Careful, Don't Kill That Golden Goose - Multichannel

Careful, Don't Kill That Golden Goose

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Once upon a time, as part of their storytelling duties, my parents would relate to me a selection from Aesop's Fables. They viewed these tales as valuable character-building instruments.

Right now, we'd be hard-pressed to find a better fable that speaks to the state of our industry than "The Goose That Laid the Golden Egg":

"There once was a humble farmer who, through good fortune, found himself the owner of a goose that laid a golden egg each day. As time passed, the farmer became very rich but he wanted more. Not satisfied with the wealth and good fortune he had accumulated and driven by greed, he cut open the goose to get all the golden eggs. Naturally, he found none, and with the goose dead, his good fortune disappeared."

The long-standing conflict and animosity between programmers and distributors continues to grow and become more public. Major national publications like The Wall Street Journal
and USA Today
have all "broad-brushed" the story. Attention is currently focused on Cox [Communications Inc.] and its dispute with ESPN, but as we all know, the issue is much larger and ultimately affects everyone in the industry.

What Distributors Say

Rarely do you find all cable and direct-broadcast satellite operators in agreement, but on this issue there is unanimity. Distributors characterize the current environment as "out of control". Programming costs, particularly sports fees, have increased dramatically [by some accounts more than 100% in 5 years] and are expected to continue upward at alarming rates.

As one distributor put it, "The high cost of the sports services are simply not justified for a service that appeals to 8% to 20% of basic customers." Other programmers have also demanded double-digit increases. But fees for individual services, operators say, are just the beginning.

Retransmission consent, originally conceived by legislators as a shield to protect broadcasters, has morphed into a sword now used by the "mega-programmers" to leverage other demands such as higher fees for sister services. Operators feel squeezed between escalating fees and efforts to keep basic pricing stable and operating costs down.

Meanwhile the mega-programmers with "fat staffs, large marketing budgets and bloated expense accounts" continue to focus on their own agendas, "oblivious" to the current needs of their customers — needs that operators say might be better met by a diversity of new providers.

Programmers claim the marketplace has yet to reach equilibrium in terms of negotiating strength and revenue share. Cable operators have for years been able to "dictate terms," "extract ownership for distribution" and enjoy enviable margins and cash flow, underwritten to a large degree by content providers.

Since the introduction of DBS and consolidation by some content providers, programmers have been better positioned to capitalize on a more competitive landscape and begin to "gain fair value" for their services, but even this trend has been neutralized by distributor consolidation.

Viewership of satellite-delivered programming now exceeds that of broadcast TV. This didn't just happen. The success was driven by huge investments in programming acquisition, production and marketing by programmers. Operators, they believe, remain "too focused on technology," and not focused enough on marketing, and have been unable to discard the notion that programming is fungible. Consumers buy and watch programming which, they say, "is not a commodity."

Content is at the heart of what has built the industry and has underwritten the valuable plant owned by operators … an infrastructure that stands on the threshold of building a robust [high-margin] broadband and telephony business.

Meanwhile, the ripple effect of these battling giants has left smaller, independent operators and programming entrepreneurs angry, frustrated and without leverage. In an effort to control costs, distributors have denied rate increases to standalone existing channels and made it all but impossible for upstart channels to become a reality.

Contract terms and conditions are onerous. Smaller cable operators must pay programmers the highest rates and many have sought, or at least considered, Chapter 11 protection. Both sides of the industry will soon be completely dominated by a few mega-communication companies, and the entrepreneurial freedom, risk tolerance and willingness to experiment that built our industry will have evaporated. Many say it is already too late.

The Conflict

So what has been for years a mutually beneficial partnership that has built a hugely successful and very profitable industry, unimagined by its founders, now appears to be on a collision course with consequences that will profit no one.

Some characterize the public exchanges as overactive negotiating. Others view them as much more serious.

The current conflict between Cox and ESPN has emotions running high. Cox, one of the best operating companies in our industry, wants programmers to moderate rate increases or have the flexibility to move channels with fees over $1 per month to a tier. A conservative company, Cox enjoys a very good relationship with its customers and will likely not draw its sword unless it is confident it can win the public relations battle and can keep disconnects at a minimum. The bets are that Cox has done its homework and will be ready with a well-conceived contingency plan if negotiations fail.

The Opportunity

The current concept of basic packaging — fundamentally unchanged since the introduction of Home Box Office — may very well need to be reassessed. The industry, the product offerings, and how these offerings are delivered to the consumer have changed radically in the last 25 years, and will continue to do so at exponential rates driven primarily by advances in technology.

But those changes can — and should — be made collaboratively between distributors and programmers. A "my-way-or-the-highway" approach will fail.

Distributors and programmers both have unique assets and initiatives that could significantly benefit from a broader, more comprehensive partnership. The potential and financial upside for broadband content and delivery are huge; true video-on-demand will change the way content is selected and viewed forever; and there are libraries of content currently collecting dust that can be more profitably exploited.

The list of possibilities for a win-win solution is almost endless, and every opportunity should be on the table and fully explored.

Revenue and margin protection are at the heart of the debate. But there are many ways both sides can protect themselves, with creative packaging, marketing and short term revenue guarantees. A simple compromise could be reached by an agreement on a "moderate" fee structure and the migration of more expensive programming to a subscription video-on-demand model. Good idea or bad, it is that sort of thinking that needs to be a part of the dialogue. And the dialogue should be viewed as an opportunity to build the business rather than defend it.

The notion of throwing a few expensive services on a tier is as ill conceived as is a free ride for life on basic. Neither is a viable, long-term option. The solution must accommodate short term needs but in the long term work satisfactorily for both industry sectors and the consumer.

The problem is difficult and the solution requires creative thought, a willingness to find common ground and a clear, deliberate implementation plan that addresses a much broader issue than the rising cost of sports programming. The failure to redefine our profitable partnership appears likely to result in a long, nasty, costly and very public battle in which both sides will lose. Congress will step in and attempt to "fix" the problem. One way or another, the paradigm will change.

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