel “triple play” cable plan might cost $90 a month, for comparison. 

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Analyst Rod Hall of J.P. Morgan told clients that he expected the new Apple TV service to be priced below $40, because otherwise it would not be very competitive with standard cable. This is a decent indication of how narrow the price advantage would be. 

One certain bonus of the various new services: They will allow consumers to escape the nest of extra fees and equipment charges piled onto cable bills, which are often not reflected in measures of the “average cable package” cost. A sample bill from Time Warner Cable Inc. (TWC) shows a combined $15.99 a month for renting a set-top box, remote control and digital-video recorder.

Some channels are pricier than others

There is a popular view that the standard cable “bundle” of hundreds of channels costs as much as it does because of the abundance of marginal, niche networks that very few people watch.  

Yet most of the content costs embedded in a cable subscription go to the couple-dozen most popular channels. 

For instance, the top 20 cable networks collect more than 45% of the entire nationwide pool of “affiliate fees,” the money that pay-TV providers pay them for each subscriber, according to research by SNL Kagan and Nomura Securities. The top 40 networks account for nearly 58% of content costs and the top 60 take in 67% of these fees. So the Cooking Channel and Crime & Investigation Network and dozens of others at the upper end of the channel array hardly fatten up cable bills at all. 

Savings certainly can be had through narrower packages or a la carte selections for those who have no interest in sports. Walt Disney Co.’s (DIS) ESPN alone collects more than $6 per month per subscriber – four times the next most expensive network, Time Warner Inc.’s (TWX) TNT. ESPN 2, Fox Sports 1 and NFL Network are also among the priciest channels, as games command a reliable real-time audience and must pay enormous rights fees to the professional and college leagues.

The point is, if you want to pay less, it’s possible – but you have to be willing to watch less. Or, more specifically, you need to know exactly what you will want to watch and thus to forgo the serendipity of channel surfing or the chance that some obscure network will create next season’s can’t-miss show. 

There are handy shopping guides to test out whether you’re a good candidate for cord cutting, such as this one from the Associated Press. 

More competition or heightened demand?

Some enthusiastic advocates for greater competition across video platforms believe we might ultimately see broader price reductions as the cable-and-content “ecosystem” is disrupted. 

The argument here is that content costs – those fees to ESPN and the others – have grown well in excess of inflation in part because the pay-TV middlemen (like Time Warner Cable and Comcast) were always able to pass them on to their captive subscribers. 

So, these experts say, perhaps disconnecting content fees from dominant cable and satellite systems will make them more susceptible to price competition as the networks scramble to chase the eyeballs of cord cutters. 

Maybe. But won’t the wider variety of services bidding to carry the coveted networks simply broaden the demand for them? Isn’t content still king, under this scenario? 

For sure, Apple seems perfectly equipped to drive a tough bargain in negotiating content fees. And its TV solution might deliver additional benefits. Maybe it will offer a handy tool to search and organize YouTube videos? The ability to access one’s TV programming on an Apple device anywhere will also be a huge bonus for many and well worth the $30 to $40 monthly cost. 

Yet the greatest impact of all these trimmer video packages might not be in enticing existing all-inclusive cable subscribers to abandon the bundle. Perhaps drawing younger people who have never been interested in paying for TV will be the main result.

As Yahoo Finance Editor-at-Large Aaron Task says in the attached video, the great irony would be if the new services and the side-by-side comparison they enable persuade lots of people that regular old cable isn’t such a bad deal after all.