The Television Consumer Freedom Act proposed this week by US senator John McCain is being treated by politicians and commentators alike as an unwelcome piece of intervention, which has been suggested and tried in the past and which will fail once more.
But the fact that it has both Verizon and Cablevision already pushing for a change to a la carte programming, and that cablecos Charter and Suddenlink have both come out with statements in favor of it, has had the effect of giving the idea real teeth, so that even if it does not get enshrined as US legislation, it may inspire something similar, which does.
This is because there are some unspoken thoughts at the heart of the idea that just don’t add up. There is a presumption that a $60 package, when broken down into its component channels, will add up to $60 or something similar. Of course it won’t and for two separate reasons.
US Cable companies charge for things like a set top box inside such payments, or an HD upgrade or a DVR, and spread that cost typically over 2 years. So the cable companies would have to offer up details of how it calculates this, in order to lead to a fully transparent channel cost breakdown. And MSOs will not want to do that. Secondly, and more importantly, if in a $60 bundle every one of 10 million homes is paying $5 for ESPN, then Disney (who owns ESPN) is getting $50 million a month, or some $600 million a year. But if only one in three (3.3 million) of the cable homes wanted ESPN, then the cable company would have to charge $15 for each home in order to pay out ESPN.
Now you might say that it can get by with less, but the truth is that it has long term contracted payouts to sports organizations and if it has a shortfall, it would make a huge loss and close, or cancel some sports. Cutting the cost of a channel might be viable if less people take it, if its cost structure has been set up that way ‘ per home, but many of them aren’t and cable networks might close overnight, with a mass of disruption to the entire industry.
Anticipating this, everyone would overcharge for each channel and you would end up with a $60 a month bundle costing more like $120 a month fully a la carte. It would ‘force’ people who are happy with that selection, to drop some of them, in order to get the channel cost down to $60 once more. There would be no net gain, and still quite a few channels would close, with the resulting unemployment and bleating this would cause.
So the process of how the US gets from where it is today, to the point where the most basic cable tiers are unbundled, will need to be carefully thought through. And once the legislation was be enacted, nothing much might change.
McCain expects this to be a negotiation between the content owner and the MSO with the FCC having the right to arbitrate. That would create a huge amount of discomfort.
Tom Rutledge , CEO and President of Charter Communications said this week, ‘We at Charter applaud Senator McCain for introducing the Television Consumer Freedom Act of 2013. It is clear that consumers are being forced to purchase content that they don’t want or need. The tying together of networks by programming giants, combined with a lack of consistency in pricing for distributors and a complete lack of transparency surrounding that pricing, creates a no-win situation for consumers, who are forced to purchase large bundles of program content at prices that continue to escalate despite the myriad alternatives enabled by current technology.’
John McCain has a reputation as a maverick, but the bill does something for the US consumer and nothing much for anyone else. Sure it gives the cable operator a leg up in negotiations with content businesses, but that’s just a cynical change from a sellers-market to a buyers-market, so they are bound to support it.
At Faultline we believe heartily in channel unbundling, and think that it is inevitable, however the way it might be arrived at is through start-ups that do not have huge vested interests already in play, so it has to be an internet phenomena. But the invention of TV Everywhere has already meant that the status quo has been kept in internet content, and innovation is cramped for new OTT services.
McCain’s bill would provide program producers and cablecos operators certain ‘incentives’ to offer subscribers a la carte options. What he has done is say that it’s fine not to provide a la carte but if you don’t you lose the benefit of the statutory copyright license if you are a broadcasters and lose the right to retransmission agreements for broadcast if you are an MSO.