Indie Operators Bemoan ‘Terminally Ill’ Video Model

Key To Future: Broadband, Better Packaging
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SAN DIEGO — Patrick Knorr was going to say he wore black to mark the death of the multichannel-video business model, but then he hedged a bit.

“It’s really not dead, but I do think it’s terminally ill,” Knorr, executive vice president of business services and IP technology at West Coast-based cable operator Wave Broadband, said during a panel session at last week’s The Independent Show here.

Knorr’s mordant forecast was all about the rising cost of programming. His sentiment was widely shared at this gathering of small and midsize cable operators and related businesses.

On the same panel, Michael Morrison, director of Cincinnati Bell’s Fioptics video, Internet and phone service, said, “We’re very close to the current model breaking from a programming-expense standpoint.”

STORM ON THE HORIZON

Next year’s perfect storm will see four big programming contracts up for renewal at the National Cable Television Cooperative, Morrison said. (The NCTC would not comment.) And Cincinnati Bell is headed into a new cycle of retransmission-consent talks with local broadcasters.

Knorr and Morrison both seemed interested in working with another member of the same panel, Ed Lee — even though he’s vice president of content acquisition at Roku, which sells a consumer device that lets broadband users stream video services such as Netflix and Hulu Plus to the television set.

“I don’t see it as a real competitive threat,” Knorr said of Roku and other over-the-top video services. “I think it’s a real opportunity.”

For every three video customers, Wave Broadband has four broadband customers, Knorr told panel moderator Matt Stump of One Touch Intelligence. High-speed Internet is now the core business for cable companies, he said, and adding affordable programming could make a broadband subscription more valuable to customers.

Knorr said distributors need to “reinitiate the partnership” with programmers and come up with lower-cost alternatives for customers, rather than “continuing to squeeze the revenue stream, ultimately from our customers.”

The conference — which drew 1,229 attendees, according to the NCTC — was alive with the chatter of Time Warner Cable’s retransmission drama involving CBS broadcast and cable properties in New York, Los Angeles and other markets.

Wall Street analysts on a panel agreed the cost of programming is the cable industry’s biggest problem. “There is no strategic issue that comes close to the challenge that the whole ecosystem faces because of the rise in programming costs,” Craig Moffett, senior analyst and principal at Moffett Research, said.

Four years ago, Moffett said, four networks were saying they wanted to get 50 cents per subscriber for their programming, escalating up to $2. Now those networks are saying they want $2 per subscriber, rising to $20. Distributors and programmers agree that figure is “unsustainable” but, in the meantime, prices keep going up, he said.

PUSHING BACK ON SPORTS

Deutsche Bank managing director Doug Mitchelson pointed out that distributors have started pushing back, including on sports programming. DirecTV, he said, has decided it won’t carry NBCUniversal’s Houston-based regional sports network or Time Warner Cable’s coming (in 2014) Los Angeles Dodgers-based channel. Some small cable operators attending the Independent Show have said they pay upwards of $15 in some markets for regional sports channels, he said.

“That’s just abusive pricing for something that’s not programming that many sports hours a year as it is,” he said.

Still, live sports programming is a key component of the pay TV bundle, he said.

Laura Martin, managing director of Needham & Co., agreed and said even if all sports channels could be separated onto a pay tier, that would cost multichannel video providers $13 billion in revenue — because sports fans would drop entertainment channels and just keep sports.

Moffett said operators who think they can outnegotiate the programmers on price will find they can’t win that way. “The alternative is to win with your broadband business instead,” he said.

TAKEAWAY

Rising programming costs were the top-of-mind worry as smaller MSOs gathered for The Independent Show in San Diego.

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