Why Pay For Channels You Don’t Watch? Ctd

Andrew Sullivan —  Dec 8 2011 @ 6:43pm

A reader who worked at a consumer group writes:

As someone who spent about a year of my life on this issue, and many months buried in the FCC’s record, the former telecom attorney is right to an extent. ESPN watchers (about a third of the national cable audience) would probably be forced to pay around $30 for ESPN if it was only available on an a la carte basis. Some people see that as a reason why a la carte couldn’t work – that it was full of bugs. I saw it as a feature.

It puts the whole issue of exploding sports salaries and owners’ profits into the clearest possible view for consumers. Want to see voters vote down publicly financed stadiums? Remind them they’re paying $30 bucks a month to the team already (of course, that won’t be the price, as you will see as you read on).  It’s such a laughably high figure that they’d have to lower that price to attract subscribers – and in turn lower the prices they pay league owners, and in turn lower the astronomical salaries they pay athletes, which go hand in hand with huge ticket prices for games in publicly-financed arenas and stadiums. It would also reduce some of the obscene amounts of money paid to big college athletic programs in two sports – football and men’s basketball.

The LA Times has a story today noting how ESPN's programming costs have increased 50% in five years. Consumers are paying for it and have no way to discipline the market and reject the price increases  without dropping their entire cable package.

What no one has really said is that a la carte, or cable channel choice, or whatever, never had to be an all or nothing. DC’s telecom attorney industry did a great job of framing the issue that way, but they knew that it was a red herring. It was easier to defeat  it that way because of its perceived impact to minority and other niche channels. But some, even back in 2007, were willing to embrace a la carte because it would finally give them a tool to combat the programmers that the telecom attorney correctly identifies as the enemy of this choice. They're the ones who want to force you to pay for more channels.  

Cablevision, DISH Network, and smaller independent cable companies were fighting for the consumer’s interest — while TimeWarner Cable, Comcast, DirecTV and programmers of all kinds like Disney, Hollywood, sports leagues, etc. were strongly opposed. But now that TimeWarner Cable is independent of Warner Brothers and owns minimal programming properties, and now that DirecTV is free from Rupert’s holdings, you’re already seeing some new thinking by these companies. 

If you were to give cable operators the flexibility to offer programming and allow consumers more choices, I think you’d see some cable and satellite companies do some creative things – Pick 10 channels from this bucket for $5 bucks.  Pick 25 for $15.  Buy 10 from this bundle at $10. – Buy this bundle of sports channels that includes the NFL Network instead of making me pay a dollar a month you can watch the Scouting Combine in the summer. (As an example, check out Montreal’s cable company Videotron and don’t give me the line about Canada being a niche market – the point is it’s a proof of concept.)

Many (most?) would take the big package as it is today.  Some would buy individually.  But if cable operators had that freedom, you would certainly see consumers examining their options and many would take advantage of them.

Outside of the most expensive channels, most of them cost in the dime to quarter range.  Those dimes add up for the consumer – four different home improvement channels? – that the cable lineup looks a lot like drug companies in that when one programming format works, everyone else tries to copy it, resulting in more and more channels in the bundle. Except, in the drug market, competition can lower prices; in cable – without a consumer having the power to pick the winner and loser – competition for viewers results in a price increase to the consumer as each of the big programming conglomerates ties carriage of their weaker channels to carriage of their must-have programming.

And the secret to so many of these channels in upper-800-land on the lineup is that almost no one is watching.  Ratings are so low, they don’t publicize or qualify for Nielsen ratings; sometimes numbering in the thousands. How people argue that a network needs to survive – that it is critical to our entertainment or to our nation’s discourse with viewership in the thousands is beyond me.

What took me years to fully understand is why advertisers never caught on. Here they are buying millions of dollars of TV ads every year for clients on channels that people aren’t watching. There’s the old marketing adage – that only 50% of your marketing budget is actually effective, you just never know which half – well, here you have a chance to know who actually wants to see your client’s message, you can tell because people are choosing (or not choosing) those channels they want to get.

It de-clutters the dial so that your client’s message can break through! This should be what you and your clients want! Until it struck me that Madison Avenue has no interest in informing their clients that the cable emperor has no clothes – that their revenues are often a percentage of the client’s TV spend, and that it’s more important to get them to buy as much airtime on as many channels as possible – no matter how few people are actually receiving their message.  So even if Madison Avenue doesn’t want to hear this message, their clients, who are spending thousands on an ad that maybe a few thousand people will see, should.

One final thing, in the old days, cable operators were constrained by two things, limited channel capacity (a la carte was impossible in the analog cable days) and the economics of handing a consumer too high a bill. Channel capacity is now a non-issue (and digital boxes for cable and satellite make a la carte possible), and in the old days, operators would tell new independent programming companies (Quincy Jones’s New Urban TV comes to mind) that they wouldn’t offer customers a new channel serving that demographic because they already had a "black channel".  No matter that many African-Americans felt that BET didn’t serve them, one channel was all they would get. 

Fast forward, new African-American channels are on the lineup (like Centric, owned by BET; and TVOne owned by Comcast and DirecTV) that people claim wouldn’t survive if every customer wasn’t forced to get them – and there are only a small number of independent channels on the air in any significant distribution. First, because these niche channels are almost exclusively owned by the other conglomerates, they're getting preferential promotional value that would no doubt continue – and all channels would have an incentive to be as attractive (and low-priced) as possible.  One independent had a brilliant idea – offer your channel for free and you get included in every basic package.  After all, no better price discipline than free – and you’d get a lot more eyeballs among channel surfers being 1 channel among 100 than 1 among 800, which could increase the survivability of these channels.

Cable has time to figure this out, but it’s running short.  A programming market that serves consumers better serves cable better in the long run. Consumers are learning about internet streaming options but are (mostly) correctly judging it as too complicated. Right now, they’re not willing to leave cable for the complexities of streaming services and devices (no Hulu Plus on AppleTV, no E!’s The Soup anywhere other than iTunes/AppleTV, no way to get The A-List: Dallas except on their website) that no one has figured out how to merge in a user-friendly way.

Once someone figures this out – and they will – cable will be crushed. Cable (how most people get broadband) and telcos (the ones that sell TV and broadband over the same wire) both will have to make up lost TV revenue somehow.  These companies will have no choice but to force people to buy TV in order to get broadband and/or broadband prices will be even more onerous and objectionable than today. And when that happens, cable has just traded one headache for another.