Saturday, January 12, 2008

Economics of cable and satellite broadcasting, part two

After my last post, I began to research cable programming fees a little bit more. Here's a little bit about what says about the industry:

Let's start with the consolidated ownership of cable networks: 4 companies own the 10 networks with the highest programming fees; and, 6 mega-media companies own the 20 networks with the highest programming fees. Put differently, 6 companies pretty much rule Expanded Basic.

Now, let’s add a generous dollop of cross-ownership to our batter of consolidation. For example, Time-Warner, the second biggest cable company, owns 8 cable networks, 5 of which are typically included in the Expanded Basic tier. Comcast, the biggest cable company, owns all or a majority stake in 7 smaller cable networks (with 1 typically in the Expanded Basic tier).

Now, frost this fetid cake with the all-important high fat fact that 5 of the biggest cable network owners are also big time owners of local broadcast television stations (and are affiliated with hundreds and hundreds more broadcast stations).

The end result is a rotten robber-baron cobbler - chock full of smoke-filled, backroom shenanigans - that hits consumers right in their pocketbooks....

In all of this, the most painful con being run on consumers is what economists call tying. This is when one product or service cannot be bought without another. For example, NBC/Universal, the owner of CNBC, MSNBC, USA, SciFi, Bravo, and other networks, makes it very attractive for cable companies to "take them all," and very hard (read economically punishing) for cable companies to "pick and choose" only the nets they want. This rolls right up to consumers because the cable companies' contracts with NBC/Universal make promises to NBC/Universal about how many subscribers its many networks will reach. If the cable companies fall short of the promised "subscriber guarantees" the programming rates are subject to increase and/or the carriage deals may be revoked.

Now, add to this terrifying tying the important fact that NBC/Universal also owns the NBC and Telemundo broadcast television networks. Cable companies must secure permission (so-called "retransmission consent") from local broadcast affiliates to carry the affiliate over the cable system. Permission is, as you can imagine, tied to compensation. A favorite form of compensation is, "We'll ‘give' you the right to retransmit NBC and Telemundo if you carry not only our ‘good stuff' (read our marquee cable networks), but also all the new and/or minor networks we have."

Remember NBC/Universal is just one example. The tying racket is equally valid for News Corp. (Fox), Disney (ABC) and Viacom/CBS.

And here's the website's take on the whole NFL Network issue:

Right now cable companies are in a big fight with the NFL over the NFL Network. The cable companies are making a lot of noise about how their fight to keep the NFL Network off of Expanded Basic is for the good of consumers. That's more deceptive than the ol' Statue of Liberty play. Yes, the cable guys know that non-sports fans are getting tired of paying big bucks for sports networks. They also know that by putting NFL on a digital tier they can sell a lot more of that digital tier and make a boatload of money. Mostly, the big cable companies dare to tangle with the NFL because the NFL doesn't own a bunch of other networks and the big cable guys don't own a piece of the NFL. Regardless, bundling in digital tiers is pretty close to as rotten as bundling in Expanded Basic. If cable's fight with the NFL is really about serving consumers, why not just let people choose and pay for what they want? Blasphemy! That business isn't as fat as the business they're in.

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