Bundling vs. A la Carte - Implications

In previous posts I've explained why bundling can be a good marketing and pricing strategy, particularly for certain types of information goods, and why a la carte strategies can be appropriate for networks with certain characteristics and in markets where access can be easily restricted.  I've also made the case that in the early years of cable and multichannel video distribution, bundling was arguably the optimal marketing strategy for system operators, as well as for audiences.  Technological advances and the explosive growth in market competition over the last decade or two, on the other hand, have opened the door for the effective use of a la carte marketing of video networks.  The remaining core question is whether shifting to a la carte is a good strategy for video distributors, networks, and audiences.  I'll try to address that issue in this post.

One of the problems with much of the current discussions of forcing a shift to a la carte marketing is that it's largely based on overly simple, and occasionally inaccurate assumptions.
   The one I've already addressed is the argument that bundling forces consumers to pay for channels they don't want.  The problem with that argument is that a consumer's decision to purchase a bundle of networks from a multichannel distributor is not based on a network by network consideration of value, but on the simpler issue of whether the consumer feels that the aggregated expected value of the channels he or she does want is greater than the price of the bundle; from that perspective, whether the distributor includes unwanted "costly" channels is irrelevant. ("costly" in the sense that the distributor pays for carriage rights).
   A second major assumption (unstated but underlying most discussions) is that the a la carte price for a network would be close to what multichannel distributors pay for carriage rights as part of bundle.  The problem with that assumption is that it oversimplifies the market forces at play, and ignores the economic impact of unbundling.  For many of the 800+ cable networks available in the U.S., going a la carte is likely to lead to a pricing death spiral.

   The problem is that while cable networks in aggregate (i.e. bundled) have been quite successful in attracting audiences (gathering 50-70% of viewing overall (a bit less in primetime), all but a handful of networks attract less than 1% of audience viewing (averaged daily viewing).  Of course, some programming draws significantly higher audiences, and demand for networks may be even higher.  Still, most cable networks are likely to attract substantially smaller number of subscribers as an a la carte offering than the potential audience obtained as part of a bundle.
   For example, the total daypart audiences for ad-supported cable networks in the last quarter showed that only 8 cable networks had overall total day ratings of 1 or higher.  Weekly primetime numbers for top networks can be 2-3 times higher, and certain episodes or events (primarily but not exclusively sports) can draw ratings of 10-15.  Actual demand for a channel marketed a la carte is likely to be higher than that (as it's aggregating across shows and over time), but is also likely to be highly price-sensitive.  Even if a cable network could get a 50% buy-in rate as an a la carte offered at the current bundled carriage rate, that would result in a 50% decline in subscription revenues for the network.  (That's one reason pay-tv network subscription prices are in the $15/mo range, while carriage rates for cable networks top out around $5/mo, and most are under a dollar.)
  However, that's not the only impact of shifting to a la carte.  Most cable networks are also supported by advertising.  While a network would likely keep most of its core viewing as an a la carte offering, it would lose the occasional or drop-in viewers, which would have some negative impact on revenues.  More critically, though, is the fact that many national advertisers prefer to buy spots on networks that have a potential reach of 80-90% of the national population.  Few cable networks are likely to reach that goal as an a la carte service without significantly discounting subscription prices.

Unbundling cable networks is likely to have significant negative impact on revenues for all but a few channels.  Those where losses are small are likely to be channels with established record of high-value content, and a fairly broad audience base.   Those channels whose value lies in a narrow niche are likely to find that unbundling will drastically cut their revenues, forcing them to choose between significantly hiking a la carte prices or cutting back on programming costs.  Either of those responses put the network on a potential death spiral where demand (and revenues) continue to shrink as networks try to cope through price hikes or cost-cutting in content.

