Programmers Seek Increases, Higher Cable Rates to Follow

An adage in investigative journalism was made popular during the heyday of the Watergate investigation; “Follow the Money”. Nowadays it seems you can follow the money spent for your cable or satellite service right back to the big media companies. Bob Iger at Disney is pointing to ABC Network taking a higher share of its broadcast affiliates retransmission consent fees, while Chase Carey over at Fox is telling his investors that National Geographic Channel and FX network should be receiving higher license fees from cable operators. Meanwhile, independent programmers like Hallmark Channel are seeing themselves dropped from line-up as providers like AT&T seek ways to reduce programming costs.

Guess what going to happen to your cable bill as ABC, FOX and others continue to demand increases in their license fees? That’s right; those increases are going to be passed directly on to the consumer. Anyone who thinks different or is of the belief that cable operators should absorb the increases should refer back to their Business 101 textbook. After all, Comcast, Time Warner Cable and all the rest have investors to answer to as well. With programming costs being one of the biggest line-items that cable operators have to deal with, what else would you expect?

Meanwhile cable operators seem to be whistling past the graveyard while they are losing subscribers and insisting that cord-cutting has nothing to do with it. All the while they are rolling out their own “TV Everywhere” services, providing a collection of video to their customers in a “walled garden” fashion.

Where does that leave the multichannel industry? Is cable dying a slow death, choking on ever increasing fees and programmer demands to carry a plethora of new channels that seem to come about with every contract renewal while customers are warming to the idea of program-by-program a la carte on line? Recent reports suggest that the industry is at the precipice of a long, slow decline. This isn’t the first time that the cable industry has seemingly stood at the edge of the abyss. No doubt the cable industry will find a way to survive this too.

Is Ivi DOA?

So there is another start-up with a great idea. It goes like this, “Let’s be disruptive and pull TV signals off-air, stream them on the internet and charge a fee to subscribers to watch them.” Seattle based Ivi thinks they have a solid business case and an iron-clad legal argument that permits them to do this. However, broadcasters and other content owners think differently and have quickly slapped them with Cease and Desist letters.

Here’s the crux of the matter, Ivi argues that proposed payment to the Copyright Royalty Tribunal (CRT) obviate the need to pay stations directly or to even have an agreement in place with the broadcasters. However, it seems that Ivi’s logic is a bit clouded. They are leaning on payment to the CRT arguing that they are operating just as any other cable operator, but are ignoring retransmission consent saying that they are not a cable operator. Seemingly, Ivi wants it both ways.

For a start-up with less than $1 million in financing, it looks like Ivi will be spending all of their seed money on lawyers. They’ve already countersued the broadcasters and rights holders that have taken action against them; asking the local district court in Seattle to issue a declaratory ruling in their favor.

It seems to me that if you could lean on payments to the CRT to avoid negotiating retransmission consent, the cable guys would have done so long ago and live internet streaming of broadcast TV would be the norm. Along with the rest of the industry, I’ll be keeping an eye on this. For now it seems that the cards are stacked against Ivi.

CableLabs 3D Specs Paves One More Lane on the Road to Mass Adoption

Multichannel video providers have been dabbling in 3D programming for the past few months in order to prove the technology, test the waters with their consumers and enhance the perception that they are keeping up with new technologies. All of the 3D programming aired to date has been event driven content. With the adoption of 3D specs, CableLabs has taken the first step in paving the way for mass adoption of 3DTV.

In a way, as with HDTV 3D is a “chicken and egg” proposition. Is it that readily available 3D content will drive purchases of sets, or will content providers wait until there is a “critical mass” of 3D sets in homes before making the content available? ESPN and Discovery (who were both early movers in the HD) have already made their bets. As with any new technology, multiple specs lead to consumer confusion, which results in the delaying of a purchasing decision. Now that CableLabs has written 3DTV specs, it seems that there is one more lane of certainty on the road to mass adoption of 3DTV.

As is always the case on cable systems, it comes down to bandwidth. Fortunately, the move to all digital, switched digital, and ultimately IPTV systems will alleviate bandwidth problems for cable operators. The other pieces that still need to be understood are consumer appetite and elasticity of demand, programmer willingness to create content, the carriage/distribution deal and how operators will charge to recover the costs of 3DTV programming. Hey, we’re just getting started, folks!

