March/April 2013
Volume 33 No. 2

March/April 2013
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Despite Riches and Quality, Channels Hitting Snags

By Dom Serafini

The successful business model created by cable and satellite channels is bringing the companies that own them billions of dollars in profit and a large catalog of high-quality programs.

Actually, what drives the financial growth of these channels is the quality of the shows which the channels leverage in order to get more money per subscriber from providers. And yet, this El Dorado could represent the tip of the bell curve, marking the beginning of the end of the same model that created it. Curiously, while this drama unfolds, companies are flooding the markets with even more new channels, especially sports channels, like Clint Eastwood’s Back9Network golf lifestyle channel.

For the TV provider sector, churn is no longer even contemplated, the four Horsemen of the Apocalypse are:

  • Cord-nevers: Young people who don’t subscribe to a cable or satellite TV service when they move out of their parents’ house. If they want to watch a particular show, they stream or download it.
  • Cord-cutters: Subscribers who “cut” their cable and satellite services in favor of “cord-cutting services” such as Barry Diller’s Aereo (for over-the-air channels) or Netflix (for streaming).
  • Cord-rippers (also called Cord-shavers): Subscribers who still have some cable, but have reduced spending to a bare minimum.
  • Dwindling sub base: In order to compensate for the loss of subscribers, providers are charging remaining subscribers higher rates. The critical point when rates will be too high to be sustained is expected to arrive in 2016.

But let’s not get ahead of the juicy details. According to an article in The New York Times Magazine, a channel like AMC collects $30 million a month in fees alone on a base of 80 million subscribers, which is good considering that their best shows have fewer than 3 million viewers. In 2012 NBC Universal’s cable channels generated around $5 billion, half of which was profit. Viacom’s revenue is more than $8 billion, with 49 percent profit.

The Times pointed out how channels that are offering a few hours a week of original programming are making larger financial demands on the cable and satellite providers. Channels like AMC now charge providers about 40¢ a month per sub, including millions who will never watch.

This newfound El Dorado has spurned a myriad of new channels, based on the same successful business model that involves the network (or brand), the distributor and/or the platform and the service provider (cable and satellite systems). These new channels are mostly developed by existing channel brands that, due to ever-growing audience fragmentation — including online disruptions — need to aggregate relatively bigger audiences. And this is done by creating even more channels (so that TV spots can run across multiple programs), for amortizing costs and seeking wider reach, because networks that reach 70 million homes can charge more for their TV spots than channels with fewer TVHH.

In the cable/satellite business, TV spots are sold on the basis of “best estimates” for cumulative (cume) audiences, and not for quarter-of-hour ratings as is the case with broadcast TV. But advertising, especially in Latin America, is not as important as it used to be; therefore, content providers and platforms are focusing more on piracy and, in particular, under-reported subs who, in the past, helped them provide extra eyeballs to advertisers.

One region where the cable/satellite channel advertising market remains robust is Asia Pacific, which compensates for the traditional low ARPUs. Last year, the region generated a reported U.S.$33 billion in TV advertising, with an additional $33 billion coming from pay-TV revenues.
According to Luca Cadura of NBC Universal Global Networks Italia, the quality of the brand and the strength of the channels’ sales rep determine the advertising results. Other factors are the “target homogeneity and packages across multiple channels.” In Italy, Cadura runs Studio Universal and Diva Universal channels.

The key nowadays, especially for basic-cable/satellite channels, is to transmit shows that are exceptionally good, so subscribers will actually complain if providers don’t carry them. In effect, cable and satellite channels have developed a clever business model based on quality programs for a relatively restricted core group of viewers.

As far as the structure of the business model is concerned, a new network could find affiliates on its own even though, as a stand-alone channel it would be very difficult, with the exception of ethnic channels such as RaiWorld or ART America, which are premium, meaning that, in addition to the basic subscription charge, they require an added fee.

In many cases, an online live streaming alternative to cable/satellite carriage, like the Hallmark Channel’s online subscription service, would be more practical. Another way is to forgo carriage fees from service providers, as Justice Central channel did. The risk for a stand-alone channel could be that the service provider might drop services that do not perform well with viewers, like Time Warner did with art channel Ovation. As A+E Networks’ Steve Ronson commented, “Marginal channels can no longer survive.”

