Is Cable's Business Model Kaput?

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.