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December 01, 2005

Is A La Carte Pricing Coming To Cable?

The big news this week in media is the announcement that the FCC appears to have changed its mind and is now supporting requiring the cable TV industry to offer a la carte programming. A la carte means that subscribers could chose whatever channels they want to come into their house and pay only for those channels. So, you might pay $2.50 for ESPN, 20 cents for Lifetime, 35 cents for CNN, etc. In theory, this would save consumers money because studies show that most consumers only watch about 17 of the more than 50 channels that are included in the typical expanded basic cable package. It would also allow consumers to opt of channels that carry so-called indecent programming that now are included in standard cable TV packages. MTV, Spike, Comedy Central, and FX are networks often cited for indecent programming....

Media stocks sold off on this news and analysts were most concerned that cable networks stand to lose a lot if a la carte pricing were brought to multichannel TV (as opposed to cable companies like Comcast who would also be hurt but are not the focus of this commentary). Cable networks have two revenue streams: subscriber fees and advertising. The question is how much those two streams are linked. ESPN gets $2.50 per subscription per month from the cable and satellite companies, which pass this cost right through to their subscribers. A broadly distributed and popular network like HGTV might get 25 or 35 cents per subscription, while a niche network like Fine Living might get just 5 cents to 10 cents per subscription. At well-established and broadly distributed networks, advertising revenue is much larger than subscription revenue, as it is for newspaper or magazine companies (except ESPN where the high subscription fees are meant to underwrite the cost of expensive sports programming like the NFL). Another datapoint that fits into this debate is HBO: The most broadly subscribed a la carte network has 28 million subscribers who pay an average of about $10 per month. There are just short of 90 million multichannel TV households in the U.S, out of a total of close to 110 million TV households.

Those in favor of a la carte pricing will say that ratings on small, niche networks like Oxygen or the Game Show Channel will be easily replicated as the core audience for those networks will opt in and buy the network. Thus, the number of eyeballs will stay the same, and advertising revenue will be maintained. One could even argue that advertisers will pay a higher cost per thousand viewers if they know that they are reaching interested and motivated potential consumers. In fact, these networks could probably charge a higher monthly subscription fee since they will be demanded by their viewers. This is a sort of a "cost per click" model, I guess.

On the other hand, the networks will argue that the mere fact that the entire universe of viewers can stumble upon their channel increases viewership beyond the core audience. These incremental viewers can be monetized via greater advertising dollars at the same cost per thousand viewers. Further, networks will argue that the cost to develop or acquire programming is very high, and without the potential to increase ratings via the easy sampling that can be obtained with broad distribution across all multichannel households, there is no incentive to invest in new programming. Networks will also argue that independent networks will have no way to make potential viewers aware of their channel and gain sampling at an economical cost, so they will be no better off in an a la carte environment. Finally, the networks will argue that they will have to dramatically raise the current subscription prices to offset the cost of higher marketing expenses to attract subscribers and to offset whatever decline in advertising occurs (think about HBO now which charges $10 per month with no advertising and is generally thought to be as profitable as a traditional cable network like MTV).

There are a lot of other issues for a la carte as well. Can the cable and satellite companies offer it without spending hundreds of millions or billions on new technology upgrades to their networks? What happens to multiyear contracts for the carriage of current networks? What happens when a network like ESPN has a carriage agreement that requires the cable or satellite company to also offer a niche channel like ESPNU that otherwise would not be bought by consumers?

In the end, I believe that a shift to a la carte is just too disruptive to the current TV model for all concerned (viewers, programmers, and distributors) to suddenly be forced via Congressional fiat. What is really going on here is a power play by the indecency lobby, which is largely Republican and knows that it has friends in control of all three branches of government. Commissioner Martin is probably just making a play, hoping to force the cable and satellite companies to offer broad programming packages that exclude the channels that attract the most attention on indecency (i.e., Comedy Central, MTV, Spike and FX). If Congress actually moves toward passing a la carte legislation, I suspect that multichannel TV distributors will quickly offer these family friendly packages.

Posted by Steve Birenberg at December 1, 2005 10:24 AM in Comcast/Cable TV