But no matter how difficult it is to launch a new channel in the U.S., it is nothing compared to the U.K. where, according to Jacques de Suze, a Washington, D.C.-based consultant, even broadcasters such as BBC and ITV pay platforms such as BSkyB for carriage (and not the other way around).

Most likely, new channels would partner with a distributor such as Al Baraka’s ReachMedia or a platform such as HBO, Turner, Viacom, Disney/ESPN, Fox, Liberty Global’s Chello Media in Europe and Astro in Asia. Naturally, it is easier for service providers, such as Time Warner, to foster their own channels. For example, AMC’s chairman is Cablevision’s Charles Dolan.
Indeed, the top 10 U.S. service providers account for 90 percent of TV subscriptions in the U.S., and they have a list of just top 50 must-carry networks even though, of the hundreds of TV channels in the U.S., only 10 account for most of the revenues and audiences.

Nevertheless, due to the large number of channels they broadcast, distributors and platforms have more leverage power with service providers. Naturally, this strength comes at a cost, which is usually a minimum guarantee (that can vary from $300,000 to $500,000) from the channel, plus a percentage (e.g., five percent) of what the service provider will pay. For basic service, the provider will pay 3¢ to 7¢ per sub. Specialty channels get 25¢ to $1 per sub. The platform can also provide uplink services and transponder space at a fee plus costs, in addition to handling ad sales, keeping commissions on the net that vary from 15 to 20 percent.
Usually a channel gets revenues from per sub, ad sales and VoD after the linear broadcast.

For the latter case, in addition to MSOs, channels could make arrangements with such services as Apple, Hulu and Netflix. However, explained Victor Rodriguez, a Toronto and Miami-based cable and satellite consultant, MSOs don’t usually permit the channels they carry to go outside their own VoD services. Though he added that a satellite provider, for example, will allow a channel to expand its reach through cable, after an exclusivity period (for which the provider pays a premium), because they all realize that’s the only way for a new channel to survive.
Ethnic channels have several business models. RaiWorld’s Giovanni Celsi explained that the most common model is to deliver the signal to the distributor, which pays for the uplink and transponder, and find cable and satellite affiliates. If, on the other hand, an ethnic content provider prefers to market the channel on its own, it has to take into account at least $400,000 a year for transponder costs, in addition to other technical expenditures. Fortunately, in most cases, ethnic channels have little or no content costs, since they tend to utilize shows that they own.

In the U.S., the most widely used satellite provider for ethnic channels is Dish Network. Distributors handle ad sales (a 50-50 split on net with the channels) and leave avails for local TV spots. Revenues from subscribers are usually split 50-50 between the distributor and service providers. In turn the distributor splits its portion of revenues with the content provider (channel). Other models are for the distributor to pay the channel a fixed amount (let’s say $1 million per year) or a flat fee for sub (e.g., 25¢).

The aforementioned issues facing cable/satellite TV (i.e., increased subscription costs and people leaving their systems in favor of online) represent a threat of astronomical proportions to the industry. Cable bills have more than doubled over the past decade. Subscribers currently pay $90 billion a year for their services. But researcher SNL Kagan noted that 85 percent of U.S. households paid for TV service in the third quarter of 2012, down from 87 percent penetration in the third quarter of 2009. SNL Kagan estimated that 4.3 million people relied on Internet video instead of paying for TV, projecting that number will more than double by 2016.
In 2004 the debate about ending the current practice of offering bundled package versus a la carte service went before the U.S. Congress. Today it is resurfacing even though service providers are looking at ways to unbundle sports programs that are driving up subscription costs. Officially, the industry is fighting this provision. According to A+E Networks’ Ronson, “A la carte is not a model that will benefit consumers and content providers.”

However, the cable/satellite service providers are not standing idle — they are starting to react. Singapore’s StarHub, for example, has introduced a “pay-as-you-watch” service for viewers who do not want to commit to a subscription. Plus, satellite is growing, especially in Europe, where it now reaches 84 million TVHH, surpassing the number of homes reached by cable and over-the-air TV. Similarly in Asia, satellite TV grew by 15.19 percent in 2012 compared to the previous year, reaching a total of more than 262 million subscribers.