Comcast - CBS Deal Completed Above the Fray

The announcement is out that Comcast and CBS have entered into a 10 year distribution deal that covers retransmission consent of CBS O&O stations as well as carriage of Showtime, Smithsonian Channel and the CBS College Sports Network and On Demand and online rights for certain CBS owned programming. This deal is notable for several reasons

First off is the term of the deal. Rather than keep the term to 3 years in order to mirror the usual retransmission consent election cycle, the deal has a 10 year term which is rather long by industry standards. As noted by CBS CEO Les Moonves, “There is a lot of flexibility built in”. I certainly hope so given the speed at which things change in the industry.

Secondly, the agreement encompasses more than just retransmission consent. Comcast was smart to tackle all of the networks at once. Strategically, it allowed them the ability to do some good old fashioned “horse trading”. As any negotiator and chess player knows, the more pieces you have to move around on the board, the better deal you are able to craft. There is no word whether CBS College Sports will be moved from the poorly penetrated Comcast sports tier to a more penetrated “digital basic” or “expanded basic”. Of course, it doesn’t hurt that Comcast is the largest player in the game either.

Lastly, the agreement was hammered out behind closed doors. Unlike recent negotiations between other cable operators and broadcasters, there were no public theatrics or threats of pulling the stations off the cable systems. Not that I expect this to change the very public way in which Time Warner Cable and The Walt Dinsey Co. are engaging over ESPN and ABC. To be sure, Comcast has traditionally handled their negotiations without high public drama. Even more so lately as the last thing that Comcast needs is a high profile struggle with a broadcaster at the same time that their deal to acquire GE’s NBC-Universal is under review. Perhaps CBS knew that and played it to their advantage.

As if to underline the nature of Comcast’s negotiation style, there was little chest thumping by CBS. While neither party disclosed the financial terms of the deal, there was no grand statement by CBS that the deal is proof that the "marketplace works". That pronouncement will be left to the NAB. However Moonves did say that Comcast negotiated in good faith and “kept their word” – just what Comcast needs the regulators to hear.

STARZ Original Programming: Billion Dollar Baby

Reports are that STARZ CEO Chris Albrecht has been tasked with raising $1 Billion of off balance sheet financing for original programming. This is yet another confirmation that original programming will continue to be the tentpole of the premium service business.

In 1975, when HBO launched as the first national premium service, the idea of showing Hollywood titles on a round robin basis made sense. TV viewers had little alternatives other than local broadcast stations and a handful of nascent cable nets. Early VCRs were just starting to come on the market. Fast forward to today and between online viewing, retail and rental; not to mention cable VOD, the consumer has a variety of methods to receive Hollywood titles.

So it is no surprise that premium services continue to stress the importance of original programming, whether it is True Blood on HBO, Dexter and Nurse Jackie on Showtime or the slate of programming that STARZ is looking to produce with the new financing. A large part of the reason STARZ brought Albrecht on broad is as a result of his experience with original programming while he was at HBO.

This latest foray by STARZ is a natural and necessary step in their evolution. Although they have aired some original programming along the way, it was never to the same extent as HBO and Showtime. This is a great opportunity for STARZ to really shine.

Retrans Rhetoric Heating Up

This week sees the formation of the American Television Alliance (ATA), a consortium of multichannel providers with a goal of raising awareness and ultimately changing policy on retransmission consent. Among the “strange bedfellows” in the ATA are Time Warner Cable, Direct TV, Cablevision and AT&T – companies that often compete against each other for multichannel subscribers, and in the case of Cablevision and AT&T, fight over access to and pricing of programming (but that’s for another day). A large part of the argument made by the ATA is that retransmission consent is essentially a consumer issue since any payment made by cable operators to broadcasters are ultimately passed on to the subscriber.

Predictably, the National Association of Broadcasters (NAB) scoffed at the ATA’s consumer rights stance, with an NAB spokesman berating it “as credible as BP executives joining Greenpeace”.

The rhetoric on both sides of the issue is just about as predictable as Keith Olbermann and Glenn Beck discussing the economy. Both sides passionately make valid points filtered through their own lenses. There is no doubt that the broadcast business model is changing and that cable operators have long benefitted from the carriage of local broadcast signals. However, cable operators are increasingly coming under pressure to keep rate increases in check and have even renewed an industry conversation on smaller and cheaper programming packages. All of this comes at a time when viewer options are expanding and much of the broadcast programming is finding its way to the web for free (Hulu’s premium aspirations notwithstanding). However, for the broadcasters to paint the formation of the ATA as an effort to do little more than protect the bottom line of the operators is a bit disingenuous given the boasting that NAB member companies have been doing on their quarterly calls about how much retrans dollars are contributing to their profits.

