The programming alone isn't what makes cable expensive.
GPM is a simple equation: (Revenue – Cost of Goods Sold)/Revenue. It works well for calculating the profit margin on selling tangible goods like televisions and computers where the Cost of Goods Sold (COGS) is easy to calculate.
But GPM doesn’t properly evaluate the cost calculation for any business model dominated by high infrastructure costs, like broadband because the costs are not included.
The cable industry has invested nearly $200 billion in building networks since 1996, and it continues to invest more than $10 billion more each year in maintenance and upgrades. Yet cable’s COGS takes into account only the much lower day-to-day costs of running the network as opposed to building it. This produces GPMs that make cable companies’ profits look artificially high.
GPMs exaggerate broadband profits in a second, subtler way. Cable companies provide not only broadband but voice and video services as well–over the same networks. Many of their costs, such as network maintenance and customer service, can’t be broken down by service. These costs are thus considered operating costs for the entire business, and likely were left out of the equation when determining the gross profit of providing broadband services alone. This, again, overstates the margin of revenue over costs.
“Return on invested capital†(ROIC) paints a much more accurate picture of how the cable industry is performing. Unlike the gross profit numbers, ROIC actually attempts to incorporate long-term investment in infrastructure, giving a better sense of how a company is using its money to generate returns.
Using ROIC, we find that until very recently cable companies were earning small returns, still trying to recover their colossal initial investments. It often takes years of positive profits for these companies to make up for that initial investment and start seeing a return. So, what may appear to be a massive annual profit using GPM is really just recoupment of a tiny piece of past costs. Returns for cable companies range from negative to quite small.
Comcast, supposedly the greatest cable monopolist, has averaged just a 4.5% ROIC over the last five years. Time Warner Cable’s 5-year average is -1.3%. Compare those with Apple (32%) or Google (16.1%).
Read more:
Does cable really have a 97% profit margin? | The Daily Caller
