Pay-TV A La Carte Could Put 1 Million Jobs At Risk: Analysts

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If the U.S. government mandated that TV channels be sold individually, only five to 10 traditional TV networks would survive -- destroying up to $300 billion of value, endangering some 1 million jobs and curtailing consumers' video choices, according to an analysis by Needham & Co.

The Department of Justice has launched an investigation into a range of practices among pay-TV and telecommunications providers, including data-usage caps and programming bundling agreements.

An a la carte regime for pay-TV would present tremendous risk to every company in the TV business, Needham & Co. analysts Laura Martin and Dan Medina wrote in a June 22 report.

"The government is a bull in the proverbial china shop with unintended consequences likely to destabilize the delicate work of the invisible hand, which is working today in the TV ecosystem," Martin and Medina wrote.

Without the ability to sell TV channels in a bundle to consumers, just five to 10 "hit channels" would be profitable enough on a standalone basis to survive unbundling, implying that 125 channels would become uneconomic to produce, according to the analysts. Needham surveyed 500 TV viewers to gauge which channels they would pay for in an a la carte model.

"Minority and special-interest channels would be unlikely to survive," Martin and Medina wrote. "Since the average household watches 12-14 channels each month, every household would lose channels that they believe are important to them. In an a la carte world, consumer satisfaction would be destroyed."

While a la carte would lower consumer prices in the short term, "it bankrupts all niche channels within five years, destroying enormous value for the highly diverse U.S. population and especially the smallest minority groups," the Needham analysts said.

According to Needham's analysis, with unbundling, TV subscription revenue would decline 15% to 20% and ad revenue would plummet 75%. Meanwhile, if content companies delivered content directly to consumers, they would incur customer service costs estimated at $50 per customer per year, or $5 billion nationally.

Needham calculated that 1 million workers -- typically middle-class Americans, according to the analysts -- are potentially at risk of losing their jobs with a U.S.-mandated shift to a la carte. Those include employees at cable operators, video employees of telcos, and more than 500,000 employees at media companies that depend on TV profits. "We believe that every job in these companies is at risk if the TV ecosystem is disrupted by the government because TV is the most material contributor to revenue in every case," the analysts said.

By contrast, over-the-top video distributors have a comparatively "tiny number of employees, most of whom have graduate degrees and live in large cities," Martin and Medina said. "These types of employees do not need government protection: There are many job alternatives for them."

The "invisible hand" of market forces is working well today, according to Needham, arguing that such companies as YouTube, Netflix, AOL, Yahoo and Hulu and are creating a "parallel, high-quality video business on the Internet."

"If [Internet video providers] work together to solve several tactical issues, we are optimistic that they can unseat the TV ecosystem over time," Martin and Medina said.

The report is part of Needham's monthly research series on the Internet and entertainment sector.