The Broken Cable Industry

Fatty_watching_himself_on_TVLast week Mediacom filed a petition asking the FCC asking to open a rulemaking about regulating programmers. The FCC is under no obligation to act on this request, but I hope that they do.

Mediacom makes a point that I totally agree with, which is that the relationship between programmers and distributors is broken. The industry has evolved to the point where the programmers dictate all of the terms for carrying their content. In the early days of the industry the power was mostly with the cable companies. The FCC changed that with the Cable Act of 1992 that required that cable companies to carry local networks. But over time since then the industry has tilted nearly 100% in favor of the programmers.

The power of the programmers is due in a large part because the ownership of content has become concentrated in the hands of a few companies. There are six corporations that together own most of the programming that people think of as part of the cable TV experience. This has happened through mergers and acquisitions, and the situation might get even worse if Rupert Murdock and New Corp is successful in buying Time Warner.

Condensed media power has resulted in the following:

  • Programmers dictate what content cable companies must buy. Each of the six major programmers owns some ‘must see’ channels but each also owns many other channels. Most programming contracts require a cable company to take everything offered by a programmer in order to get the must see channels.
  • Additionally, the programmers dictate where many of the channels must be placed in the line-up. This is why the line-ups of different cable companies look so eerily alike – they don’t have a lot of options about how to create packages from the content they buy. I have one client who recently got into the cable business. They hoped to have a basic lineup of around 60 channels, but the programming contracts instead forced them into carrying nearly 85 channels.
  • The programming rate increases are accelerating. Some of the recent rate increases I have seen are mindboggling. Earlier this year Viacom forced a nearly 100% rate increase over five years upon several cable providers. But the largest rate increases have been for local network channels. Five or six years ago these channels (ABC, CBS, FOX and NBC) were free or nearly free for cable companies. Now most of my clients are paying between $8 and $10 per customer per month just for these networks.
  • To make matters worse for cable companies, the programmers turn around and make a lot of their content available online on a delayed basis to companies other than the cable companies. This means the cable companies pay to carry the content and then see customers watching it somewhere else (with somebody else’s ads).

All of this translates into runaway inflation in cable rates. I’ve seen various industry estimates that the average cable rates by 2020 could be around $200 per month. The high cost of cable is obviously is affecting households and is starting to drive people to find an alternative to the big cable packages.

This is not to say that the cable companies don’t also have policies that are making cable too expensive. For example, they keep increasing rates on settop box rentals and cable modem while also introducing other mysterious charges onto cable bills.

Mediacom has asked the FCC to explore this issue and to find a fix. They call this a broken industry and they are right. The constant large rate increases cannot be sustained and every rate increase is driving more customers away from traditional cable TV.

Mediacom is asking for common sense fixes. They are asking to be allowed to unbundle the programming packages and buy only those channels they want and to then be able to package content to customers in ways that they want to buy it. These changes will require FCC intervention, because right now all of the terms are being dictated by the programmers. Every company that offers cable would benefit by these changes and if the FCC opens a docket I will be making comments.

If the FCC fails to act, I predict that within a few years that the industry will implode. There will become a point where households will abandon cable in sufficient numbers to put that part of the industry into a death spiral. It’s a tricky set of issues and one wonders how much authority the FCC has to make drastic changes without some assistance from Congress. But if nothing is done then the industry is headed over a cliff in the not too distant future.

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