Finally a la Carte Programming?

English: Signature of US Senator John McCain.

English: Signature of US Senator John McCain. (Photo credit: Wikipedia)

 

John McCain recently introduced a bill to the Senate that would allow for a la carte programming. The bill will be known as the Television Consumer Freedom Act of 2013  and is attached by clicking the link. Also here are the comments made by McCain when he introduced the bill.

Here are the things the bill does:

  • It makes it voluntary for cable operators to offer a la carte programming.
  • It mandates broadcast networks (ABC, CBS, NBC, FOX, etc) offer their channels to cable providers on an a la carte or face the possible loss of their broadcast license.
  • Programmers like Discovery and Disney can only sell their programs as a bundle if they also offer them a la carte. So cable operators can buy only the programming that they want.
  • It threatens that any broadcast network that pulls its programming off the airwaves would lose the spectrum and also any rights that go with being a broadcaster. This is a threat for local networks to not mimic Aereo.
  • Current sports blackout rules won’t apply in cases where the stadium being used was publicly financed.

Here are the practical consequences if this bill becomes law:

  • Cable companies could save money by eliminating channels they don’t want to buy. I helped one client get into the cable business a few years ago who ended up taking almost twenty more channels than they wanted due the bundling requirements from the programmers. And so I see cable providers shedding channels. This may not necessarily result in any price cuts and might just increase the profits of the cable company. But over time this ought to help hold down costs and rates.
  • This bill does not mean that any customer will get a la carte programming. In McCain’s announcement he said that ESPN costs $4.69 per month. That is the price that a cable provider pays for the ESPN suite of channels if they agree to make them available to, and charge every customer for them. But if ESPN is forced to sell this on an a la carte basis, they understand that a lot of households are going to opt out of paying for it since many households have no interest in sports. I would expect that ESPN’s a la carte price is going to be a lot higher than the $4.69 bundled price. If that occurs (and there is nothing in this law that would prohibit it) then the math for ESPN and customers changes drastically overnight. Rather than everybody paying $4.69, if only one-third of households would want ESPN the price would have to go to nearly $15. And this same kind of math is true for every cable network. So my prediction is that none of the large cable companies will move their programming to a la carte. But there might be small ones who try it.
  • This benefits companies who want to deliver programming in a non-traditional way. This might open the door for Aereo or web-based companies to buy programming. I can see sports fans willing to pay $30 a month for a suite of sports channels and nothing else. But the first cable company that tries this is going to see the wheels come off. It could end up costing consumers as much to buy the channels they want a la carte as it is to buy the big bundles of today, due to the way the current pricing averages the cost across millions of homes instead of just those who want to watch it.
  • I can see cable operators who will put the broadcast networks on a la carte. There is a huge battle between local stations and cable companies over retransmission fees and I can envision cable companies who will price each channel according to what they must pay and letting the public deciding what they want to watch.
  • Marginal cable networks will fold. Some of the large programmers have made cable providers buy channels they didn’t want, and if enough of them elect to shed some of these networks they will fold.
  • It would be interesting to know if this law would override existing multi-year contracts for programming or if it would force new contracts immediately.

The primary benefit of this law is that it breaks the bundling being done by the large programmers who own many channels. The cable business is not profitable for cable operators and I have some clients who lose money on cable. They make almost all of their profits on data and voice. If cable companies have the ability to set any line-up they want they might be able to return some sanity to what they pay for programming. Over time this might be the change that breaks some of the power of the programmers and stops the insane price increases. McCain cites a 6.1% average increase in programming costs since 1995, but where I have been tracking it in the 2000’s it has been more than 7%. These kinds of rate increases are heading the whole industry towards a consumer revolt. If the 6.1% increase that McCain cited continues unabated, a $75 cable bill today would be over $136 within ten years.

The real shame of the bill is that the public will interpret this bill to mean they are going to get to pick just the channels they want to watch and that is still unlikely to happen. The bill is a good idea, but it’s really a la carte for the cable companies, not a la carte for consumers.

