In the increasingly bitter and contentious carriage negotiations between cable programmers and distributors, smaller independent operators are discovering a new tactic: dropping networks completely from their packages.
Some are doing what was once unthinkable: dropping video altogether.
In recent years, operators have typically come away from license-fee imbroglios more battered than the programmers. Content companies threaten or follow through with blackouts. Customers get mad at their distributors, complain about price increases and defect to another provider. This pattern usually ends with operators caving in to programmers’ price increases.
But a funny thing has happened on the way to the negotiating table: Consumers aren’t automatically blaming distributors for hefty rate hikes, as in years past. Moreover, they’re not abandoning their service providers when channels are dropped, according to industry players.
And that’s given distributors the confidence to channel Peter Finch’s character Howard Beale in the 1976 movie Network, who shouted, “I’m mad as hell and I’m not going to take this anymore!”
Operators are increasingly throwing their own punches by refusing to pay higher prices and dropping channels when negotiations stall or go sour. The biggest, most recent example of this was clearly evident earlier this year when several members of the National Cable Television Cooperative dumped Viacom’s stable of networks — including MTV, VH1, Nickelodeon and Comedy Central — rather than fold.
Subscriber attrition in the wake of this fight, and others, has been surprisingly inconsequential, independent operators said, and the threat of an embargo doesn’t hold the same kind of terror it once did. The NCTC, for example, began helping its 950 small- and midsized members prepare for upcoming negotiations and their outcomes about a year ago, president Rich Fickle said.
Schoen Media Group, a Los Angeles-based marketing and sales consultancy, set up a number of websites operators could use to combat programmer propaganda. The NCTC helped the MSOs frame their arguments and provided market research resources to better gauge public perceptions and desires.
What has brought these Davids so much confidence against the programming Goliaths? Desperation. With the wholesale cost of programming rising faster than retail prices, the decision to drop channels all comes down to economics.
“The cost of programming is unsustainable,” Fickle said. “We’re at the point where operators have to pick their poison — pay the increases or drop the programming. I think we’ll see more operators drop programming.”
At the Independent Show last week, virtually every panel and private conversation revolved around the skyrocketing price of programming and the inability of small and midsized cable operators — who do not get the same volume price discounts as giants Comcast or Time Warner Cable — to pay for it.
Cable operators including Cable One, Vyve Broadband, ImOn Communications and Cedar Falls Utilities chose to chuck Viacom’s stable of networks earlier this year rather than agree to a new, expensive contract. CFU in Cedar Rapids, Iowa, chose to dump Viacom’s channels after a customer survey answered by one-third of its subscribers. By a margin of more than 2-1, survey respondents said they would rather replace Viacom’s programming than face a rate hike of about $3 a month, CFU said in its company blog.
Viacom declined to comment on the matter. To be sure, the bulk of NCTC’s members opted to retain the programming company’s channels amid new contract terms, according to Fickle. While an exact number of operators that chose not to renew their deal with Viacom was unavailable at press time, Fickle and USA Communications president Chris Hilliard both pointed out that many of the operators that chose to eschew a new Viacom deal generally serve rural areas with older populations rather than the younger demographics Viacom’s programming tends to attract.
Some operators are actually dropping their entire video offerings as costs rise and margins shrink. When it became apparent to USA Communications’s Hilliard and his partners that they were spending 80% of their time and financial resources on the video-distribution part of their business for nominal returns, it didn’t take long for them to shelve the entire product line in some markets.
Today, USA Communications has a fraction of the video customers it had at the turn of the century, counting about 5,000 video customers in 25 markets. But the company is more profitable and has expanded its footprint and business model to include a fiber-to-the-premises commercial services offering.
Exiting the video business or dropping popular services takes some courage and will to fight, but it can pay off. The first two weeks are the most brutal, Hilliard said. It doesn’t matter whether it’s an obscure network few people watch or a whole channel lineup. But providing customers with a roadmap of alternatives, as well as a clear explanation of why those channels are being dropped, eases the pain for both customers and employees.
“It’s disruptive, there’s no way of getting around it,” Hilliard said. “But as long as you replace that programming with something comparable, you’re good. The Internet has helped.
“When you drop programming you always take a hit and lose some customers,” he added. “But the increased costs of the programming are generally more than the loss of the handful of customers. And the rest of our customers don’t have to bear the burden of the increases.”
Making sure there are options for customers is crucial for an operator during blackouts and programming displacements, Hilliard said. Cable One filled the empty pots on the dial with BBC America, Sprout, SundanceTV, IFC, Investigation Discovery, TV One, National Geographic Channel and TheBlaze. CFU added Great American Country, Disney Junior, MeTV, MAV TV, FXX, WE tv, Investigation Discovery and AXS TV to offset the gaps left by dropping Viacom’s services.
Vyve replaced its bundle of Viacom networks with a slate of networks from Entertainment Studios, which distributes six high-definition channels — Cars.TV, Comedy.TV, ES.TV (similar to E!), My Destination.TV, Justice Central, Recipe. TV and Pets.TV. The channels are either free or have a nominal monthly fee, according to Entertainment Studios chairman and CEO Byron Allen.
