Dr. Strange-Cable Programmer-Love: or How I Learned to Stop Worrying, and Love the Big Programmers, Big Distributors, and Big Subscription TV Prices . . . While I Wait on Internet TV
Given last week's posts, one of the big attractions of the Cable Show was to hear how the big programmers viewed the upstart Internet content distributors. Therefore, I was especially intrigued by a panel presentation by big cable programmers cleverly titled, "Jumping Through (Hulu) Hoops: Programming for a New Video Paradigm". Every panelist seemed, in one sense or another, to regard the Internet as something to be either shunned, ignored, or to be indulged, but in limited amounts, and with great care. The primary concern with putting programming on line seemed to be jeopardizing the "dual" revenue stream that the large programmers get from subscriptions and advertising revenue. No one wanted to be "broadcasters" (not even the broadcasters--Fox and NBC)--in the sense of being reliant on advertising revenue alone.
The spectrum of opinions regarding the value of placing programming on the Internet seemed to go from the "more progressive" that saw some perceived value in either using the Internet to "monetize" (this was a word that was used a lot) non-first-run (i.e., repeat) programming, or in using the Internet to promote interest in new channels, or new shows on existing channels.
Similarly, some content providers perceived value in placing different (from that shown on TV), complementary, content on the Internet that is designed to increase consumer "touches" and viewer interest in the primary, on-screen content. For example, more on-line gossip, deleted-scenes, etc. In other words, if the content/programming had a clear value, then panelists seemed to agree that the Internet was not the most efficient means of exploiting that value. In sum, the Big Programmers were very comfortable with their present business mode--extracting advertising and subscription revenue from large packages of bundled channels, where the availability of "good" channels with broad appeal, are tied to the distribution network also being required to purchase programming of more limited appeal, e.g., you have to take ESPN "Classic" (re-runs of "classic" sporting events) if you want ESPN (real time sports and original programming).
There was also some interesting discussion of the merits of the Internet as a better vehicle to exploit non-real-time value than the DVR (there is no "fast forward" on the Internet. Others posited that Video On Demand, with "fast forward" disabled (easily hacked?), seemed to be another alternative that the panelists thought might be a better alternative, but was not ready for commercial use at present.
On the other end of the spectrum, some panelists thought that "real" programming (complete episodes vs. clips and supplementary content) should never be placed on the Internet, because it encourages "bad habits." It's unclear whether the speaker was referring to stealing programming, which is indeed a "bad habit" (not to mention illegal), or whether the programmer was referring to the ability of the ability of the owner of the original content to bypass the big bundling programmers. In other words, is it a "bad habit" for the NFL to sell packages for certain content directly to consumers, via the Internet, or is it competition (even worse)?
As a complete outsider to this industry, and the dominant business model of vertical integration (affiliation?), through either contract and/or acquisition, of big programmers and big MSOs, I appreciated the opportunity to hear some of the perspectives of the Big Programmers. I was struck by a few observations (that could be based on pure ignorance).
First, the "dual revenue" business model that the panelists seek to protect from the ruthless efficiency of the Internet can only be "preserved" and "protected" if the "content-distribution complex" (to co-opt Eisenhower's characterization of the "military-industrial complex") already possesses some degree of market power that does not need to be acquired, but only maintained. In a world of bandwidth scarcity (one dominant subscription TV vendor with limited capacity) it is not difficult to understand how a few multi-channel/multi-format (digital plus high-def) content providers--especially with complicit and vertically-integrated subscription TV distributors--could foreclose access to better, more efficient, and more innovative content providers. In other words, it is easy to see how one good HD channel, like HDNet, is at a distinct disadvantage in securing carriage when a distribution network simply must "take" the less-desirable bundled programs of a large bundler in order to get the "must have" channels that consumers expect. The panelists seemed to view this state of affairs as one that they could maintain through good discipline.
A second, and related, observation that I had was that the big programmers seemed to think the Internet was something that was limited to a little screen on their already-little-screen computers. I would say this was definitely an incorrect observation on my part (who in a telecommunications-related industry would think this way?), except that the panelist that was most opposed to putting any programming on the Internet was the executive from Rainbow--the one content provider that most aggressively exploits the terrestrial loophole to foreclose competitive video entry (see last week's blog). The Rainbow executive clearly understood that Internet delivery can easily show up in beautifully on a 52 inch, high-def screen--which is why his company refuses to give that high-def feed (for critical local sports programming) to Verizon, a competitor to cable companies like Rainbow's owner Cablevision. Both Verizon and Cablevision deliver their video over the same wireline Internet transmission facilities over which they deliver their phone and Internet service.
If I was a cable programmer, I would be as wary of the Internet as the executive from Rainbow. Bandwidth to the home is not only trending higher naturally, President Obama views this trend as something critical to the economic recovery of the nation. Nonetheless, if dedication to your business model could affect the effect of the Internet, there would be a lot more CLECs still around.
When I started at CompTel (the Competitive Telecommunications Association) in 1999, it considered itself a home for all competitive (at the time, that word meant "non-regulated") carriers. Another association chose to more or less limit their membership to competitive local exchange carriers ("CLECs")--and the emphasis was on the word "local." For a while, this characterization enjoyed some cachet with the FCC. Unfortunately, the distinction between "local" and "long distance"--as a commercial matter--meant nothing to the customers of these carriers; the Internet had quickly rendered the concept of distance as economically meaningless. Pricing became capacity-based, and distance-insensitive. Nonetheless, these companies bravely adhered to the business model to which they were dedicated; notwithstanding the effects of the Internet.
In 2005, CompTel absorbed this association, which, by that time had about 12 carrier members that were not already members of CompTel. CompTel, at the time, had over 200 carrier members.
If I perceived anything correctly from the Big Cable Programmers view regarding the Internet, my advice to the Big Cable Programmers would be to make peace with the Internet, before the Internet makes pieces of their business model--even if that means not extracting every penny of rent from your existing subscription TV distributors and advertisers. The problem with declining cost industries (for network owners, each additional customer reduces the average cost per customer) is that losing customers increases cost per customer, which, in turn, will lead the network owner to increase prices to the remaining customers in order to maintain revenues. Similarly, one would think that in industries like cable programming, where the cost of the programming is fixed and the addition of new subscribers/advertisers drives up the profits per customer, that a loss of customers will lead to the same vicious spiral--increased prices to remaining customers, further exacerbating share loss.
If a programmer can keep its customers happy over a distribution vehicle that the customer is becoming more and more drawn toward (the Internet), then the programmer has less to fear from the inevitable assimilation of video distribution over this medium. This would be a wise choice, given that network owners, equipment manufacturers, competitive content providers, customers, and even the government, are determined to increase bandwidth--and Internet service provider alternatives--faster than the programmer can productively foreclose distribution capacity. When firms have business models that are comfortable, but unsustainable--given consumer demand and technological trends--the firm can either change to accommodate the customer, or lose the customer.