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

  • From: Craig Birkmaier <craig@xxxxxxxxx>
  • To: opendtv@xxxxxxxxxxxxx
  • Date: Thu, 10 Jul 2008 09:53:41 -0400

At 9:44 AM -0400 7/9/08, John Shutt wrote:
The ala carte system of paying for cable sounds good at first until you figure out that 1) because of reduced revenue from a smaller subscriber base, the ala carte price for each channel would be higher than the current per-subscriber fee the cable company pays on your behalf, and 2) if you include all of the channels your entire family enjoys, you'd most likely end up paying more than you do now. Ala carte only makes sense for single households.

And yes, the commercials help pay for the channels, as does the subscriber fee. If there were no commercials, you'd be paying closer to the per month charge for commercial-free HBO, Showtime, etc. Likewise, if there were no local insertion ads, you'd be paying more directly to your cable company as well.

Where do i begin...

Your response sounds like it was written by the PR department for the NCTA. This has been the "company line" ever since the FCC and others started talking about ala carte. It is a worst case scenario based on the FALSE premise that subscriber fees are a critical component of economic viability of all cable and broadcast channels.

Yet somehow, broadcasters have managed to thrive for decades without the "found money" from retransmission consent fees.

And most cable networks have become financially profitable now that they have become a standard component of what 85% of the homes in the U.S. watch.

The reality is that all of these networks can exist without the subscriber fee revenues, with the possible exception of ESPN, which uses a portion of subscriber fee revenues to pay for the rights to the content that makes sports fans willing to pay these fees.

The multichannel industry "party line" is that any loss of subscriber fees would need to be completely recovered from the smaller potential viewer base, if consumers are allowed to choose whether or not to allow the channel into their homes. This "theory" assumes that ad revenues would remain stable, and that subscriber fees would be forced to go up to compensate for the loss of revenue from homes that do not currently watch the channel in question.

I do not buy this theory. Ad revenues are still the main economic driver here, and they are dependant upon actual ratings, not homes cleared. A percentage of those ratings come from homes that may occasionally watch a program on the channel in question, simply because they saw something interesting while channel surfing. So the reality is that ratings would likely decline in an ala carte world because there would no longer be the possibility of surfers tuning to that channel.

This is a reality that most cable networks simply cannot afford to risk, ESPECIALLY the browser channels that recycle shows from the broadcast networks to attract generic audiences, as opposed to channels that offer niche content targeted at specific special interests.

Freeview is living proof that subscriber fees are not an economic imperative for the survival of a TV channel. Somehow, these channels are making money ONLY from ads, and many channels that are operated by companies that are not among the original Freeview partners, are paying millions of dollars to get their content onto the service.

What this tells us is that it is critically important for viewers to have access to your content - without access you cannot draw an audience and therefore cannot sell ads.

The history of the extended basic tier in the U.S. is all about ACCESS. Getting your content into this tier was the critical economic reality because it made your content available to the masses who had turned to cable (and later DBS) to access a wider choice of programming than one could get via FOTA TV. Subscriber fees are an artifact of the battle between broadcast and cable to develop the extended basic tier that nearly 85% of U.S. homes access today. These fees were tacked onto cable bills to help new cable only networks get established in an era when most of the audience was still watching the broadcast TV networks. As these channels became profitable in their own right, the need for the subscriber fees became less important; in fact the media conglomerates went on a buying spree to buy back big chunks of the audiences they were losing to cable.

Even more important, the conglomerates understood the need to get their content - and more outlets for their content - into the heart of the extended basic tier. Thus we saw the early years of retransmission consent used to rebuild the crumbling broadcast TV empire. Rather than demanding cash the networks negotiate carriage of new channels in preferred locations in the extended basic tier. The reality here is that it was, and still is far more likely that a channel surfer would just use the channel up/down button on the remote to surf - the statistical reality of this is that channels below 30 had a greater opportunity to be seen back in the days the extended basic tier topped out at 35 or 40 channels. As cable plants upgraded and the extended basic tier grew to 50 then 60+ channels channel placement became even more important.

Getting into that extended basic lineup was critical to the success of any new cable network. The Fox News Channel is an excellent case study. The cable industry was not interested in allowing competition to the Cable News Network, which operated at a loss for more than a decade. NBC and Microsoft used retransmission consent to force MSNBC in the extended basic tier and got CNBC in as well as a financial news channel. Fox did not have the leverage to force FNC into the lineup. So they PAID the cable industry more that $700 MILLION to buy access to the extended basic tier. As the top rated cable news channel today, this appears to have been a very good investment - FNC is now in a strong enough position to demand a substantial subscriber fee from the multichannel system operators.

All of this happens because it can. Consumers are told that ala carte is not feasible and would cost them even more than they are paying today. The reality is that we are about to transition to a ala carte world with Internet distribution. It is not a question of whether the cable bill would go up with ala carte. Instead, it is a question of how far will the dollars I am spending today go if i drop cable and choose to pay only for the stuff I want to watch. As we are seeing already, in many cases you do not need to pay at all. Services like Hulu are ad supported, and miracle of miracles, there are less ads in the Internet version than watching the same show via FOTA, cable, or DBS.

The same would be true for cable and DBS if they were to offer ala carte. Most cable channels would DROP their subscriber fees, lest they be dropped from the channel lineups in millions of homes. This is inevitable, as we move into a new world with more competitive options for our entertainment dollars.

Yes, people will pay a premium to watch a program without ads, whether it is delivered via a premium channel like HBO, via a VOD transaction, or purchased/rented at Blockbusters, Netflix, or the iTunes store. But the extended basic tier is like going to the Mall - networks want to be there because it is a convenient place to shop.

It is interesting to note that Malls are no longer the big thing in retailing. They take too big a bite of profits and it is easier to park in front of the store you want to shop at than finding a parking spot at the mall and walking through the mall to find the one store you want. Thus strip shopping centers are the big thing again - and a big reason is that large retailers can OWN the real estate and maximize their profits.

Guess what - the same thing is going to happen with TV. Opening a store in cyberspace where you can control the customer relationship is going to replace the good old extended basic mall...

Regards
Craig


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