News

Setting Sub Fees In an Era of Free

3/30/2010 7:44 AM Eastern

Those of us in the basic
cable industry, and the millions
of viewers we serve, are
enjoying what many have
called a new “Golden Age” of
television, with shows such
as Damages, Rescue Me, Mad
Men
, Breaking Bad and The
Closer
routinely dominating
the Emmys and Golden
Globes. Basic cable is enjoying
more critical acclaim than
broadcast, and as much as if
not more than our premium
brethren, Showtime and HBO.

The reason for this wealth of
quality programming is a revenue
model that combines advertising
sales with carriage
fees from cable and satellite
providers. Over the years,
these two revenue sources
have grown along with our audiences,
and now we can aff ord
to pay as much for shows as the
broadcast and premium networks
do, while taking more
chances creatively.

But this model, and the great
television it supports, is under
attack from the increasing trend
of networks giving away their
original content free online.
One need only look to the music
world to see how this “self-
Napsterization” of content can
undermine the economics of an
entire industry.

At Rainbow Media, we believe
the value programmers
bring to video providers — and
consumers — lies in the exclusivity
of their content. After
all, why should someone
pay for something that’s easily
available elsewhere for free?
Th at’s why we don’t off er full episodes
of AMC’s Mad Men and
Breaking Bad, or shows from
our other networks, Sundance
Channel, IFC and WE TV, free
on the Internet.

When it comes to determining
subscriber fees, however,
basic-cable programmers that
regularly devalue their content
in this way are treated no diff erently
by distributors than networks
that don’t engage in this
destructive practice. That’s because
carriage fees are currently
arrived at through a haphazard
combination of historical legacy
and corporate leverage, without
factoring in dramatic changes
in the media landscape.

Meanwhile, affiliate fees
continue to go in only one direction
— up — at a time when
consumers are more focused
than ever on price and value.
So it’s no surprise cable operators
have recently balked at
programmers’ demands for
rate increases, with the resulting
stalemates.

We believe the time has come
for a subscriber fee structure
that ref lects the value of exclusivity;
one that pays less for
content that’s available free on
other platforms and one that
pays more for content that’s exclusively
available to cable and
satellite customers.

To put this idea into practice,
we’ve developed a formula
we call the “Video Value
Index” that uses quantifiable
metrics to determine the value
of programming, based on
a network’s efforts to keep its
content exclusive. The Video
Value Index adjusts a network’s
subscriber fee either upward or
downward, depending upon
how much over-the-top content
the network offers. It’s a tool we
think may help the industry set
rates that are fair and appropriate
based on network practices.

Fortunately, the industry is
developing technology giving
viewers the convenience and
flexibility of the Web without
sacrificing exclusivity. New services
deliver programming via
the Internet, but only to viewers
who verify their status as current
subscribers. Networks that only
allow their shows to be viewed
under these conditions would
not be penalized by the Video
Value Index.

Despite the emergence of authentication
technology, many
networks continue to devalue
their content by giving it away,
both on their own Web sites
and on third-party portals like
Hulu. They defend the practice
on the grounds that it gives
them additional brand exposure,
as well as incremental advertising
revenue.

In fact, the practice brings to
mind “texting while driving,”
that seemingly benign behavior
that’s easy and tempting to
engage in, but is ultimately insidious
and reckless, with potentially
dire consequences.

The irony is that by undermining
the dual-revenue model, networks
risk losing the ability to
produce quality shows that attract
viewers in the first place.
A subscriber-fee structure such
as the Video Value Index that
incentivizes networks to keep
content exclusive may be the
industry’s last best hope for retaining
this time-proven revenue
source and our ability to
continue to create great TV.

In short, networks that play
by the rules should be rewarded
for their good behavior;
networks that are reckless
should pay a price, before consumers
decide they no longer
will.

September