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The Economics of Television

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April 09, 2012 – Comments (0) | RELATED TICKERS: AAPL

Board: Apple

Author: Goofyhoofy

How exactly does the business model work in the first place?

With the caveat that individual deals are all over the place (like prices for airplane seats), it works like this:

Cable programmers get about 25% of their revenue from cable fees (that's money you pay your local cable company, which forwards part of it on to the Discovery, Disney, MTV, etc. channels), and the other 75% from advertising. (I'm sure there's now a component of DVD/streaming/etc, but I've been out for 10 years and it was not significant at the time.)

If you have a big brand (ESPN, for instance) you get more fees, ESPN gets several dollars every month from every household, whether they watch or not. If you have a low brand you may get a few pennies, or even nothing at all. The Outdoor Channel? Who cares. They're happy to be carried, even for free, because no carriage, no advertising, no nothing.

Shopping channels and religious channels pay the cable company to be carried (just as merchants pay for better real estate to get more traffic.) And that's why there are so many of them, because it's basically "free money" to the cable MSO. It may only be $1 a year per sub, but it's no fuss, no muss money so they grab it.

The advertising is mostly sold by the cable programmer, but a minute or two each hour is sold by the local cable company. So the programmer gets fees + most of the advertising. The cable operator gets your money minus what it sends to the programmers, and some advertising dough, though not a lot. (Remember: Cable Programmer = Science Channel, A&E, Fox News, etc. Cable Operator = Comcast, Charter, Time Warner Cable, etc. Network Programmer = NBC, CBS, etc. )

It's different for the big 4 networks, which have "local affiliate" stations (Channel 8 Action News!). The network sells most of the advertising, the local affiliates get about one minute per hour (but all 16 minutes in 'syndicated' or 'local' (usually local news) programs. There are no minutes left for the cable operator, so they pay nothing. (This may have changed; as I said, I've been out for a decade.) There was a time when there were huge fights between the networks and the cable MSO's. The argument was that 50% of the viewing was to network programs, and the cable guys were "getting a free ride" by not paying anything for it even though it was obviously "highly desired" programming. The counter argument was that cable was "expanding" the audience (true in the hinterlands and maybe in some cities with bad multi-path signal problems) and that the networks should be grateful.

The other model, of course, is "pay", like HBO, Showtime, etc. That's how a lot of people thought cable was going to be, but it didn't turn out that way because people don't really want to pay by the "each" because the price turns out to be high. Disney, for instance, originally set up the Disney Channel to be a pay tier, but after several years realized that there was more money to be made by reaching a wider audience and selling advertising. (Another decade and they would realize that they could create franchises like Hanna Montana which got them into other areas like recording, concerts, etc. and more fodder for the theme parks. This wasn't true with a smaller, exclusive audience.)

I don't like the fact that I send $3 a month to ESPN since I never watch it, and I'm not thrilled to send Rupert Murdoch a check every month (and I'm sure others are unhappy to support MSNBC) but that's how the business model evolved and until somebody smashes the paradigm that's how it's gonna be. I'd like cable to be unbundled, but that is fraught with problems. (For instance, how do you launch a new channel when nobody can see it?)

Most people have around 5-8 "main" channels they watch. Would they really be happy paying $10 each, every month, rather than $80 for everything? Because the economics are the economics. The cable companies have high profit margins compared to old-line manufacturing or industrial businesses, but nothing spectacular compared to other service businesses. And they don't live high, pay gazillion dollar bonuses to 23 year olds at the end of the year, or have big "Dennis Kozlowski" type frauds and parties going on that I ever saw.

There is certainly argument to un-bundle (and some people are doing it by "cutting the cord"), but when people realize that their eight channels are costing $10 each, they'll probably start thinking about having seven, and maybe six, and so I understand why the cable companies are so reluctant to do it.

I have a hard time believing advertisers are actually paying $1-$2 per show per viewer.

No they're not. But everybody has a legacy system to protect: the network with their affiliates, the cable programmers with the MSO's (ownership is now interlocking in so many cases) so the price is "high" to slow the advent of the breakup of the system.

It will break. It has to. Like so many others things that the internet has changed (shopping, newspapers, music, telephone calls, advertising, yellow pages, etc.) this is a system which will change. It's a matter of time, but it may be some time before it happens.

Or perhaps Apple TV will create such a compelling alternative that people will flock to it. The iPod certainly spelled the end of the CD and cassette players, and the iPad is doing the same to netbooks and notebooks. I've put on my very very best Steve Jobs hat and tried to figure it out, but them I'm not him and the highly variable brainwaves have not yet aligned.

Maybe tomorrow.

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