There is one additional implication of shifting from bundling to a la carte.  Multichannel video distributors face significant costs in building and maintaining their distribution infrastructure.  Those costs need to be recouped through subscription fees.  When the subscriptions are for bundles with a large number of, the per-channel distribution costs are fairly low.  If consumers shift from a large number of channels to only those they are willing to pay for separately (the goal of a la carte), then those distribution costs would have to be paid for separately, or split among the smaller number of channels subscribed to.  In the first instance, that would mean that a multichannel distributor may place a surcharge on access, regardless on how many or which networks are subscribed to.  The alternative is to split distribution costs across the channels; meaning networks would have to pay for their distribution, or add distribution costs to their a la carte prices.  In either case, that's more negative pressure on revenues and demand.

The upshot is that unbundling will result in significantly lower subscription numbers for most, if not all, cable networks.  The lower buy rates will negatively impact both subscription and advertising revenues compared to the current bundling market option.  If networks need to maintain current revenue levels, they're likely to have to significantly boost the a la carte pricing, or drastically cost the price (and consumer value of) their content.  Either strategy could easily result in a death spiral of declining audiences leading to price-highs and cost-cutting, leading to falling demand and audiences, etc. until the network proves to be no longer economically viable.

The "death spiral" problem is aggravated by the fact that there is a new TV distribution system available.  Online video delivery is becoming widely available as broadband Internet access increases.  Over 70% of Internet users already watch online videos, and streaming services like Netflix, Hulu+, and Amazon offer access to a vast archive of current and older TV and movie content.  The TV consumer faced with the issue of whether to purchase, say, Turner Classic Movies channel is not only thinking about whether that channel is worth purchasing, but the value of TCM vs. AMC vs. USA vs. CNN vs. a Netflix subscription and a plethora of free online content.

  Already several million US adults have become "cord-cutters", dropping some or all of their multichannel distribution services in favor of accessing their TV and movie content through online streaming services.  If unbundling drives channel prices up and forces consumers to be more rational in their purchasing of subscriptions to access cable networks, this could trigger a move of consumers to online video.  That move may well be followed by a move  by networks finding a less costly - and more flexible - distribution system that allows more viewer interaction, better usage metrics, and greater capacity for price differentiation.

If unbundling is bad for most cable networks, it's got to be good for consumers, right?  After all, a lot of the political push argues that it's in the consumer interest.  The reality here is that unbundling is likely to result in consumers paying higher prices for significantly fewer channels.  The problem is that bundling acts as a form of cross-subsidization as well as a form of risk aggregation.  When value is uncertain, aggregation through bundling spreads that risk - moving the the consumer from "I'm not sure that program/network is worth the price charged" to "It's likely something in the bundle is worth the price."  Bundling spreads distribution costs across more networks, reducing per-channel costs.  And from the consumer perspective, buying a bundle of channels you're not sure you want while getting those you do essentially subsidizes access to those added channels.  Previous efforts to remove subsidies in cable (the 1992 Cable Act) actually increased prices for most cable subscribers, rather than reducing them, as the politicians and interest groups pushing for the Act claimed.  In telecommunications, cross-subsidies usually are based on high-demand & high-value services subsidizing low value and low demand services.  In this case, it's ESPN subsidizing The History Channel; not the other way around.

