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Web TV to Force Rethink of Business Models

2009.02.17

Fans of Nickelodeon's Dora the Explorer and MTV's The Hills breathed a sigh of relief last week as programming giant Viacom Inc. and cable operator behemoth Time Warner Cable settled their financial dispute over carriage of the former's arsenal of cable networks. Thankfully, no one lost their favorite shows.

These feuds are nothing new. In this particular case, Viacom had the foresight to have deals on all of its cable channels expire simultaneously, giving it a nice piece of leverage over Time Warner Cable, which probably would have preferred to negotiate individual deals rather than a one-size-fits-all package.

This form of deal-making is known as "bundling" in industry parlance. The programmer tries to tie the renewals of as many channels as possible into one deal. That way, less popular channels are protected and don't risk losing carriage. Want ESPN? Well, then you'll have to carry a few ESPN spinoff channels or some other Disney properties, too. It's easy to see why this appeals to the programmer, and just as easy to see why the distributor and the customer might have a differing view on the practice.

Consumers and, more recently, outgoing FCC Chairman Kevin Martin, have been advocating that the cable industry adopt an a la carte approach to selling cable. In other words, let the consumer cherry-pick the channels they want without having to buy the ones they don't.

Let's look at the pros and cons of a la carte. Opponents argue that while in theory the idea of being able to pick individual channels sounds good, in reality it would raise costs for everyone, because pooling a large group of channels into one package lowers the cost of offering all the channels. Furthermore, if Bravo, for example, was to go from the 90 million homes it has now to 50 million homes in an a la carte world, it would either need to increase what it charges distributors or substantially reduce what it spends on programming in order to make up for the revenue shortfall. (For the sake of this discussion, we won't even get into the technological hurdles facing an all a la carte world, but, needless to say, for now they would probably be quite costly.)

But should we dismiss the idea of a la carte out of hand? One of the greatest concerns is the rising cost of programming, both in entertainment and sports. Doesn't the current approach just enable those costs to continue to rise by guaranteeing a place on the dial and revenue increases, regardless of performance?

Perhaps sports programming is a place to experiment a little with a la carte. If a sports channel has to beef up its subscriber fee to over $10 to compensate for a loss of homes in an a la carte world, many consumers would balk. Maybe the sports channel would go to the leagues and say, "Guess what, guys? The party's over." Leagues would then have to go to the players and say the same thing. You never know—before too long, fans might not have to take out a third mortgage to take their kids to a game. Dare to dream!

Could that also work for entertainment programming? Well, programming costs and salaries have gotten way out of whack, both in the corporate suites and on the set. In an industry where a mid-six-figure salary is seen as just getting by, a market correction is coming one way or another. However, with only a handful of companies controlling all the media assets, there is little incentive for change.

The good thing is technology may soon make this debate obsolete. While channels may not be offered a la carte anytime soon, in many cases, the programming on these channels already is. Take TNT—episodes of its original shows The Closer, Saving Grace, Leverage, and the soon-to-premiere Trust Me can all be seen on TNT's website. Other broadcast and cable networks also offer much of their content for free either on their own sites or other sites.

Right now, the audience for online programming is not enough to force anyone to rethink their business models, but that will change over the next decade—and the industry better be ready to change with it.  

http://www.paleycenter.org/time-warner-viacom-spat-resurrects-a-la-carte-debate

 

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