Cable industry to discuss challenges — and hear from Jennifer Lopez

The cable industry’s annual gathering is usually a celebration of new technologies, popular programming and sunny projections for growth.

But when top pay-TV executives gather in Washington for the National Cable & Telecommunications Assn. convention this week the conversation may be a bit more somber as there are some big clouds on the horizon that will put a damper on what typically has been a three-day party.

The cost of programming — particularly sports — continues to skyrocket, and the relationship between content suppliers and distributors has soured as a result. Sen. John McCain (R-Ariz.), concerned about rising pay-TV bills from cable and satellite companies, wants heavier regulations on the industry.

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The industry has also been stung by a struggling economy, which has led many people to decide that pay TV is something they can do without, at least until their financial prospects are stronger.

On top of that, a younger generation is bypassing cable altogether in favor of Netflix, iTunes, Hulu and other new platforms. As worried as the industry is about so-called cord cutters, these cord-nevers are the bigger fear.

Pay-TV penetration has been on the decline for four years. According to consulting firm SNL Kagan, in 2009, 87% of all TV homes had a subscription to some sort of pay-TV service. This year, the figure is 84%. In 2017, SNL Kagan projects it to fall further, to 82%.

At the same time, bills continue to rise. The typical pay-TV package that cost $70 in 2009 now is $83 and could hit $94 in 2017, SNL Kagan projects. This is a potentially lethal combination, a top analyst warns.

“This creates an almost intractable dilemma for the industry,� wrote Moffett Research chief Craig Moffett in a recent report. “Programming costs are already rising at an unsustainable growth rate. In order to support revenue growth in the face of declining distribution, however, programmers are compelled to raise prices even faster.�

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Many in the cable industry counter that the talk of cord-cutters and cord-nevers is overblown. The thinking is that when younger people start to settle down and have families, they will subscribe to pay TV and those that have dropped service because of the economy will resume when their fortunes change.

But Moffett is not so sure.

“The pricing power that once made cable’s annual video rate increases of 4% so attractive to investors has become a liability rather than an asset; lower-income households are now being priced out of the market. And at the same time, lower cost alternatives are emerging from outside the traditional ecosystem,� he wrote.

Although programming costs have been rising, the inflation rate for pay TV from 2005 to 2011 was far less than that of a cup of coffee or pet food or gasoline, according to analysts at investment firm Sanford C. Bernstein Co.

The number of channels available to TV watchers continues to grow, something that often gets overlooked when consumer advocates gripe about rising costs. In 2007, a subscriber with an expanded basic package got 119 channels. Today that number is closer to 180.

From a programming perspective, the last few years have been a golden age for cable. Shows such as AMC’s “The Walking Dead,� FX’s “Sons of Anarchy� and HBO’s “Games of Thrones� are legitimate hits. The Emmy Awards are dominated by cable shows now.

Recognizing the need to give customers more bang for their buck, pay-TV distributors and programmers are finally starting to become more aggressive in offering their content online and making it available to viewers to watch outside the home on their tablets or phones as part of their pay-TV subscription.

Executives making the case for pay-TV’s future this week include Comcast Corp. Chief Executive Brian Roberts, Viacom Chief Executive Philippe Dauman, Discovery Communications Chief Executive David Zaslav and Showtime Chairman Matt Blank.

There will even be some glamour at this year’s convention as Jennifer Lopez is scheduled to talk about NuVoTV, a Spanish-language network she took an ownership stake in last September.

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Follow Joe Flint on Twitter @JBFlint.