Even if the subscription prices of channels don't increase, consumers are likely to reduce the number of channels they will subscribe to. Rather than "bundling forcing consumers to buy channels they don't want," unbundling means that consumers will be able to not buy the channels they don't want.  Audience research shows that for most consumers, almost all of their viewing is confined to 5-10 channels.  Another factor suggesting reduced channel access can come into play when there are multiple channels or networks in a content niche.  If the consumer perceives overlapping value across related niche channels, then the purchase decision is based not on the total value of the additional channel, but the added value that channel is likely to generate above that available in channels already in the a la carte subscription basket.  That makes it much less likely that the consumer will purchase complementary channels, or multiple channels within a content niche.  At least not without some significant cross-subsidy of channel prices. 
  So rather than having access to 100s of channels via bundling, it's likely that most Americans would scale back to 5-10 channels, perhaps with occasional video-on-demand purchase of high-value content.  Gone would be the opportunity for serendipity and the opportunity to sample and establish value for innovative networks and programs.  Thus, unbundling, along with the removal of possible subsidies, is likely to negatively impact general social welfare.  In fact, that's the long-established argument for public broadcasting.
  To illustrate, a consumer who has a low to moderate interest in news is much more likely to subscribe to a single news source than to subscribe separately to multiple news networks offered a la carte.  It's generally given that relying on multiple news and information sources is more valuable than relying on a single source - but a la carte models reduce the likelihood of multiple subscriptions, as the added value of additional news sources decreases as the number of sources goes up.  (When content overlaps, the consumer will base a purchase decision on the added value the additional channel will bring, rather than the full value of the channel.  Thus further decreasing demand for multiple channels within a niche).  I'm sure that most liberals would be upset if Fox News Channel was the only cable news channel subscribed to, just as most conservatives would worry if MSNBC was the only cable news network many people subscribed to.
    In addition, the impact of increased costs will hit lower income groups more than others.  Lower income groups are likely to cut off a la carte subscriptions once their separate subscriptions reach a point where the channels provide a threshold level of content, particularly if the addition of other channels provide minimal incremental value.

So, a complete unbundling and a shift to a pure a la carte marketing approach is likely to have a significant negative impact on all but the biggest high-value cable networks, and be particularly problematic for networks with content of lessor or unknown value, and those targeting small niche audiences.  It's quite likely to increase access costs to consumers (both on a per-channel and aggregate level), and result in their reducing access to networks and content of low or uncertain perceived value.  Not only is this a negative consequence for the consumer, but the reduction in access brought by a pure a la carte marketing approach is quite likely to have meaningful negative social impacts as well.
  It would hurt multichannel distributors as well, impacting the cost and profitability of their multichannel video services, and accentuating their competitive disadvantage as a TV distribution system vis-a-vis online streaming.  The eventual certainty of competitive disadvantage in that field has been recognized by the industry, and is one reason why much of their focus is shifting from multichannel video distribution to becoming a digital telecommunication access point and service provider.

Let me end by saying that a look at the likely impacts of a shift from pure bundling to pure "a la carte" model for multichannel video distribution suggests that there will be serious negative consequences for most groups in the market.  But it's not necessary to completely shift from one extreme to another.  The growth of video-on-demand (VOD) is demonstrating that a la carte can be a viable option for some networks.  The explosion of carriage fee rates for some networks - regional and nation sports networks in particular - suggests that splitting related niche networks and channels into separate mini-bundles, possibly with some a la carte options, would be appropriate and even have a positive impact on consumers and networks, letting the high costs of those channels be born more directly by those that see that value.  (And also hopefully bringing bundle prices back down to where multichannel access, and the social values associated with maximal access, are maximized.)

The market and technology is a a point where a la carte marketing of networks and channels is viable, and where it makes sense for some types of channels.  The same can be said for the intermediate strategy of offering various mini-bundle mixes of channels, programs, and services.  However, there are still a large number of channels, networks, and services where bundling remains the optimal approach, from consumer, network, distributor, and social perspectives.  It's pretty clear that rushing into a overly simplistic "bundling is corporate evil so a la carte must be consumer-friendly" assumption is not a reasonable foundation for policy in this area.  This is an area where an incremental approach that considers what marketing approach is best within a specific context; where consideration is given to the type of content and its content as well as audience interest, social welfare, and the values inherent in having the content accessible and used.  That's the approach most likely to result in positive outcomes.

