[opendtv] Re: Analysis: Broadcast's $1 Billion Pot of Gold

  • From: Craig Birkmaier <craig@xxxxxxxxx>
  • To: opendtv@xxxxxxxxxxxxx
  • Date: Tue, 8 Jul 2008 08:36:01 -0400

At 7:02 AM -0400 7/8/08, Tom Barry wrote:
Craig -

I've never commented on this before since it is not my own hot button. But I am not sure why you think it is bad that a consumer pays 2 different ways for some service, say a combination of subscriber fees and advertising. Either way they are being charged by someone and the sum total of both is what they are paying. If the sum of the dollar cost plus the ad annoyance becomes too great they switch to another service or channel.

Thanks for asking about this.

The practice of paying for a service and ALSO being subjected to ads is not unique to cable and DBS. I saw WALL-E at the theater Saturday evening and was subjected to a variety of ads and informercials prior to the movie. By the way, WALL-E may be the best movie I have seen in years!

And many folks pay for subscriptions to magazines that contain ads. At least with a magazine you can skip the ads.

In some cases I might agree that it is appropriate to pay for a channel and still be subjected to ads. For example, ESPN pays a huge amount of many for rights to various sporting events, so I do not find it too objectionable to pay for the ESPN channels.

Here's the big rub. Of the ~ $22 per month I pay in subscriber fees, the majority of that money is paying for channels that I DO NOT WATCH. This is more like a TAX than a subscriber fee, as I would not choose to pay for the service. Unfortunately I have no choice in this matter - IF I want extended basic cable I must pay the subscriber fees for ALL of the channels, not just the ones I want.

You suggest switching to another service or channel, but my options are very limited. I could drop the extended basic service with Cox, but almost all of the channels I watch are in that tier, not the limited basic tier. I could subscribe to DISH or DirecTV, but I would still be forced to pay for a bunch of channels I do not watch. Or I could use only OTA TV and download the programs I want to watch from the Internet.

This last option is likely where I am the rest of us are headed, but we are not there yet in terms of availability of many programs, or the bandwidth needed to make this option truly viable.


And then there is the reality that these subscriber fees are not really necessary, especially for broadcasters who are now starting to feast at the retrans consent table. From the article I posted:

And that value is growing bigger fast. For broadcasters, retransmission consent deals are found money, with a better economic profile than a station's Website or multicast digital channels, both of which require extra investment. While Wall Street is downbeat on TV broadcasters because of stagnating ad revenue, the retrans boom is a potential bright spot for industry economics.

So broadcasters, who are already making much higher than average profit margins by U.S. corporate standards, now expect cable/DBS subscribers to pay for the privilege of watching their ads, while those who opt for an antenna do not have to pay the fees. And the broadcasters are paying almost nothing for the use of a valuable spectrum resource.

This is just wrong.

It also raises the question of how it is possible for multichannel services in some countries - e.g. Freeview - to be funded exclusively by advertising? With Freeview, content owners who want to be carried on the service are PAYING millions of dollars for the right to air their programs; they must recover these costs AND the cost of producing and distributing the content ONLY with
ads.

Clearly we are paying a premium in the U.S. for our TV fixes, relative to other global TV markets where the U.S. media conglomerates operate.

This is why I am upset.

As I have often stated, I am a proponent of an ala carte system for subscriptions services such as cable and DBS. The conglomerates have become comfortable with this over-the-transom revenue. Clearly they do not want to risk losing viewers via an ala carte system, where viewers can opt out of their programming and fees.

But ala carte would provide real competition, and in this environment I believe that most cable channels would drop their subscriber fees rather than risk losing access to millions of homes. It is important to note that there are TWO metrics at work in the multichannel universe:

Actual ratings - the number of viewers on average for a channel and its programming.

Homes cleared - the total potential audience of homes that subscribe to tiers that contain the channel.

The number of homes that have access to a channel is almost as important as the actual ratings, as you cannot have actual viewers unless they can view your channel. In a world where channel surfing is commonplace, having access to viewers is critical. I strongly suspect that a large percentage of cable channels would drop subscriber fees if viewers could choose the channel they want from a multichannel service.


I realize we could get into free market and monopoly discussions but the issue would still be overpaying in a non-free market. It really doesn't change because the sum cost is mixed in two forms.

Yes, the discussion really boils down to non-free market economics. Propped up by government authorized monopolies and oligopolies, consumers in the U.S. are overpaying for TV relative to other industrialized nations.

I would be careful using the world "costs" in this discussion. It would be more appropriate to use the term "sum revenues," as the costs for programming these channels are the same, whether or not subscriber fees are involved.

That being said, services like ESPN are now at the mercy of the sports franchises, because the leagues know that ESPN has a huge pot of money available to pay for rights fees. Essentially, the summed revenues of ESPN make it possible for the content owners (the sports franchises) to charge more for their product.

So I can pay dollars or ad-watching time, or a combination. Why should it have to be 100% one or the other?

See above.

If I have the option to choose to pay for something then you are 100% right - it's just a normal buying decision.

If I do not have the option to choose what I am paying for because of bundling or tying, then we are talking about a different situation - one where I must decide if the value I get is worth the total cost for the stuff I want and the stuff I don't want.

Bundling is not unique to TV either. I bought a Makita 18v tool set yesterday. The cost was significantly lower than the cost of the individual components of the set. As a result I got a carrying bag and a flashlight that I would not have purchased individually.

The conglomerates argue that a bit of TV socialism is acceptable as it keeps the cost lower for everyone. Unfortunately, this is only true if we ignore the way these same companies do business in other countries.


Should premium channels also not be allowed any product placement?


Now you're opening up another can of worms. Product placement is advertising and should be accounted for as such, with identification in the program credits of the companies that paid for product placements. For the most part this stuff is innocuous, but it is easy to step over the line, as we have seen with children's programming.

It does get interesting when ads and content are integrated. The recent NYTimes story about Rush Limbaugh notes that the most expensive ads on his radio program are the ones where he integrates the sponsor into his monologs and other program content.

Unfortunately, there is no place to hid from advertisers. Perhaps the trend toward the use of the Internet to help with buying decisions will benefit all of us. I have no problems with ads that are targeted to me when I WANT information about products. I just hate the spam...

Regards
Craig


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