MVPDs Seek Gradual Move Toward a la Carte, and One Broadcaster Open to It

Broadcasting executives said the trend of stations getting more money from cable, DBS and telco-TV providers will continue. They said that reflects their ratings versus those of less-watched cable networks. The executives said changes in rules on retransmission consent deals aren’t needed, as MVPDs said they continue to seek at the commission and in legislative changes by Congress. Instead of paying TV stations less in retrans fees, MVPDs ought to “make adjustments to what they compensate much lower-rated channels,” said CEO Vincent Sadusky of LIN Media. Its blackout of nine stations for more than a month with Mediacom hasn’t done much to raise the profile of retrans in Washington (CD Sept 15 p8).

Mediacom CEO Rocco Commisso wants a “carefully designed a la carte regime,” he said. “If I don’t like the price that they charge me,” he added, “I should have the option” of putting the channel on a tier other than basic or expanded basic. Suddenlink CEO Jerry Kent continues too to seek a move toward unbundling. “We want to see something that’s more consumer friendly,” he said. “The status quo is not consumer friendly -- the business model is breaking as we speak.” Comcast and Time Warner Cable have the size and leverage to experiment with programmers in selling smaller packages of channels, but not so companies like Suddenlink with 1.2 million subscribers, Kent said. DirecTV said “the ability to offer programming on an individual basis, particularly sports content, would allow us and the programmers to better tailor their offerings to the interests of our customers and their pocketbooks."

There’s “an opportunity for the pay-TV providers to do something more proactive than simply pass these incremental costs along to consumers, which has been the cornerstone of their argument” on retrans, Sadusky said of MVPDs’ programming expenses. “A la carte is something we totally support: I would be very pleased to see certain pay-TV operators go to an a la carte model. I feel very strongly about the popularity of our channels, versus other channels in the market. I believe we would be chosen by virtually every subscriber in an a la carte environment.”

Under current rules, wireline MVPDs must carry all stations in a market on their most widely distributed tier. DBS must carry all stations in a market if it carries any, leaving satellite providers with the option of carrying no broadcasters in a particular area. “It doesn’t seem fair why satellite would be treated differently, but it’s the state of the law,” Kent said. DirecTV executives said the company includes the cost of the so-called local-into-local programming in all channel packages in markets where it carries the stations. Dish Network and the FCC had no comment.

A La Carte Limits

It probably won’t be practical for every channel to be bought individually, some pay-TV executives acknowledged. “Getting to true a la carte on every service is probably impractical,” said DirecTV Executive Vice President Derek Chang. “Bundling the services at reasonable price points for many people probably still works. Yet “if the people who really want a certain product have to pay more for that, that’s OK, but let’s try to ease the pain on customers that don’t want the really expensive stuff” such as sports, he said. “The problem is you have a lot of programming” that must contractually be carried broadly, so “there’s a limited amount that you can do to achieve some of those goals,” Chang said: “We haven’t done much so far” on a la carte.

Programmers so far have been largely resistant to the idea of letting MVPDs carry smaller packages of channels, without charging them much more per channel or other concessions, pay-TV executives said. “It’s unfortunate, because they've got spectrum because of the broadcast networks” that programmers can use as leverage to get carriage of cable channels, Chang said. “You would hope that they would see the longer-term picture, which is ultimately if our subscribers shrink, that’s not good for their industry,” he said: “But no one’s willing to step up” to be the first programmer to break up packages, thinking that “someone else will just slide in and take our money.” Chang noted the pay-TV industry lost customers in Q2. Suddenlink has lost them on a year-over-year basis, said Kent. “I think a lot of that has to do with pricing people out of the market,” and “we're going to continue to be challenged in retaining video customers as long as we have escalating programming costs."

The ESPN and ESPN2 channels go on basic or expanded-basic MVPD packages, something that’s worked well for the several decades each channel has been around, said Executive Vice President Ed Durso of the Disney-owned cable programmer. “It offers tremendous viewer loyalty,” so pay-TV companies keep existing subscribers and can attract new ones, “and tremendous return” to MVPDs which can sell local ads during ESPN shows, he said. ESPN Classic and ESPNU are among the networks sold to MVPDs on packages other than expanded basic, “and many operators take advantage of that,” Durso said.

It’s “ultimately” up to pay-TV companies, as the retailers, to decide how many channels to include in video packages, Durso noted. “Our pricing across the board is reflective of the value that we bring to the distribution community.” If cable operators want “to engage with us on other ways they can package the product, we would have that conversation. But it would be held against the amount of value that ESPN brings,” he said. Pay-TV customers are accustomed to getting the channel, and “there would be significant dissatisfaction if they did not have ESPN as part of their expanded-basic package,” Durso said.

Blame for rising programming costs lies with much sports programming, not just ESPN, Commisso said. He wants “a situation where the sports freaks are not subsidized by older ladies, like my mother,” with more flexibility to exclude sports channels from some packages. “We should be able to offer any channel on an a la carte basis, to the extent that that channel’s price exceeds two times the cost of the average channel” on the family tier, said Commisso, who has long criticized programming prices. “My anger revolves around this whole issue” of such costs, not just ESPN, he continued. Other major cable programmers and the NCTA declined to comment.

Customers who cancel video service from DirecTV and Suddenlink say they're doing so because of the high cost of video, and much of that is attributable to programming expenses, those companies said. Suddenlink is “very concerned” that cable rate hikes “could price consumers out of the market,” Kent said. “We have been exploring options. Unfortunately, most of the programmers have not been very flexible: They have a business model that allows them to offer their channels in a broad array.” He also expects more retrans blackouts later this year, as many contracts are up for renewal. “They're not shy about using it as a nuclear weapon,” Kent said of TV stations. Suddenlink’s programming costs rose about 8 percent this year, and will rise another 10 percent or more next year, he said: “The percentage that we're increasing our retail bills is significantly less,” and so “our margins are declining.”

Broadcasters see a gradual shift of carriage fees to TV stations. “They continue to rise, but they are still nowhere near the value based upon actual ratings,” Sadusky said. “We've been incredibly reasonable over a period of more than five years now.” Retrans accounts for less than 1 percent of the average cable bill, an NAB spokesman said. “All the squealing from the pay-TV providers about retrans leading to higher pay-TV bills just doesn’t hold up to scrutiny,” he said: “The market is rebalancing to a place where the tremendous value that broadcast brings to cable is being reflected in the market,” as “pay-TV companies sell their service based on customers having access to the most popular shows, which includes local broadcast news and network programming.” Sadusky believes cable operators are “incredibly profitable,” noting Comcast had the money to buy control of NBCUniversal in January. “There’s that element of profitability that’s never mentioned when pay-TV providers make the argument that it will only make the service” cost more to consumers, he said of retrans.