Must-carry TV: putting viewers last in the US and Canada (1)

57_Channels_(And_Nothin'_On)Highlights The CRTC is moving ahead with its must-carry decisions for 22 niche TV channels on the basis of whether they are of “exceptional” importance to Canadian culture (public hearing begins April 23). Canadian TV subscribers will be forced to pay for all of the services that succeed, without any regard for their viewing preferences. This approach suits the old media guard perfectly, because it guarantees a revenue stream even for channels few people are watching. While American consumers are being subjected to the same abuse, their TV world is being revolutionized from two directions. 

First, OVD upstarts like Netflix are demolishing the idea that broadcasters should control viewing. Netflix is enhancing viewer choice by e.g. posting an entire season’s episodes all at once, in some cases of shows it has financed. Second, a backlash is under way in the US against the market power that limits choice and picks consumers’ pockets. Even US pay-TV distributors are fighting program providers that bundle their popular fare with channels nobody wants. Meanwhile, Canada is clinging to an outmoded cultural ideology that will bring about exactly the opposite of the intended effect, by chasing viewers out of the regulated broadcasting system and into the waiting arms of Netflix, YouTube and the Pirate Bay.


The absurdity of force-fed bundling: follow the money

Before I get to the CRTC’s must-carry proceeding, I want to touch on the debate raging in the US over whether TV subscribers have a right to “à la carte” service – the ability to choose only the channels they want from their service provider, as opposed to being obliged to take bundles of channels they don’t want but have to pay for anyway. Channel bundling is the subject of an article that appeared in the Wall Street Journal in late February, entitled “New Attack on TV Bundles” (here, pay wall).

One of the article’s key findings is the yawning gap between the affiliate fees paid by distributors for particular channels and the number of subscribers on their systems who actually watch the channels in question. The more immediate context is the lawsuit launched by distrib Cablevision against entertainment giant Viacom. Cablevision alleges that “Viacom forced it to carry and pay for more than a dozen ‘lesser-watched’ channels such as ‘Palladia, MTV Hits and VH1 Classic’ for the right to carry its popular networks such as Nickelodeon, MTV and Comedy Central.” Everything that’s wrong with the bundling system, legal niceties aside, is summed up in the chart below…


The bars in the chart represent the total amount in affiliate fees coughed up by pay-TV distributors like Cablevision in 2011 for each Viacom property as indicated, divided not by the total number of subscribers on these systems, but the total number of viewers estimated to have actually watched each of these channels. As you can see, popularity or lack of same makes a world of difference to the money.


Going on rough numbers, I gather a “popular” Viacom property like Comedy Central runs about 15 cents wholesale per sub per month. The chart indicates affils paid Viacom some $480 in 2011 per viewer (keep in mind these subs may have qualified as “viewers” by tuning in as little as a few minutes a week: “tuning” or “reach” in audience research does not refer exclusively to those who watch entire programs). Translation: if viewers only were being charged, each would have paid back to Viacom, through its affils, $40 a month just for Comedy Central!

Now let’s check an “unpopular” channel like VH1 Classic, which the chart shows returned $3,000 per viewing sub to Viacom. For the sake of argument, let’s say its wholesale is the same as CC, 15 cents (a few pennies more or less do not change the argument). That would make a whopping monthly charge of $250 per sub. Or think of it this way. The imputed Viacom “charge” of $250 per viewer per month is over 1,600 times greater than the actual wholesale fee of 15 cents per subscriber per month.

But these Viacom examples are peanuts compared to the real culprit: the staggering cost of licensing fees for professional sports. The grandaddy of all sports channels, Disney’s ESPN, has now passed the $5 mark for its monthly fee – and that’s wholesale. Major sports stars like Yankee hitter Alex Rodriquez work on multi-year contracts running into nine figures. And, it turns out, everybody is helping with the upkeep. As the headline of an article in the New York Times put it last January: “Rising TV Fees Mean All Viewers Pay to Keep Sports Fans Happy.”

The new face of cord-cutting

This squeeze play is getting so worrisome that pay-TV distribs in the US are starting to cut their own markups or look for other avenues of escape, apart from lawsuits like that between Cablevision and Viacom. Time Warner has threatened to drop smaller channels. Comcast hurried up its buyout of NBCUniversal in what the WSJ describes as a “hedge against escalating programming costs.” Verizon has proposed that its FiOS TV unit pay programmers like ESPN only for subs who actually watch them. This ain’t pocket change. Verizon pays Disney $24 million every month for ESPN – regardless of how many of its 4.7 million subs tune in.

Cable and pay TV distribs in the US have two good reasons to worry right now. On one hand, their retail rates are going up too fast for comfort, while on the other, extended basic cable is saturated. From 1995 to 2011, according to the FCC’s 2012 Report on Cable Industry Prices, the price of expanded basic service increased at a CAGR of 6.1%. By contrast, the CPI increased over the same period at a CAGR of only 2.4%.

The irony is that while those increased fees are mostly going into the pockets of the program suppliers, cable and pay subs are forced to take out the financial pain on their hapless retail providers. Although the numbers are still small, there’s an unmistakeable trend here, fuelled by the steadily rising rates for traditional distribs and the allure of sexy OVDs, led of course by Netflix:

There were only 213,000 net new video subscribers in 2012, Nomura says, a 37% drop from 2011. And five million U.S. households have opted not to pay for traditional TV in favor of online streaming and other video sources, according to Nielsen, with 36% of them citing cost. That represents 4.3% of total households, up from two million, or 1.8% of households, in 2007 (WSJ).

What about prices in Canada?

What does this roiling of the TV business in the US say about the business in Canada? Let’s look at one big similarity and then one big difference. The similarity lies in the price increases inflicted on consumers. The difference lies in what allows the markets in each country to inflict those increases.

The similarity. Here’s what the CRTC tells us about the trend in Canada’s BDU prices over the period 2007-2011 (see the CRTC’s 2012 CMR, section 4.4). First, all BDU revenues in that 5-year period (including cable, IPTV, DTH, MDS and non-reporting estimates) experienced a CAGR of 8.0%, whereas the growth in the overall subscriber base was only 2.3%. Second, the upward price trend in BDU prices handily beats the CPI over the period from 2002 to 2011, as shown in the CRTC figure below, which I’ve embellished slightly…

Price indices for BDUs, CPI, TPI, Internet: 2002-2011


The trend lines of interest to us are the top two – the red line indicating the growth in the price of watching TV in Canada (BDUs), and immediately below, the green line indicating growth in the CPI. A base of 100 is assumed for 2002. Nine years later, the cost of watching TV has gone up by 50 points, whereas the CPI has gone up by only 20 points. In other words, the cost of watching TV in Canada has risen 2.5 times faster than the usual index for the cost of living. (TV fees have also gone up way faster than the fees for telephone and Internet access service.)

Now, this trend may not exactly match the FCC figures I cited above, because of differences in the reporting calendar, the services included and so on. But that doesn’t change the close match in the long-term trends in the two countries: in the US, TV prices have gone up at almost exactly the same rate over time as they have in Canada – in both cases, just about 2.5 times the rate of inflation.

So much for the similarities. In my next post, we’ll get back to the big difference between how TV operates in the two countries, and some reasons you might not want to have even more mandatory services boosting what it costs you to watch TV.