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Cable Technology Feature Article

September 28, 2011

U.S. Cable Operators Want to Restructure Content Contracts

By Gary Kim, Contributing Editor

In a somewhat significant shift, U.S. cable operators are working on a plan that could require some programmers to unbundle their networks and allow customers to subscribe to channels on an individual basis, Reuters (News - Alert) reports. Embracing a la carte

Though the move might under other circumstances seem to be a radical departure from traditional practices, the ways cable operators are likely to “unbundle” channels will limit the impact, though some think the new embrace of selective unbundling is a stepping stone on the way to full a la carte service. Cable ponders big switch

There are a couple key objectives. Cable operators want to be able to offer lower-priced packages of channels to price-conscious consumers. But cable operators also would like to regain some leverage over the networks. Selective unbundling would help them do so.

Right now, local TV broadcasters, for example, bargain from a position of strength, as Federal Communications Commission rules require that cable operators carry those channels. And though in decades past, local broadcasters were content to ensure they were available on the cable networks, these days, local broadcasters expect to be paid for the use of their signals. That is one element of growing programming cost for cable and other distributors.

The cost of sports programming is another key driver of costs, especially ESPN (News - Alert). But there is an additional angle. When a network is a “must see,” it can bargain for carriage of other new channels also owned by the network. In other words, to get ESPN, a distributor might also have to carry a number of other lightly-viewed new channels also affiliated with ESPN.

So what cable operators would like to do is gain negotiating leverage at the same time that they gain the right to offer lower-cost service. In many cases, the new packages would cost less because they those packages exclude high-priced sports programming, for example.

The threat of unbundled programming is going to encounter fierce resistance from network owners. It isn’t simply that fewer cable customers for ESPN means ESPN will make less potential advertising revevnue. ESPN also will find its ad rates under pressure, as its viewership would likely decline. ESPN also will make less money from affiliate fees, which are the content rights cable operators buy on a per-subscriber basis. Fewer subscribers mean lower affiliate fees.

In principle, the new approaches would build on the “lifeline” service cable operators have offered for decades. Such tiers typically are low-cost offerings featuring local channels and public service channels. In principle, though, the new gambit would allow cable operators more freedom to create “sports-free” packages, for example.

Gary Kim (News - Alert) is a contributing editor for TMCnet. To read more of Gary’s articles, please visit his columnist page.

Edited by Rich Steeves