|Federal Communications Commission
Chairman Kevin Martin
A change in the way cable networks are distributed could upend a system that’s been in place for the better part of cable’s 25-year lifespan. Networks could potentially lose a major chunk of their audience and, in turn, try to charge higher carriage fees to cable operators in order to recoup some of the lost advertiser revenue.
A network that is carried on Time Warner Cable’s expanded basic tier, for example, is in almost 11 million homes. If only 25% of those 11 million customers chose to pay for the network on an a la carte basis, it loses the potential audience that could discover it while flipping through channels. The cable networks themselves have admitted that most viewers only regularly watch a handful of channels.
“One of the outcomes is a potential significant reduction in a network’s ad base and revenue,” said Brian Dietz, spokesman for the National Cable & Telecommunications Association, which represents the cable industry in regulatory issues. That, in turn, he said, “can reduce diversity in programming and choices for advertisers.”
Of course, most media executives envision a future of on demand programming—the ultimate a la carte option. The problem is most networks are set up under a traditional ad-revenue model that values high ratings above all else and not yet ready to sell ads based on a per-household or direct-sales basis.
Most cable TV executives see FCC Chairman Martin’s recent adoption of the a la carte idea as a response to pressure from the conservative right, which has waged a highly publicized campaign against what it contends is TV indecency. Cable operators offering a family-friendly a la carte tier could be a potential solution.
The cable industry, meanwhile, contends that its customers have more control over the cable content that comes into their homes than they have with any other media. Basic-cable customers have the option to block entire channels, digital-cable customers can block particular programs and the V-chip allows parents to block programs that have garnered particular ratings.
While the FCC doesn’t actually have the power to legally require cable operators to offer a la carte pricing options -- that would require legislation -- one cable company executive suggests the powerful commission could make the request a condition of such major transactions as the upcoming Adelphia sale to Time Warner Cable and Comcast.
Requiring the two largest cable operators to offer the pricing option in order to get their Adelphia acquisition approved would have major industry effects.
Of course, as Merrill Lynch analyst Jessica Reif-Cohen contends today in a note to investors on the issue, likelihood of real change is low, given the lobbying power of pay TV and content companies and the difficulty in implementing any meaningful change. But, said one cable exec: “There’s a pretty strong lobbying power on the other side as well.”