Meet Google (GOOG), The Cable Company

When you pay your cable bill, you effectively pay for two things: content and delivery.

For instance, I currently pay Comcast (CMCSA), as many other Americans do; it’s the largest cable company in the United States. Comcast has to pay for the content it delivers to me, with the exception of its own NBC products. The company passes these costs, along with the cost of delivery, on to me.

Cable companies have traditionally done very well because of their complete control of the delivery aspect of the transaction. Even if they have to pay for content, cable companies long relied on the fact that content creators like HBO had to go through them in order to reach viewers. Until recently, there was no other choice. Networks have, however, historically fought hard to increase their licensing fees, a struggle which has mainly resulted in ever-rising cable subscription costs.

Streaming video has begun push the boundaries of this arrangement in recent years. Now Google is poised to disrupt the cable model outright.

Taking a cue from streaming services such as Netflix (NFLX)  and Hulu, Google (GOOG) has announced plans to offer a subscriber version of YouTube, which is currently supported entirely by advertising. The new paid model would not replace ads, but would allow users to pay a fee to avoid them. Google has said it will share subscription revenue with video creators.

At its simplest, a premium YouTube service is to video what Google News was to news and information. Someone else spends the money to create content. Google then assembles that content and helps customers find it, while selling advertising around the content that cost Google nothing to create. The value Google adds comes through promotion and distribution. Google shares a piece of the resulting ad revenue with content creators at a rate set, conveniently enough, by Google.

This model is primed to work as well for video as it does for information, with the added benefit that viewers annoyed by ads may be willing to pay for ad-free content outright – at least, this is the hope behind the proposed subscription service. The only missing link, from Google’s perspective, is that Google still depends on someone else – like Comcast, for example – to deliver its content to the viewer by providing Internet service.

But Google is taking care of that, too, at least in some markets, by introducing its own broadband service, Google Fiber. While Google Fiber is only available in three major metro areas currently, plans to expand to five more are already underway and an additional four are under discussion.

I think we are seeing the start of a war between Google and the cable companies, especially Comcast. Google is one of the very few companies with both the resources to really build out its own broadband network from scratch and the motivation to spend time and money doing so. If Google can deliver its content to customers faster and more cheaply than Comcast, Google has every reason to make that happen.

Moreover, Comcast currently pays for nearly all the content it delivers. Google will have a set of content from YouTube for which it doesn’t pay, except for a share of the ad revenue it feeds back to creators. This library of content will subsidize Google’s purchase of content from name-brand providers. The excitement surrounding HBO Now, which will let viewers buy streaming access to HBO programs without paying for the cable channel, shows content producers are increasingly willing to reposition themselves to appeal to viewers who prefer a streaming experience.

Google would, no doubt, be thrilled to attract more users to its broadband service by offering standalone HBO packages. Unbundling subscriptions may not ultimately save consumers money, because each channel will be expensive on a standalone basis. Already, viewers increasingly must consider which channels are available through which online service when deciding whether opting out of cable is worthwhile. But unbundling may go even further. Google may follow the model set up by Apple’s iTunes Store, in which users are allowed to buy shows episode by episode if they prefer, paying only for what they watch. Google Play already offers this model for some shows; if it gains traction, Google may put more effort into expanding its offerings.

Like Google, content providers like HBO have good reason to try to sidestep Comcast and other cable companies. They want to expand their audience, and viewers are increasingly unwilling to buy Comcast’s expensive TV and Internet bundles. As the cable industry continues consolidating in pursuit of economies of scale, customers have expressed dissatisfaction with what they get compared to what they pay.

Cable companies do not only face competition with Google. Another potential threat comes from wireless providers. AT&T (T), Verizon (VZ) and their smaller brethren are already spending billions of dollars to upgrade their networks, and they are often the content delivery providers of choice for cable cord-cutters. Right now, wireless broadband is frequently too slow and expensive for high quality video streaming. But given sufficient time and spectrum, wireless providers – along with Google – may finally apply enough pressure to break the cable monopoly model.

Cable isn’t dead. But as the advent of Google Fiber, subscription YouTube and HBO Now indicates, it may be past its prime.

About Larry M. Elkin 553 Articles

Affiliation: Palisades Hudson Financial Group

Larry M. Elkin, CPA, CFP®, has provided personal financial and tax counseling to a sophisticated client base since 1986. After six years with Arthur Andersen, where he was a senior manager for personal financial planning and family wealth planning, he founded his own firm in Hastings on Hudson, New York in 1992. That firm grew steadily and became the Palisades Hudson organization, which moved to Scarsdale, New York in 2002. The firm expanded to Fort Lauderdale, Florida, in 2005, and to Atlanta, Georgia, in 2008.

Larry received his B.A. in journalism from the University of Montana in 1978, and his M.B.A. in accounting from New York University in 1986. Larry was a reporter and editor for The Associated Press from 1978 to 1986. He covered government, business and legal affairs for the wire service, with assignments in Helena, Montana; Albany, New York; Washington, D.C.; and New York City’s federal courts in Brooklyn and Manhattan.

Larry established the organization’s investment advisory business, which now manages more than $800 million, in 1997. As president of Palisades Hudson, Larry maintains individual professional relationships with many of the firm’s clients, who reside in more than 25 states from Maine to California as well as in several foreign countries. He is the author of Financial Self-Defense for Unmarried Couples (Currency Doubleday, 1995), which was the first comprehensive financial planning guide for unmarried couples. He also is the editor and publisher of Sentinel, a quarterly newsletter on personal financial planning.

Larry has written many Sentinel articles, including several that anticipated future events. In “The Economic Case Against Tobacco Stocks” (February 1995), he forecast that litigation losses would eventually undermine cigarette manufacturers’ financial position. He concluded in “Is This the Beginning Of The End?” (May 1998) that there was a better-than-even chance that estate taxes would be repealed by 2010, three years before Congress enacted legislation to repeal the tax in 2010. In “IRS Takes A Shot At Split-Dollar Life” (June 1996), Larry predicted that the IRS would be able to treat split dollar arrangements as below-market loans, which came to pass with new rules issued by the Service in 2001 and 2002.

More recently, Larry has addressed the causes and consequences of the “Panic of 2008″ in his Sentinel articles. In “Have We Learned Our Lending Lesson At Last” (October 2007) and “Mortgage Lending Lessons Remain Unlearned” (October 2008), Larry questioned whether or not America has learned any lessons from the savings and loan crisis of the 1980s. In addition, he offered some practical changes that should have been made to amend the situation. In “Take Advantage Of The Panic Of 2008” (January 2009), Larry offered ways to capitalize on the wealth of opportunity that the panic presented.

Larry served as president of the Estate Planning Council of New York City, Inc., in 2005-2006. In 2009 the Council presented Larry with its first-ever Lifetime Achievement Award, citing his service to the organization and “his tireless efforts in promoting our industry by word and by personal example as a consummate estate planning professional.” He is regularly interviewed by national and regional publications, and has made nearly 100 radio and television appearances.

Visit: Palisades Hudson

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