TELECOM Digest OnLine - Sorted: Re: A-la-carte Pricing For Cable and Satellite TV

Re: A-la-carte Pricing For Cable and Satellite TV

nmclain@annsgarden.com
Thu, 25 Nov 2004 12:34:28 -0700

I wrote:

> The FCC has released its report on a-la-carte pricing for cable TV
> and satellite TV services (formally called "Report on the Packaging
> and Sale of Video Programming Services To the Public"). It's posted
> on the FCC website at
> http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-254432A1.pdf .

Whereupon Tony P. <kd1s@nospamplease.cox.reallynospam.net> wrote:

> Most people don't understand the concept that a la carte
> would cost more, not less.

> When a cable company offers a channel they pay the
> provider a fixed cost for the years contract.

Actually, a cable (or satellite) company pays each program provider a
"license fee" (aka "affiliate fee" or "wholesale rate") that's
calculated on a *per subscriber* basis. It's not a "fixed cost"
except in the sense that it's fixed for each retail subscriber for the
life of the affiliation contract between the cable/sat company and the
program provider.

Every month, the cable/sat company reports the number of retail
subscribers to each program provider, which then calculates the
monthly bill based on that month's subscribership. If the number of
subscribers is reduced, the provider's revenue is reduced accordingly.

> That cost is then spread among ALL subscribers. But lets
> see you took, oh, the Cramp Channel (Aka Lifetime) and
> offered it among others a la carte. The subscriber base
> would likely be smaller but the provider wouldn't want to
> adjust their price because there are real costs behind
> producing those programs.

The subscriber base would indeed be much smaller, with two results:

- The program provider's license-fee revenue would be smaller
in direct proportion to the reduction in the subscriber base.

- The program provider's advertising revenue would be
substantially smaller, although probably not quite in direct
proportion because the programmer might be able to raise its
ad rates somewhat.

To offset these losses, the program provider would have to
substantially *increase* its license fee and/or curtail its
programming budget. In my previous post on this subject, I estimated
that license fees would increase by 400%:
http://massis.lcs.mit.edu/archives/reports/alacarte-cable-service

Apparently I underestimated the increase. The FCC's report (quoting a
study by Booz Allen) states:

Affiliate fees. . . To maintain current cash flow in a pure
a la carte environment, all of the networks in the study's
segments would have to raise their affiliation fees by at least
400% and ranging up to nearly 2500%.
-- FCC report, II-C, "Analysis of Booz Allen Hamilton
Economic Study," 90-91 (pdf pages 91-92).

> Nobody seems to understand this.

Least of all Consumers Union.

Neal McLain

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