Thursday, July 29, 2010

Will the cable/satellite model have to change?

Economics is dictated by supply and demand. In the cable and satellite industry, that means that the content providers have the pipe providers over a barrel. (Oddly enough, in the cellular industry it's the pipe providers that hold all the cards. Go figure.)

Specifically, let's pretend that Empoprises is a big media conglomerate, providing four channels of televised content that are extremely popular. (Allow me my fantasy here.) Now Empoprises gets a good chunk of change by selling commercials to Old Spice and other companies, but Empoprises is mandated to maximize its profit.

So when Empoprises approaches the Big Ol' Satellite Service (BOSS), Empoprises makes its demands very clear - "You can carry our four channels...if you pay us five dollars per subscriber per channel. Oh, and if you carry one channel, you have to carry all four, even the trivia channel. And they have to be in your basic tier of services."

Then the war begins. We at Empoprises fire the first shot:

On September 1, BOSS may stop carrying the Empoprises Business Channel! Let BOSS know that you value the wonderful news that the Empoprises Business Channel provides. Call BOSS at 800 867-5309 and let them know that you want them to keep the Empoprises Business Channel! Oh, and here are some alternative services that will continue to provide the Empoprises Business Channel.

For some reason, BOSS doesn't see the value of our well-researched arguments and launches this cruel attack on Empoprises:

Empoprises wants to force you to pay more for your satellite service, and we don't want to force you to do that because We Care About You. Call Empoprises at 800 555-1212 and tell them that you don't like cable rate gouging! Oh, and after September 1, we'll continue to carry the Louis Gray Business Channel, which is frankly a lot better than the Empoprises Business Channel anyway.

In the end, after a lot of volleys back and forth, the two parties reach a compromise, Empoprises gets a little more money, and the satellite subscribers get gouged.

Now I hate to leave my fantasy in which I'm a major television mogul, but perhaps we should take a step back and ask - why do the cable and satellite providers have to pay content providers to carry their channels? An equally valid point could be made that it should be the other way around. Namely that content companies, who get to charge rates to advertisers, can charge higher advertising rates if more people have access to their shows. So therefore, doesn't it make sense that the content providers actually pay the cable/satellite providers to get access to those additional markets?

Well, while the two industries are bickering over who should pay who, there's a danger from without that could threaten the gravy train upon which both of them rely.

What if people quit watching satellite and cable TV?

Let's face it, as these rates continue to get higher and higher, people will be moved to find cheaper alternatives. And a comment at a Michael Hanscom post provides anecdotal evidence that people are doing just that. Mike Johns, Roku user:

I spend 9 bucks for netflix, and 6 bucks on the kung-fu, cowoby classics and drive in movies - and that has replaced my $75 cable bill.

If enough people decide that cable/satellite service isn't worth it, the industry will be forced to adopt a more economical model that better serves the customer.

Ah, who am I kidding? The industry will instead buy out the competition and either shut it down or jack up its rates. Of course, as I noted back in 2009, buying up the competition doesn't always help:

...that analysis assumes that the cable industry is competing against the cable industry. It isn't. Cable providers are competing against satellite, people who still get their TV from antennas, and this here thing called the Internet. So it may be in the interest of the Feds to allow Comcast to bulk up to compete against Dish, Google, et al.

Let's face it, even when formerly competitive environments are reduced to a single company, the remaining company has trouble surviving. Remember that Sirius XM is still losing money.

Failing that, the movie industry will exact penalties on people who provide content via unapproved services such as Roku or swap meets...

P.S. Back in 2008, I wrote a three-part post series entitled "Economics of cable and satellite broadcasting." Here are parts one, two, and three. I'll try to revisit the thoughts in those posts at some point.
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