4 thoughts on “Finally a la Carte Programming?

  1. Hmmm…
    Maybe the way the arrange the pricing schedule is that the end-user customer gets to pick their first 10 channels at a given price point, with additional channels costing additional monies. For instance, the first ten channels cost $10/month, plus $1 per channel for additional channels.
    As you said, carrier can arrange it so that the majority of their customers purchasing cable service cover the majority of a carrier’s costs.
    On the other hand, if folks dislike these pricing schedules, they can always “vote with their feet” — as they have already been doing.

    Or better yet, read a book…

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  2. While we may all see the logic in this type of legislation, my guess is that the (inevitable) change will come about due to technology, not our govt intervention. The iTunes parallel is huge – where Apple was able to dismantle the record industry and virtually eliminate the record store from strip malls.

    Over The Top (OTT) programming is already taking hold – Netflix reported 4 billion hours of content viewing in the first qtr 2013, and may be the “most watched cable network” by some. That is not too much of a stretch to see. Netflix HHs watched 87 mins of Netflix per day (in line with the Disney Channel stats). There were 28 million unique streaming events in the first quarter. These stats are only the beginning as customers tackle the technology and realize how easy it is to watch what they want when they want. (Google Netflix most viewed content for hollywoodreporter.com story)

    Similarlay, Hulu has 4 million paying subscribers, but 38 million unique viewers in the past 12 months. Those viewers saw 457 million videos in the past 12 months and the average viewer spent 1 hr, 13mins watching videos. (SOURCE: statisticbrain.com/hulu-statistics/).

    The challenge is to find the inflection point – WHEN, do programmers bypass their current distribution model (the MSOs) with a direct-to-consumer model. I argue they already are – many shows are on the broadcast websites within 24 hours of an original run. Smartphone apps offer (without payment or subscription) access to this same programming. In essence, the MSO offers an easy one-stop shop for the customer at a price they are willing to pay for now. But, as alternatives become more available and prices continue to rise, customers will “cut the cord”.

    Sports programming offers an additional challenge as the ESPN model is hard to break. With every subscriber paying $5/month in their cable bill today, it would take a subscription model price to between $50 and $100 as only 5% – 10% of customers are AVID viewers committed to these channels. I would also argue, much of this programming is available today on the web, and time will make it more available.

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  3. A couple of recent announcements are also worth noting:

    From Multichannel News (5/15/13): Turner Takes Wraps Off Live Streaming for TNT, TBSTurner Takes Wraps Off Live Streaming for TNT, TBS

    From Fierce Cable (5/15/13): Netflix dominates peak downstream traffic in North America. Netflix dominates peak downstream traffic in North America

    From Fierce Cable (5/15/13): Disney’s ABC streams live TV programmingDisney’s ABC streams live TV programming

    and, from the same Fierce Cable issue, could this be why programming is not more widely distributed direct-to consumer? They need to know how many people are watching?
    Media execs lament lack of Nielsen ratings for online videoMedia execs lament lack of Nielsen ratings for online video

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  4. ESPN doesn’t have to cost $5. They send over $200 M a year just to the ACC for rights to carry their sports. They can afford that by having every cable household in the country sending them $5 per month. McCain’s announcement said that his little old lady neighbor would be horrified that she was sending $70 per year to ESPN. But she would probably be even more horrified to realize that much of that money is sent on to the big time college football programs.

    But that model has to break and sports programming is going to have to come back down to earth to survive. Certainly ESPN is not going to be leading any charge to break the current programming model. You are right and there are not very many fanatics willing to pay $50 per month for one network of sports programming. So when the industry breaks apart at some point, ESPN will only be able to survive by stopping the payments for programming. The average college sports fan is going to get shocked one day when half of the teams fold when the money stream dries up. But money has corrupted college sports and it will probably be a good thing to see it return to the 50’s.

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