“I believe we will see more operators drop expensive and bundled channels,” Allen said. “Advertisers love cable programming and there is nothing — except for sports — that can’t be reproduced for less money. Consumers have always gotten that. Operators are now getting it and they are feeling empowered to do it.”
The key to successfully navigating the morass of a blackout or nasty contract negotiation is guts, preparation and execution. Todd Schoen, president of Schoen Media Group, who became familiar with how programmers gear up for contract while an affiliate representative with Fox Networks, also teaches distributors how to avoid potholes and crashes. These entanglements can be messy, long and ultimately damaging long-term if not played out correctly, he said.
Viacom’s latest gambit includes denying cable customers access to its websites. But that doesn’t appear to be working in the content company’s favor at this point, according to American Cable Association president Matt Polka.
In a May 30 column, The Joplin (Mo.) Globe columnist Joe Hadsall called Viacom “cowardly” for blaming Cable One for the blockade rather than explaining why it wasn’t allowing the operator’s customers access to its sites. In the past, Hadsall had repeatedly bashed Cable One for raising rates and forcing expensive programming bundles on its customers.
These types of maneuvers have traditionally helped push operators into signing new deals. But those efforts don’t look to be as successful as they’ve been in the past. Why?
Hilliard believes that’s partly because customers have more outlets to watch their favorite shows. With the proliferation of Netflix, Amazon, Apple TV and Hulu, consumers aren’t locked in to just getting entertainment from their pay TV provider — and cable programmers have become less formidable at the negotiating table.
MCTV in Massillon, Ohio, hasn’t jettisoned its video business just yet, but it is losing its stature as the most profitable and important segment, said Robert Gessner, MCTV’s third-generation CEO. In MCTV’s marketing materials and on its website, Internet access is now the first product offering listed, followed by video and phone services.
Educating customers and explaining why networks are added or dropped helps consumers understand the issues when a blackout or deletion occurs. Gessner has been painstakingly explaining the intricacies of the industry and MCTV’s decisions since the mid- 1990s. When the company dropped the NHL Network, for instance, it provided step-by-step instructions on how to sign up for the National Hockey League’s “Gamecenter Live” over-the-top package of out-of-market games. MCTV offered deals on its Internet services and explained — in detail — why the channel wasn’t being carried on its video lineup.
The tactic worked beautifully, Gessner said. The operator lost virtually no customers. MCTV’s hockey fans were happy because they could still see games. The bulk of the company’s customers were pleased they didn’t have to pay more for programming they didn’t care about. And MCTV added a bunch of new broadband customers.
Steering customers to alternative video sources is a strategy many operators are deploying these days, regardless of whether they are in the middle of contract negotiations. Some operators are opting to ditch the video business altogether and instead teaming up with satellite providers DirecTV and Dish Network. It’s more profitable to take the commission from those companies and focus their attention on offering high-speed data and phone services, Hilliard said.
“This was an economic decision for me,” said cable veteran Joe Ogren, founder and managing partner of SpeedConnect, which decided to give up on video and be a Dish reseller. “The cost of providing video to our customers was about what we could charge for it. It made sense to expand our Internet offerings and migrate our video customers to Dish. Bandwidth is so valuable and people want a lot of it and they want it to be fast.” SpeedConnect currently offers 4G wireless services bundled with Dish to about 50,000 customers in eight states.
Many operators see their role increasingly as a provider of a gateway for many different digital services, focused on helping the customers manage all the complexity in their homes.
“We see local operators working with OTT providers and other local competitors,” Fickle said. “There may be all new business partnerships that are formed in the wake of these programming disruptions and that’s all good for the consumer. They get more choice and more flexibility. And the operators do too.”
While MCTV’s profit margin on video is still higher than on broadband, Gessner said, the day will come when that’s not the case. In a report he created for regulators and others, he wrote that wholesale costs for the lowest level of video service will increase by 11.5% in 2014. And that number is expected to increase a whopping 400% by 2020, Gessner wrote.
The bundled model worked for so long that now that it’s broken, it’s hard to break the pattern, Colleen Abdoulah, CEO of WideOpenWest, said. “We simply didn’t do a good job of explaining to our customers why their rates were going up and what they were getting for it,” she said. “That’s when things went south for distributors. We had to come from behind to educate our customers. We are now doing a pretty good job of educating our customers on how this whole business model works. I think this will be really consumer-driven in the future. If programmers don’t get smart about knowing what customers want, their financial model will be broken.”
WOW wants to provide its customers with what they want and that increasingly means offering content via its broadband network rather than bundled TV networks, Abdoulah said. The company is focusing most of its attention on WOW’s network and infrastructure.
That’s a strategy many operators have struggled with in the past. But now, rather than pay big bucks for programming, those distributors are able to spend more on their plant so they can deliver the most robust broadband service in their markets, Fickle said. It’s a reallocation of dollars that should benefit operators and customers going forward, he said.
That’s not to say the bundle no longer has any value, Abdoulah said.
“All the cable operators I know are very bullish on the industry’s prospects,” she said. “We’re focused on infrastructure and technology but we need to meet our customers’ needs.”