The first big provider to take an exception to programmers was Verizon. Last April they moved ESPN from the basic to the digital line-up. For them this meant a significant savings. If a network is carried in the basic line-up then a cable company must pay the programming fees for every cable customer. But if a program is shifted to the digital tier then the programming fees only apply to customers that buy the higher-priced digital tier. The percentage of customers that buy digital tiers varies widely, but most cable companies have between 40% and 60% of customers electing the higher tiers.
So if Verizon had a 50% penetration of digital tiers, then moving ESPN to the higher tier would have cut their ESPN bill in half. Some programmers try to make up for this sort of shift by charging more for the same network if it’s carried in the digital tier instead of the basic tier.
Comcast just joined the same fray. Earlier this month they moved Spike, CMT, and POP (the TV Guide Channel) into the digital tiers. Viacom instantly complained about that and there is certainly going to be a lawsuit over the issue. Viacom says that their contracts require those channels to be carried in the basic tiers.
And that highlights another reason why cable rates keep rising. The programming contracts have tightened up over the last decade and programmers now demand to be carried in lower tiers as part of renewing a contract. They also often demand very specific channel placement, which is why you don’t see a lot of differences between cable line-ups in different markets.
This insistence that programming be carried in the basic tier (which maximizes the revenue of the programmer) has gotten out of hand. I helped a client set up a new cable system just a few years ago and the programming contracts insisted on 85 channels being in the basic tier. A decade earlier the basic tier generally had no more than 60 channels, but more and more networks are being jammed into the more expensive placement.
Cable companies have been complaining about this for years and I can recall several pleadings to the FCC asking them to stop the practice. But the FCC hasn’t tackled the programmers yet and so nothing ever came of this.
A company the size of Comcast might be able to beat this in court. I would imagine that this was something that was forced down their throat and that they fought this during contract negotiations. But from what I’ve seen the programmers are completely unwilling to negotiate and their programming contracts are mostly take-it-or-leave-it. At some point it’s not a negotiation when one side won’t budge.
Companies smaller than Comcast have no ability to take this on other than to decide to omit certain programming from their line-up. I reported in another blog how small cable companies had dropped the whole Viacom line-up after a huge rate increase in 2013. This removed the Viacom channels from over 600,000 homes.
So maybe Comcast and Verizon can shove a small wedge into the leverage currently held by the programmers. If the FCC won’t take on this issue (and I’m not sure they have a legal way to do so), then it’s going to take these big public fights between the cable companies and the programmers to change the paradigm.