When I joined Home Box Office in the late 1970's, my sales and marketing region covered eight Midwestern states. We hosted launch parties to bring the cable system, HBO and city leaders together to celebrate the modernization of hometown cable.
We were partners in those days — city, cable operator, and cable network. But those pleasant memories have been replaced by a vicious battle over wholesale rates and annual rate increases.
In my view, the heart of this street fight is a clash between two very different business models. Cable operators use a subscription business model — developed at the dawn of our industry in 1948 — that resembles the magazine business.
Magazine subscribers pay a set fee for a year's worth of magazines. Similarly, cable customers pay a set fee for a month's worth of programming. (That's why we still call our retail customers 'subscribers'!)
Cable's Old Model
Cable networks use an even older model — a broadcast model. Networks compete with each other for advertising revenue, just like ABC, CBS and NBC.
Yes, most basic networks do have a second revenue stream of monthly subscriber service charges paid by cable operators — but in form and content, they are otherwise nearly identical to the traditional commercial-TV networks.
Go to a Borders bookstore to see our model in action. Look at the amazing variety of magazines, covering the range of human interests and activities. Imagine asking a clerk for a current copy of Time magazine, and that she returned with an armload of 75 magazines saying, "Here you go, pal, that'll be $44.95!"
Preposterous? Of course — but that's precisely how we sell cable television today!
We commission a biennial survey of our member companies. Historically, we know our members have been able to raise their retail prices about 3% to 4% per year. That's pretty modest, even though that level is twice the Consumer Price Index for the last few years. The problem is that it's not enough to cover the average annual increases in our wholesale prices.
We recently tracked the wholesale rate increases of six major basic networks over the last five years. In total, the wholesale prices for these networks increased 71%, during a period when inflation rose just 12.4%! Networks raise their wholesale rates simply because they can — not because they supply extra value to viewers!
Frankly, I'm tired of fighting with programmers over prices. I'd much rather tell them to charge us whatever they wished, but to do it knowing we will double or triple their wholesale price to achieve our à la carte retail price.
For the first time, programmers would have to carefully consider the implications of a bidding war with their peers over high-value programming. It wouldn't be so easy to roll the cost of their newly won purchases into their wholesale prices. (Don't think à la carte pricing can work? HBO's been doing it for 30 years!)
The bad news is that à la carte may force some networks out of business, simply because viewers don't care enough to pay for them. Frankly, it's about time.
What we're left with now is a veritable Dead Sea of programming — with few new channels being proposed or launched because operators don't need more programming to support their subscription model, while worn-out channels hang on for dear life!
At least four major changes are needed to allow à la carte a chance to develop:
- Programmers — forced by Congress if that's what it takes — must provide operators with à la carte rates for their services. (That practice is now generally forbidden by most affiliation agreements.)
- Digital set-top box prices must fall below $50 — a move already underway. Every television set needs one, so they must be cheap to deploy and built to a common standard.
- Congress must void the retransmission-consent rules now used by programmers to extort channel space from cable operators. Whatever logic these rules might have once possessed is long dead and gone.
- Vendors must develop retail billing programs that can handle à la carte sales. (Most households will add up the cost of their favorite networks and find it's cheaper to buy huge groupings of channels — but at least they'll finally have a choice in the matter!)
In the interim, the Co-op can help smaller operators follow the big MSOs in deploying high-speed data, telephony and HDTV. Our success with these new revenue streams means we'll be less dependent on cable programming for our net profits.
I know many leaders in the cable industry do not share my views on à la carte. I may be wrong, but my heart and my sense of history tell me otherwise. I can still hear the voice of Bob Weary (sadly, now deceased) — a member of the Co-op's first Board of Directors — when he used to say that "no company could ever be successful over the long haul by antagonizing its customers."
Unfortunately, that's exactly how we treat our retail customers every month, by forcing them to buy channel after channel of cable programming in which they have absolutely no interest. It's a big challenge, but it's also one that this industry can meet.
Michael L. Pandzik is president and CEO of the National Cable Television Cooperative.