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Cable Technology Feature Article

May 20, 2013

A La Carte TV Programming Could Lead to Higher Costs, Less Choice

By Tara Seals, TMCnet Contributor

A la carte programming—the ability for pay-TV subscribers to pick and choose the channels they want included in their cable, IPTV (News - Alert) or satellite package—is increasingly becoming a drumbeat issue for consumer advocates looking for more choice and control over their TV experience and TV costs. But while the idea of only paying for what users watch sounds like a win for consumers struggling under the yoke of $100+ cable, satellite or IPTV subscriptions, the reality is that there’s no guarantee that choice or pricing will improve under an a la carte plan.

A la carte has gotten a high-profile backer on Capitol Hill in the form of Sen. John McCain (R-Ariz.), who has introduced legislation that would require pay-TV companies to structure their subscription packages in a way that allows custom bundling.  It’s being framed as a pro-competitive choice move, but it doesn’t take into account the underpinnings of how the content business works.

Pay-TV distributors have long argued that it’s not their fault, and that content bundling practices force them to take channels they don’t want and can’t monetize, in order to gain access to top-rated cable nets. Cablevision Systems (News - Alert) has taken that grumbling to the next level for instance with an antitrust lawsuit against Viacom, accusing the media giant of demanding a $1 billion penalty if the MSO did not agree to Cablevision to carry and pay for 14 unpopular networks, such as Palladia, MTV Hits and VH1 Classic, along with must-have networks such as Nickelodeon, MTV and Comedy Central.

“Consider the microeconomics of the matter: the cable operator will have to offer the channels individually, but it will still have to pay for many channels en bloc, which means that someone will still have to eat the cost of the unpopular channels,” explained the Heartland Institute in a blog post. “That unlucky party will be the consumer, because what the cable operator will have to do is price the individually offered channels and/or customized tiers at a level that will ensure a profit or go out of business.”

Or, they may just raise prices on popular channels. For instance, pay TV providers pay ESPN (News - Alert), the most expensive network in the history of pay-TV, more than $5 per month per subscriber. That’s because live sports is one of the only arenas that offers true differentiation for traditional TV in courting advertisers and positioning themselves against over-the-top alternatives. Forbes estimates that the network brought close to $11 billion in revenue for parent Disney (News - Alert) in 2012.

However, only about 25 percent of cable subscribers actually watch ESPN. Meaning that under an a la carte model, operators would be left with the challenge of paying for ESPN on the back of 75 percent less of a paying customer base, sending the per-channel pricing up to, in theory, $20 per subscriber per month. That’s clearly unfeasible, meaning that pay-TV will have to perhaps throw other channels into an ESPN package to justify its pricing…which gets up right back to content bundles. Or, Disney could push back on the amount they spend on sports broadcast rights, a process that would have big ramifications for teams and the sports business model as a whole.

Another issue is viability for independent networks. Heartland points out that a la carte “will certainly reduce access to programming because the less popular channels will have much less appeal for the cable provider.” In other words, the inability to bundle in the unpopular channels may signal a death knell for niche content that has a thin customer base in the first place.

It goes without saying that a smaller stable of content on offer is bad for the marketplace of ideas and for consumer choice. But a model that doesn’t protect or favor niche channels could also accelerate cord-cutting. Not everyone watches Ovation, for instance. But those who do, really, really do. And may be willing to find the programming elsewhere if they can’t get it from cable. That’s a population that OTT providers will be all too happy to court.

Providers like YouTube (News - Alert) are already making moves in this direction: YouTube is launching a pilot program for a small group of content partners that will offer paid channels with subscription fees starting at $0.99 per month. None of the mainstream Big Media companies are represented in the effort, and  YouTube is clearly looking to be a home for “long-tail” content.

It should be noted that McCain’s same bill would also prevent broadcasters from moving their networks to pay-TV—something both FOX and CBS have threatened to do in the wake of the Barry Diller-backed Aereo winning legal victories in its copyright infringement case. Aereo offers local television feeds over the Internet for a $8 per month subscription—but it hasn’t paid retransmission feeds to the local TV affiliates. That has sparked an ongoing lawsuit by broadcasters claiming copyright infringement, but the company issues dime-sized antennae to subscribers which makes the service, technically, free-to-air, it says. So far the court has been on its side, prompting broadcasters to start saber-rattling. But McCain’s bill would give the Federal Communications Commission the ability to strip the licenses of any broadcaster that moves to a cable model.

So, in an a la carte world, cable would be charging consumers for “must-carry” channels like national broadcast feeds individually to cover their retransmissions fees costs, even though these are available over the air. This also may be something that the market won’t bear.

Bottom line? The basic business models for Big Media, sports teams and leagues, indie channels, broadcasters, advertisers and OTT providers are all part of the picture and are threatened with deep change, with the specter of billions of dollars being drained out of that ecosystem in a way that doesn’t actually help consumers at all.  Any change that would make a la carte TV a boon for the consumer would need to target the ecosystem as a whole, not just traditional pay-TV distributors, and would likely require potentially far-ranging regulatory oversight and other political bugaboos. So sure, the a la carte model sounds good on paper. But the overall content ecosystem is much more complex than what it seems like at first blush.

Edited by Rachel Ramsey

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