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Why are fixed costs of cable companies so high?

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Mar. 12 2015, Updated 5:06 p.m. ET

Fixed costs of cable companies

In the earlier parts of the series, we learned about services cable companies offer in the United States. Now we’ll look at the costs of cable companies that offer diverse voice, video, and broadband services.

Cable companies such as Comcast (CMCSA) and Time Warner Cable (TWC) have high content costs. These costs are similar to fixed costs incurred by media networks such as The Walt Disney Company (DIS) and Viacom (VIAB). However, as distributors, they have additional infrastructure investments compared to content providers and aggregators.

You can have a diversified exposure to these four companies by investing in the Consumer Discretionary Select Sector SPDR Fund (XLY). The ETF held ~16.5% in these companies together as of March 2, 2015.

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High content costs

Content costs account for a sizable portion of a cable company’s operating costs. Comcast’s programming costs made up 38% of its cable communication division’s total operating costs in 2014. Programming costs were the largest contributor to the division’s costs during the year.

According to Comcast, these programming costs are impacted by factors such as license fees for media content of cable networks and fees the company pays to broadcast television stations for retransmission of their content on the cable network.

Capital investments to provide multiple services

Cable companies also provide the necessary infrastructure in order for media content to reach consumers’ homes. As you can see in the above chart, cable companies have invested a significant $216 billion in broadband infrastructures in the United States from 1996 to 2013. These infrastructures account for a large portion of the costs of cable services.

Apart from being a distributor of the media industry, these companies also provide voice and data services to consumers and businesses. Consequently, they have high capital investments in their cable network infrastructures similar to wireline telecom companies. To find out more about telecom companies, read What are the key costs for wireless and wired telecom?

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