Is Cable's Business Model Kaput?

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For followers of cable and satellite TV's ever-turbulent relationship with its content providers, much of News Corp.'s (NYSE: NWS  ) dispute with Time Warner Cable (NYSE: TWC  ) over programming fees surely felt like old news. Like previous squabbles, it followed this general script:

  1. TV network owner demands higher fees for its content, otherwise threatening to yank its programming from a cable/satellite provider's lineup.
  2. Cable/satellite provider balks at higher fees, tries to muster consumer outrage, threatens to let network owner's deadline pass without action.
  3. Fearing customer anger if the channel in question is dropped, cable/satellite provider caves, agreeing to a "compromise" involving a fee increase.
  4. In order to offset higher fees, cable/satellite company informs its customers that their monthly bills will rise.

Holding an industry hostage
Needless to say, consumers are the biggest losers here. But cable and satellite providers can't be thrilled, either. The Fox-Time Warner dispute is particularly unsettling for both groups because it centered around Fox's insistence on getting paid for its flagship network, which is available for free via broadcast.

Wait, you might ask -- Fox demanded to get paid for a network that TV viewers can get for free? And they got away with it? Yep. Welcome to the bizarro world of TV content distribution.

You see, in this business, the price that a TV network owner is able to charge has little to do with the market value that the average cable/satellite subscriber assigns to that particular network. Instead, it revolves around the price that a network feels that it can hold a service provider ransom for, lest some of its customers decide to cancel their subscriptions altogether. That's why Fox and CBS (NYSE: CBS  ) have been able to get paid for freely available content, and why Disney (NYSE: DIS  ) , according to research firm SNL Kagan, is able to charge an average of $4.10 a month per subscriber for the right to carry ESPN, with that number expected to reach $5 a month by 2012.

I'm pretty sure that many subscribers couldn't care less for ESPN. But they're paying through the nose for it, and many other channels they don't care about, all the same.

Is "a la carte" the answer?
Given network owners' ever-growing demands, an "a la carte" sales approach, in which consumers individually subscribe to cable and satellite channels, might deserve a second look. The historical opposition shown by Comcast (Nasdaq: CMCSA  ) and other providers to a la carte programming is easy to understand: Given the chance, many consumers would subscribe to a relatively small number of channels, rather than paying an average of $75/month for a "package" of hundreds of them.

But the benefits are also obvious. Since network owners will now be selling their product directly to consumers, service providers won't be held hostage to their demands. If a particular network owner decides to charge an arm and a leg, then a customer will probably respond by simply cancelling that channel, rather than his or her entire service. The days of hostage-taking come to an end, and costs for both consumers and service providers decline as a result. That's why Cablevision Systems (NYSE: CVC  ) , embroiled in a distribution spat of its own with Scripps Howard over the latter's HGTV and Food Network channels, has long been a supporter of a la carte.

A transition to a la carte would definitely be a gut-wrenching change for cable and satellite providers. But maintaining the extortionist status quo could easily be worse over the long haul. Between video games, DVD rental services such as Netflix (Nasdaq: NFLX  ) , and most importantly, the Internet and its growing repository of online video, consumers now have no shortage of digital entertainment options. And with the transition to digital broadcasts now complete, they can also get HD feeds of the major networks for free. As their cable and satellite bills keep climbing, it's easy to see a growing number of consumers deciding to spend their entertainment dollars elsewhere.

That is, unless the industry's business model gets a major overhaul, and introduces some rational pricing into a market that's seemed decidedly irrational as of late.

Fool contributor Eric Jhonsa has no position in any of the companies mentioned. Walt Disney is a Motley Fool Inside Value recommendation. Walt Disney and Netflix are Motley Fool Stock Advisorselections. The Fool has a disclosure policy.

Read/Post Comments (8) | Recommend This Article (11)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 05, 2010, at 4:40 PM, kristm wrote:

    I'm about to cancel my Comcast account due to rate increases and the end of special deals they gave us to sign up. The only way I can justify keeping it is to get only the channels we actually watch, a total of maybe 10-15 networks.

  • Report this Comment On January 05, 2010, at 6:02 PM, ellipsoid wrote:

    I've been disconnected from Cable/Sat TV for about 6 months now. I don't miss it. Instead I have installed an over the air waves antenna to receive network television and I buy TV shows that I want to watch but cant get with an antenna on iTunes/Apple TV. So far I am very satisfied with my decision. I recored network TV on my Tivo. Overall, I've probably saved money but I definately spend more on iTunes. I also seem to spend money in batches rather than regularly because of the release cycles of the TV shows on iTunes.

  • Report this Comment On January 05, 2010, at 7:32 PM, CMFStan8331 wrote:

    The traditional cable tv business model IS kaput. The Internet is just a vastly cheaper, more efficient, more democratic means of delivering digital content. It's not only cable companies who are in trouble - anyone whose business model depends on closed, proprietary distribution of digital data is at great peril (or will be in the near future).

  • Report this Comment On January 06, 2010, at 8:59 AM, DusgustedinNJ wrote:

    We live in NJ and had FoodTV and HGTV dropped in the Scripts/Cablevision fight.

    I would prefer an a la carte approach. An entire package of Spanish channels was added last year at "no cost". I do not speak Spanish, and view these channels as extras. Let people who refuse to learn the English or desire a foreign language culture experience pay extra for them. We never watch them.

    We also do not watch MTV, the shopping channels and a host of other junk channels that cater to the consumer lacking the ability to think (as evidenced by the students in my university classroom who frequent them and cannot tell me who lives at 1600 Pennsylvania Ave., but can recite the address of Sponge Bob, a la Leno) included in our packages.

    Odd that an "educational" package isn't offered with the History Channel, National Geographic, etc. We would pay or this package.

    We DID watch the Food Network, in part due to the garbage on the rest of the channels. We enjoyed Unwrapped and Good Eats. So, the ONE channel that was responsible for 75% of the viewing, after news programs, is gone. (We admit to being Fox News junkies.)

    In NJ municipal governments have the right to chose ONE cable network to offer service in their boundaries. We are considering Direct TV or another satellite provider. Why pay or a service we do not use?

  • Report this Comment On January 06, 2010, at 12:33 PM, 42theflush wrote:

    Absolutely KAPUT!

    I have gone to over the air(in HD!) coupled with Netflix and a Roku box. Searching out DVR options. My biggest withdrawl is sports programming on cable. It is the holy grail for cable maintaining pricing power. I see more and more sports programming going to subscription only.

  • Report this Comment On January 06, 2010, at 12:46 PM, lemoneater wrote:

    Giving the customers a choice is an important way to guarantee customer loyalty. I don't even have cable partly because the cost I could afford doesn't equal the value I want. I don't like the noise to signal ratio of the channel choices. Why not let customers get the channels they want since thwarting customers only ultimately loses their business?

  • Report this Comment On January 06, 2010, at 1:03 PM, IPV5 wrote:

    How could the FIOS business model be Kaput? when they are still spending Billions building out their infrastructure? I thought Verizon said subscription video services was a good business and mitigated fixed phone line losses? Same for ATT?


  • Report this Comment On May 07, 2010, at 5:40 PM, snappydan wrote:

    Verizon FiOS is actually a IPTV system, so it is both high speed internet and television. People will still want internet service whether they use subscription TV or not. Soon cable companies and telecoms will be competing for internet business as traditional "channel block" cable programming will become less and less of a factor. Also, Verizon has stopped the expansion of FiOS into new markets.

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