Five Reasons Why Time Warner Cable Had To Pay Fox - Jonathan Bokor - MediaBizBloggers

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The recent battle between Time Warner Cable and News Corp. over subscriber fees for the Fox broadcast network was one of the most publicly debated carriage disputes of recent years, but it won't be the last. The economic model for over-the-air broadcasting, which has been in decline for years, has been battered by this ad recession. While the owners of the broadcast networks and TV system operators have long had an understanding on this issue (i.e., increased subscriber fees or distribution for affiliated cable networks instead of cash payments for the broadcasters), that understanding is breaking down. Partly that's due to the already high subscriber fees for many cable channels, partly it's the bandwidth crunch that limits further distribution for new and existing channels, but mostly it's the deteriorating business model of broadcasting.

As a result, the broadcasters have realized they need a subscriber fee to remain profitable, and they're turning up the heat on cable and satellite operators. Although the result of the TWC/Fox battle wasn't made public, and TWC waged a tough battle, it appears that Fox got some sort of subscriber fee. Here's why:

1. Retransmission consent is a public relations war, and networks have a built in advantage (for now). The average cable subscriber has very little understanding of how the business of television really works. When carriage battles get big enough to make it into the press, as this one did, most viewers focus on the possibility that they won't get to watch one or more of their favorite shows. Since most viewers don't understand that the money they pay their cable or satellite operators every month gets doled out to all of the cable networks, they don't realize that any increased payments to programmers will in reality come out of their own pockets. They are more likely to see it as cable operator greed, and media companies are more than willing to encourage that belief. While Time Warner Cable made a savvy move with their "Roll Over or Get Tough" campaign, they have a lot more educating to do before they can win these PR battles. In the meantime, most viewers tend to blame the operator in these disputes rather than the network.

2. Broadcasters create the hits, and they need subscriber fees to keep doing it. Most of the biggest hits in television are built by the unmatched exposure they get on the broadcast networks, and those hits (e.g., American Idol, CSI, etc.) drive the entire television ecosystem. Although cable networks have made great strides in original programming over the last decade, they still don't generate multi-series hits like CSI or Law & Order. Those hits flow through broadcast, off-net syndication, VOD and online, and are ultimately why subscribers are willing to keep cutting that monthly $60 plus check to operators. But producing those hits costs a ton of money, both in production costs of the winners and the inevitable failures that are part of the process. Without subscriber fees, broadcasters will accelerate the trend toward reality shows and cheap experiments like Jay Leno at 10 o'clock, neither of which do well in syndication or VOD.

3. If the broadcasters don't get paid subscriber fees to fund making hit shows, operators will end up paying just as much to have cable networks do it. Look at the programming lineup on networks like TNT, USA and FX. Sure, they have plenty of original programming, but they're also loaded with off-network reruns. Although it's not cheap to acquire the rights to shows like Law & Order, they are proven hits that generate predictably strong ratings. If the broadcast networks stop generating these types of hits, then cable networks will have to substantially increase their original programming efforts. In the end, that will cost just as much as, or even more than, the broadcaster's development efforts. In order to fund that development, cable networks will demand (and probably get) higher subscriber fees.

4. Subscriber fees can be used as a carrot to negotiate other issues. The possibility of paying the broadcasters and effectively saving them from a slow and painful death creates a huge bargaining chip for operators. Before finally agreeing, they can use that chip to negotiate other things they want from the broadcasters, such as advertising avails (similar to the spots they get from cable networks), online and mobile rights, and perhaps cooperation with the Canoe effort. Concessions on these issues have been hard to come by, and this battle represents an opportunity for the operators to get some wins on these issues that likely won't come around again. My sources indicate that Time Warner Cable did in fact get TV Everywhere rights in their deal with Fox.

5. The survival of the broadcasters is at stake, so they're more motivated combatants. If they fail to win sufficient subscriber fees (including a cut of the fees their affiliated stations negotiate), it's hard to see how the broadcast networks remain profitable. They simply must win. On the other hand, cable and satellite operators aren't going anywhere. If they are forced to raise their rates in order to pay the broadcasters, they may lose a few subscribers, but probably not many. Their profitability may take a small hit, but in no way is their survival at stake. In any war between two combatants in which one has his life at stake and the other doesn't, then all other things being equal, the more desperate fighter is going to win.

Although we may never know all of the details of the settlement that TWC and News Corp. reached, my guess is that the subscriber fee was closer to News Corp.'s ask than many people suspect, but that TWC got some hefty concessions on TV Everywhere and other issues. I'm betting that the broadcasters will increasingly obtain subscriber fees in these battles, and that pay television's business model, already the strongest and most profitable in media, will become even stronger because of it.

Jonathan Bokor is a consultant specializing in monetization strategies and business development for both digital media and traditional media companies. Jonathan can be reached at jbokor@yahoo.com.

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