A History Lesson in Cable TV, Affiliate Fees and Consolidation
I guess it goes without saying that any industry that is big also has ties and loops that would make your head spin; the creative hanky-panky going on in the media business isn’t any different and it’s almost too delicious not to like even if it creates a system that negates the basis of our capitalistic consumer structure. When you open up the chest of this beast, here’s sort of what it looks like:
Let’s start at the top with Big Cable/Satellite – let’s call it the The Big CS. The Big CS is the company that you pay way too much money to for a package of way too many channels. As a stand-alone, cable companies are nothing but a middleman so they need the Networks who create the demanded content/programming. Enter Affiliate Fees. Big CS and Networks negotiate affiliate fees based on subscriber amounts for each of the networks programs. The networks then bundle up their channels and license it back to The Big CS. However, the programmers have their own revenue agendas and make sure that the bundles they offer to cable companies are cleverly designed – the industry calls it tying – i.e. Big CS if you want CNBC, you’ll also have to get USA, Bravo and this handful of other niche players we’re hoping hit it big. Big CS then sells the bundle back to you as nicely wrapped tiered packages. This makes it no likely an element of design that the show you want to complete your television viewing needs is always in the next tier up. Oh and did I mention that along with all this creative foreplay, there’s a nice dollop of vertical integration going on. I’m not going to even try to get into how advertising works in this. What this all boils down to is that cable and programmers have created a system with strong barriers to entry, heavy consolidation, and a defense line stronger than your favorite defensive line.
Last year when I finally got cable I realized my television watching patterns boiled down to The Food Network, Bravo, and an handful of our click-throughs. I really wished I could pay a la carte for the shows I wanted, nothing more, nothing less. In fact, if offered I would even be willing to pay premium just to pay for what I watched. Why wasn’t a cable company trying to service this need yet? A la carte sounds simple and even profitable? I want X, you charge me Y + % for X. Win-Win.
But once I got into the nuts and bolts of media, it’s easy to see that offering a la carte is the Big CS’s worse nightmare as it risks digging into affiliate fee revenues (all estimated $32B of it). Not only that, but if consumers are offered the opportunity to pick and choose what they want to pay for, the transparency of real consumer demand risks being exposed by a model that, in effect, creates and sustains itself on artificial demand. If given the choice, the industry knows that most of us would probably only pick 10-15 channels and those 10-15 may or may not be the ones that the Big CS has their cojones riding on – i.e. the OWN network. Not only is a la carte risky for the Big CS, it’s also risky for us in the current business model as a la carte might actually raise the price of the individual channel outside of a bundle as companies play with the price to keep revenues consistent to the bundle model. In other words, without regulation, what you pay now for 100+ channels may not look that different from the 10 you chose a la carte.
It’s a lose-lose situation
Sounds kind of crappy, doesn’t it?
Back in 2007, a couple of angry consumers brought a class action lawsuit against The Big CS claiming violation of the Sherman Antitrust Act arguing that a cartel had been created and consumers were paying inflated prices. It’s no shock that the big companies filed for a jury trial. I couldn’t find any more information on what happened to this but my guess is it’s sitting under the 10,000 other class action lawsuits, weighted down just enough by a couple of Benjamin’s – you can’t play hard ball with a pee-wee bat.
Networks, big cable, and advertisers want and will fight tooth and nail to keep the industry structure as is – uncompetitive and unable to be disrupted by new players, different models, and by the newest threat – online broadband players such as Hulu. Hulu is the second largest player of free online content and has slowly taken viewers from traditional providers and given us a view of what capitalistic media could look like. But remember that consolidation thing . . . Comcast recently acquired a position in Hulu that gives it full power to change the game and while the contract has certain restrictions, you can about guess that Comcast will shift the game in its own interests. Like I said, you can’t play hard ball with a pee-wee bat. Get your free content while you can.
The Bottom Line . . .
A la carte is still a wish to wish for and maybe one day we will be able to get our media how we get our hamburgers, our way. But with a system as consolidated and controlled from both ends, it’s unlikely that a la carte by consumer demand will be offered anytime soon and we will likely see the disruption of cable as we know it before we see a la carte. Now, I’m not trying to claim that I know anything about this industry beyond what I know about how my health insurance works but market forces of demand and disruption are at work and you can’t stop the technology train.
The consolidation and big pockets of Big CS and Networks are creating a strong line of defense but maybe it’s time for the media industry to build a model where the creation of good content is the real driver. Maybe it’s time to re-envision an industry that works to satisfy its customer verses trying to hide sub-par content behind a model of consolidation, affiliate fees, and creative internal controls. Maybe it’s time for someone to step up and change the paradigm that has manifested and sustained this model as we know it and make cable better – Oprah sounds like the person with the influence and the pockets to do just that.