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Paying For What We Watch

There were only a few channels on TV when I was a kid. Everyone watched them, and we watched the commercials that came with them, too.

Now the business model of advertising-supported broadcast television is breaking down. Customers with cable or satellite service pick from a huge number of channels, drastically reducing the audience that any single cable or broadcast station can hope to deliver to advertisers. And, with customers increasingly able to bypass advertisements using services like TiVo, the payoff for TV spots is dwindling. At the same time, the recession has tightened companies’ advertising budgets.

“Good programming is expensive," Rupert Murdoch, whose News Corp. owns the Fox television network, told shareholders this fall. "It can no longer be supported solely by advertising revenues.”

While traditional broadcast networks are struggling, cable channels are doing fairly well. These channels have two revenue streams. Cable companies like Time Warner Cable and Comcast Corp. charge consumers monthly subscription fees. These fees are then used to purchase the right to carry cable channels, providing the channels with an important source of funding in addition to advertising.

Broadcasters may be forced to follow the dictate, “If you can’t beat them, join them.” Fox has already started going after fees from cable providers. With its contract with Time Warner Cable expiring at the end of 2009, Fox threatened to pull its programs if Time Warner did not offer the network more money.

The two companies managed to reach an agreement before screens went dark. Though the terms were not disclosed, they most likely compromised somewhere between the 30 cents per subscriber Time Warner offered to pay and the $1 per subscriber that Fox originally demanded.

Of course, cable companies do not always see eye-to-eye with cable programmers, either. After talks between Cablevision and non-broadcast Scripps Network broke down, The Food Network and HGTV disappeared on New Year’s Day from Cablevision’s lineup in metropolitan New York. Cablevision told customers that it had “no expectation” of carrying the network’s programming again “given the dramatic changes in their approach to working with distributors to reach television viewers.”

Nonetheless, some now-free networks may switch over completely to the cable model. Jeff Zucker, who runs NBC and its sister cable channels such as CNBC and Bravo, told investors this month "the cable model is just superior to the broadcast model."

This switch would not necessarily be a bad thing. As technology makes it easier to avoid advertising, consumers will have to get used to paying for their information and entertainment. Those who enjoy quality programming ought to help shoulder its costs (as public television and radio broadcasters have reminded us for years).

In the old advertising-supported model, you “paid” for programming by lending your ears during commercial breaks. Only the channels that aired shows you wanted to watch could count you as part of the audience they delivered to advertisers.

With cable, however, consumers generally have to pay for many channels they do not care about. Rather than allowing consumers to select the specific channels they want to buy, cable companies usually offer different service tiers, meaning that, if you absolutely have to have one of the channels in the top service tier, then you have to pay for all of the other channels that also come in that tier.

This practice is known as bundling. In some cases, bundling can be illegal. When films with sound were still new, Hollywood studios relied on a form of bundling known as block booking. In order to show popular films, movie theaters had to agree to also screen a studio’s other, lesser-quality films, often without even seeing them in advance.

The theaters, stuck with the duds, grouped high quality and low quality films together into double features, ensuring that they would be able to get moviegoers to munch popcorn and other profitable concessions through the bad flicks.

In the 1948 case of United States v. Paramount Pictures, Inc. et al., the U.S. Supreme Court ruled that the practice of block booking violated the Sherman Antitrust Act, since it prevented studios that were not able to produce A-list movies from competing in the low-budget market.

Bundling is not always illegal, but, even when it is legal, it is often bad business. Time Inc., which publishes a variety of magazine titles, including Time, Fortune, People, Entertainment Weekly and GOLF Magazine, does not require Fortune subscribers to also purchase People and Entertainment Weekly, because those customers would probably forego the package altogether instead of paying for glossies they don’t plan to read.

The same thing may happen with television programming. If cable companies continue to force customers to pay for programming they don’t want, viewers may turn off their television sets for good, finding other ways to see what they want to see. Those who want to stick with a more old-fashioned method can buy shows when they come out on DVD. Others will make their purchases from iTunes and the like. Still others will watch shows online, either on network sites or on third-party sites like Hulu.

That is, of course, assuming that cable companies that offer both television and Internet service don’t slow down online video sites in order to draw customers back onto the sofa. In order for the net to provide a true alternative to television, we need strong net neutrality rules to prevent cable companies from using their control over customers’ Internet service to squash those who dare to threaten their hold on TV viewers.

As we transition away from a system in which advertising supports most of our programming, consumers will have to start paying for what they watch. But they should not have to pay for everything that a cable company decides to throw into the package.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us” and Chapter 4, “The Family Business."

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