us watch_us watch 28/11/2013 16:49 Page 1
Watch what you wish for the law of unintended
consequences
Larry Gerbrandt warns that historic legislation governing
pay-TV subscription pricing may now result in fewer
programming choices for consumers.
riting in The
Concise
Encyclopedia of
Economics, author Rob
Norton notes “the law of
unintended consequences,
often cited but rarely defined,
is that actions of people—and
especially the government—
always have effects that are
unanticipated or
unintended.”
The now mature US business
of multi-channel video
programming delivered by wired
W
cable, telco and satellite
distributors, is now experiencing
the unintended and largely
negative consequences of
government policies enacted more
than 20 years ago.
Government concern over
monopoly power and rising cable
subscription prices openly
encouraged multiple competitors
to aggressively enter the market.
Around the same time, US
legislators also gave broadcasters
the ability to negotiate for
monthly licence fees—giving them
the dual advertising and carriage
fee revenue streams enjoyed by
basic programme networks—in
the form of ‘retransmission
consent. While in the early days
after the legislation went into
effect retransmission consent
largely resulted in the
broadcasters launching new basic
networks such as ESPN2, FX,
MSNBC and Home & Garden TV
in exchange for the right to carry
local broadcast signals, over the
last few years it has become a pure
cash transaction, with per
subscriber fees now often in
excess of $1/month for an average
of three-to-five broadcast
channels per market.
Affiliation renewal
negotiations have now become
torturous affairs—often
accompanied
by threats of
having
popular
channels
dropped—with
the net result
being higher
programming
fees ultimately
passed on to
the consumer. The multi-channel
distributors, however, can’t
efficiently raise prices because of
intense competition: in most
major US urban markets there are
at least four providers of what
winds up being virtually the same
programming package: a
franchised wired cable operator,
two satellite providers (DirecTV
and DISH) and one of two telcos
(AT&T and Verizon).
The net effect of legislative
decisions in a now mature
market—nearly 90% of all US
households have some sort of
multi-channel subscription—is
video programme expenses
consume 44%-46% of video
programming revenue (also
known as ‘turnover’ outside the
US) according to the latest
quarterly financial statements of
two of the largest providers,
satellite distributor DirecTV and
the second largest wired provider,
Time Warner Cable. The latter
provided even more granular
numbers: average programming
costs of $34.10/month against
average revenue of $75.93/month,
or 44.9%. Both companies warned
that programming costs were
headed higher due to
retransmission consent deals,
sports programming costs and
higher premium service costs as
those programme providers invest
in original fare to stave off the
surging rival Netflix.
The short term impact has
been hardest on start-up and
smaller networks not part of one
of the five or so major
programming combines that
control virtually all of the
broadcast and basic networks in
the US. It is virtually impossible to
launch a new independent
network that carries any form of
affiliate licence fee and
independent networks are being
turned away empty handed in
efforts to increase existing fee
structures.
This in turn is encouraging new
programming ventures to turn to
Larry Gerbrandt
[email protected]
has been a media analyst
for more than 25 years with
companies such as Kagan
and Nielsen. He is a
principal at Media Valuation
Partners, which provides
strategic consulting,
research, valuation and
alternative means of entry into US
households, such as launching
broadband-based delivery
platforms—the largest of which is
Netflix—or selling programming to
Amazon Unbox, Google TV and
Apple. This in turn is fuelling
growing options to encourage OTT
and ultimately the spectre of cord
cutting, with resulting downward
pressure on distributor revenue
streams.
The conundrum is hardest on
the two satellite providers DirecTV and DISH—which unlike
wired cable and telco providers
don’t have higher margin
broadband and voice revenue
streams. Cable industry pioneer
John Malone, now head of Liberty
Media, has already suggested
publicly that economics now
militate for the merger of DirecTV
and DISH, an idea the government
has rejected in the past. It also
means the remaining large wired
cable providers may ultimately see
more consolidation in order to
achieve a few more percentage
points of operating efficiency - the
very kind of concentrated buying
and pricing power the government
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