Morgan Stanley Report on Broadband Pricing Wildly Overblown

A new report from Morgan Stanley media analyst Ben Swinburne makes quite the audacious claim.

Swinburne believes that, as more customers “cut the cord” and enough people eventually consume  programming via the Internet, via Apple’s (AAPL) iTunes, Google’s (GOOG) YouTube, and so forth, cable companies like Time Warner (TWX), Comcast (CMCSA), Cablevision (CVC), and others, may have to double rates for broadband service to make up for lost revenue.

Add to that the number of devices that now come web-ready. Aside from the new generation of televisions on the market that provide this feature, videogame consoles also do, such as the Sony (SNE) PlayStation, the Nintendo Wii, and the Microsoft (MSFT) Xbox -- which are found in 43% of US households.

"This is the key part of the equation," Vince Vittore, an analyst at technology research firm The Yankee Group, told CNN. "Not just are these devices connected to the Internet, but they're coming prepackaged with the capability to connect to rich video sources. That really becomes a competitor to pay TV service."

Vittore believes that as many as one-in-eight customers will migrate over from traditional cable to Internet-only viewing before the end of 2010.

In a study titled “Consumers Consider Axing the Coax,” Vittore wrote:
 

Admittedly, this is a small phenomenon now, but a number of recent transactions and news items point to a shift in consumer thinking and a rise in what we term “coax-cutting.” We believe we will see a gradual shift toward more potential coax-cutters due to the following trends:
 

• The introduction of connected TVs in 2010 and beyond
• The escalation of pay TV prices as operators continue to wrestle with higher programming fees
• The increased proliferation of connected consumer devices that can function as set-top boxes

However, while delivery methods will undoubtedly continue to change, Vittore tells Minyanville that Swinburne’s estimate regarding how much cable rates will rise may be spurious.

“It’s a logical thought process, because as more and more consumers cut off their cable service, [the cable providers] are certainly going to want to alter their cost structures,” he says. “But, if they can cut their programming costs by having fewer subscribers, they likely won’t have to double the fee, but raise it by just a slight amount.”

“Typically, carriage fees are based on how many households receive the programming,” Vittore notes. “As those numbers go down, the carriage fees go down as well.”

Plus, Internet service is generally very profitable for cable providers, Vittore says. So, “pushing more people to broadband, that’s not necessarily a bad thing.”

According to Adam Lynn of Free Press, a national, nonpartisan, nonprofit media-reform organization, cable providers’ profit margin on broadband access runs in the neighborhood of 80%. On top of that, Lynn points out that “cable Internet service uses just a few ‘channels.’ So while about a quarter of cable operators’ revenue comes from selling Internet access, they only allocate around 3% of their networks’ total capacity to provide that access.”

All the more reason why Swinburne’s headline grabbing forecast of Internet charges doubling seem dubious, at best.

The question left hanging over the entire equation now becomes the amount of time it will take for broadband to achieve a high enough level of penetration in the United States to make a material difference to cable providers.

A paper called “Towards Universal Broadband” by Dr. Kevin A. Hassett and Dr. Robert J. Shapiro of Georgetown University’s McDonough School of Business, says:

“Given the growing appetite for online communication, it seems likely that at some future date every American who wants broadband at home will have it. How soon that day will arrive is less clear. Our analysis suggests that the pace at which Americans achieve universal broadband access could differ greatly, depending on economic factors and policy choices including policies that affect how broadband providers defray the costs of the additional investment needed to expand broadband capacity.”

Hassett and Shapiro make the argument that flat-rate pricing by cable providers is the fly in the ointment constraining wider broadband availability to all Americans.

“To the extent that lower-income and middle-income consumers are required to pay a greater share of network upgrade costs, we should expect a substantial delay in achieving universal broadband access,” they write. “Our simulations suggest that spreading the costs equally among all consumers – the minority who use large amounts of bandwidth and the majority who use very little – will significantly slow the rate of adoption at the lower end of the income scale and extend the life of the digital divide.”

However, “If costs are shifted more heavily to those who use the most bandwidth and, therefore, are most responsible for driving up the cost of expanding network capabilities, the digital divergence among the races and among income groups can be eliminated much sooner.”

The day that a majority of consumers access their televised entertainment online, hastened along by a la carte pricing, will eventually come.

And, relax. Chances are high you won’t be paying twice what you’re paying now to access it.

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