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This past year, many TV subscribers had blackouts of channels they wanted to watch. The TV service providers – Time Warner Cable, DirecTV, DISH – had a challenging year negotiating prices for channel distribution.
The content companies like Fox and Disney own a collection of channels each. They want all of the channels to be carried in a reasonable package by the distributor (the cable or satellite TV provider). The distributor may not want to carry all of the channels – or cannot afford to put all of the channels into a reasonably priced package for its customers. For example, there are now 7 different ESPN channels available for TV. Disney requires the distributor to take all of them or none. That’s not only expensive; it chews up space on the head-end. (The head-end is the equipment that collects and encodes the signal from Disney and broadcasts it to the homes of the subscribers, where it is decoded by the set-top box for viewing. Smaller cable operators don’t even have space on their head-end to handle 7 channels of ESPN. To do so, they would have to eliminate some other channels, which will make some subscribers mad and/or it may be contractually impossible to do. Hence, the dilemma we face.)
When you look at the cable guide and see 500 channels (yet nothing is on), many of the channels are being carried due to contract. Want FX? You must take Speed and other channels that not many people watch. See how that works?
The local channels used to be carried as a courtesy to the TV stations and as a convenience for viewers. Now, even those channels want to be paid to be carried. This adds to the expense and why the cable bill keeps rising.
You might ask: why doesn’t that happen with telco TV like U-Verse, PRISM or FiOS? Well, their contracts are newer, so it won’t happen yet. Currently, telco TV isn’t as financially stable as cable or satellite. Verizon and AT&T only recently broke over 4.5 million subscribers for TV.
The economics for content is based on subscriber per bundle. So if TW Cable has 12 million TV subscribers, but only 10 million take the package above basic, then the content folks (depending on contract) get paid for 10 million users – even if no one ever watches the channels. More importantly, the channels get to use 10 million sets of eyeballs on TWC as the price to advertisers.
The reason we will not see a la carte pricing of channels is because without a package of channels, most channels would be unprofitable and close. The price of the channel is spread out of 10 million subscribers; if only 1 million wanted to buy just that channel, the channel would have to charge more than 10 times what it costs now. If that channel was $0.70 to the distributor with 12 million subs, it would cost about $10 to 1 million subs. Why? The channel would lose advertising revenue, since it would have one-tenth the viewers. (It’s probably why we don’t have intelligence yet on subscriber viewing habits – the content companies don’t want that data made available. What if Nielsen ratings provided data that only twenty thousand out of 10 million viewers watched Speed channel or Lifetime? What do you think would happen to that channel?)
It’s a complex game between the content owners – Disney and Fox – and the distributors – TWC, DirecTV, DISH. There are several levels of finances being played out, which is why we have black-outs. And when we do have black-outs, the content folks (and the competitors) use the consumers – you – as pawns.
There are two other factors playing into this game right now – OTT distribution and cord cutting. OTT means over-the-top video channels on the internet – like Amazon, Netflix, Hulu and the numerous other channels popping up on internet devices like Roku and smart television sets. Cable companies are seeing a rise in cord cutting, which means that the number of households that stop paying for cable TV has increased in the last two years to a real number (about 33,000 per month). The reason for cord cutting is not obvious. It could be economics. It could be switching to telco TV. It could be OTT – or a combination of reasons.
Netflix and Amazon have over 20 million subscribers each – and each have gotten into the content creation space, with some hits too. Netflix’s House of Cards and other shows are winning praise. It starts to look like Netflix is taking a page out of HBO’s playbook. (And Amazon is modeling after Netflix.)
This affects negotiation too. It affects the business model of the cable operators and the content owners. It will all have to be worked out. In the meantime, expect more black-outs.