At the end of the day, retransmission consent is a consumer issue. It is one more cost that cable operators need to either absorb or pass along. Very often, these kinds of disputes turn into high profile corporate pissing contests, where the consumer is the one who ultimately gets soaked.

But really, is it wise for either side to be airing their grievances in public? Do viewers really need or want to peek into the “sausage factory”? I don’t think so. At the end of the day, viewers are not interested in the disagreements of corporate behemoths. Don’t ask them to take sides or get involved in the details or you may find they have little appetite for supporting either company in an argument over money. They just want to turn on their TV to get relevant entertainment and information without having to pay a whole lot of money to be advertised to in the process. But on the other hand, they do have a right to know why they might be losing access to their local news broadcast.

There is no doubt that both sides are preparing the battlefield and oiling the guns for upcoming renewals. The heightened rhetoric by both sides will certainly draw increased scrutiny from Washington should any of the negotiations get close to failing or actually fall apart and result in TV stations going dark on cable systems.

As with anything involving legislation, this is very much a matter of being careful what you wish for. The issues of Retransmission Consent and a la carte programming have been raised by legislators and interest groups in the course of the Comcast-NBCU merger hearings. Granted, what Retransmission Consent has turned into may indeed have been an unintended consequence of the 1992 Cable Act (which, by the way, was the result of Congress overriding a presidential veto), but can you really expect that the people who gave you the problem have any idea of how to fix it?

Is it Time for Cable MSOs to Think Small?

The coverage continues to fly about Time Warner Cable CEO Glenn Britt’s comments about the possibility of smaller packages of cable programming at a lower price. While not going so far as to endorse a la carte carriage of cable services, Britt’s comments does point towards a package of programming made up of 40 or 50 channels. The tricky part will be what gets put in the package and what gets left out.

Industry research shows that the average cable viewer watches only between 10 and 17 networks on their service on a regular basis. However, each individual cable subscriber has a different list of favorite channels. The issue is compounded even more in households where mom, dad and each of the kids all have a different list.

While Glenn Britt should be applauded for moving the conversation forward, we have yet to hear from the content providers (one wonders if Mr. Britt would have made these types of comments before Time Warner Cable was spun off by its parent company). In the final analysis, the cable operators can only do what the programmers will allow. There is an expectation that smaller operators with no programming interests would love to get in on this plan. The stumbling block in the plan is that most of the programmers currently in the large “expanded basic” package likely require broad penetration as a condition of carriage. Even networks with limited appeal like Food Network and Versus could have these kinds of packaging requirements. I ask you, what network owned by a major media company will be the first to step up and permit a cable operator to reduce their distribution by putting them on a lower penetrated tier?

If it is truly a matter of controlling costs, then logic would dictate that the networks with the highest license fees would be the first to go. While some subscribers may be indifferent to the loss of highly priced sports services like ESPN and the local regional sports networks (which are typically owned by cable operators like Comcast and Cox) in return for a reduction of their cable bill, other subscribers will certainly not be happy. Of course, all it would take to derail the plan by Time Warner would be a competitor like Verizon, AT&T, DISH or DirecTV committing to keeping these services on their expanded basic service.

An alternate strategy of placing a bunch of inexpensive and relatively low viewed services like home shopping and religious networks services on a low cost introductory tier and bundling the popular services like Discovery, Disney Channel, Nickelodeon and TNT on a more expensive tier will do nothing to truly address the issue and will further damage the low reputation that cable providers tend to have among the public.

While many cable subscribers intuitively like the idea of a la carte, the average consumer’s concept of how it would likely operate is ill informed at best. Subscribers currently now getting 100 channels for $50, will not be able to simply choose any twenty channels and only pay $10. It’s not going to work that way, as cable networks will need to increase their per subscriber rate as they lose subscribers in order to be kept whole, especially taking into account the resulting loss of advertising dollars.

At the end of the day it’s all about total revenues for the programmers with the operators increasingly feeling like collection agencies for the networks. Something tells me that we haven’t seen the last of this kind of talk. If anything, the operator/programmer relationships will continue to be thorny. Networks continue to insist on wider distribution for their new and emerging services and operators of all sizes continue to find their margins squeezed by an increasingly frugal subscriber base that is beginning to look at other options for video.