FCC Votes to End UHF Discount (finally... sort of)

The FCC has had a policy for decades giving owners of UHF broadcast television stations a 50% discount in terms of applying market size to the national ownership caps.  That is, owners of a "UHF" station only counted have of their reach in terms of a broadcast group's total audience reach.  An all-UHF group owner could theoretically have an actual audience reach of 78%, yet still fall within the FCC's national ownership limits of 39%.  This has let a dozen or so of the largest TV station
groups and media conglomerates have an effective reach of 40-65% of US TVHH while technically remaining under the national ownership cap of 39%.  While ending the discount, the FCC will grandfather in those groups, and allow others with station deals in progress to retain the discount (allowing them to continue to bypass the national caps).  So the big guys get to continue violating the official cap limits. That's the "sort of" part of the headline.

The "finally" part is that the policy is a legacy of old technological limits that have long since been bypassed.  The root of the discount is the fact that in the 1950s and 1960s, UHF stations in the U.S. were at a serious technical disadvantage to VHF outlets.  UHF signals didn't go as far, and required much more electrical power for transmissions.  In the 50s and early 60s, most TV sets sold in the U.S. didn't even have UHF tuners - and it wasn't until the mid 70s that UHF tuners in TV sold in the U.S. had to meet the same quality standards as VHF tuners.  All of this put UHF stations competing with VHF stations in their market as a serious competitive disadvantage.  In fact, in research I did for my dissertation, I was able to estimate that UHF stations had a "discount" of 50% in terms of the money they were able to get for advertising spots, even with roughly equal audience sizes.
  However, by the late 70s and early 80s, things had turned around for UHF stations - improved standards in TV sets narrowed the viewing difference, and the growth of cable systems removed a lot of the coverage differences.  By the early 80s, my dissertation went on to show, that UHF financial disadvantage in terms of advertising rates (discount) had virtually disappeared.
  Still, the FCC wanted to encourage greater use of UHF frequencies (many remained unclaimed until the FCC started taking back large sections of the UHF TV bandwidth).  When the FCC shifted ownership focus from the number of stations to national reach, it seemed to make some sense to apply a "discount" to UHF to provide an incentive for large owners to start purchasing UHF stations or getting new licenses and putting new UHF stations on the air.  The 50% figure, like many FCC policy numbers, seemed to come out of thin air - although its possible someone in the agency read my dissertation and pulled the number from there (as out of context as that would be).
  However, then came the shift from digital to analog - a shift that required stations to start broadcasting on different channels, and mostly in the UHF band.  But the UHF discount - a discount remember that was supposed to be based on technological disadvantages - was still given, but was based now on the original frequency allocation, not on the actual broadcast channel used.  Initially, an argument can be made that the FCC just didn't want to deal with the additional dislocation of having to refigure ownership reach (or deal with stations pushing for changing their new allocations)  so they continued to apply the discount to the original channel assignment.
   Thus the FCC kept the old policy in place, despite being applied to channel allocations no longer in effect and justified by "technological disadvantages" that had disappeared long ago.
  So it should be no surprise that they finally ditched it - after the industry's been expecting it since 1998, and certainly since 2009 (when the digital transition was completed).  Although, as noted above, with the grandfather clause, they really haven't.  And with the TV national ownership caps under regular review and court challenge, it's not likely to really change anything in terms of concentration in the broadcast TV industry in the long run.

  To recap, the FCC created a policy in 1985 to allegedly compensate for technical disadvantages that had virtually disappeared a decade earlier, kept it in place for two decades despite knowing there was almost no remaining disadvantages, and for about a decade after the shift to digital began.  With the shift to digital, the new digital UHF allocations actually had a slight technical advantage in reach over VHF allocations, and yet the discount continued to be applied.  Moreover, it was not applied based on to the new allocated frequencies, but to the original analog channel allocations instead that were being phased out.  Now, five years after analog phase-out, the FCC is considering dropping the discount.  However, the FCC has decided it will not let owners apply the "UHF discount" in future purchases of stations, but won't require those who have used the discount to bypass ownership limits to actually come into compliance with those caps by selling off stations.

Sounds about right for government policy - create a solution to fix a problem that disappeared long ago, and continue to apply it to channel allocations that are no longer being used.  And even in "dropping" the policy, continue to allow those who took advantage of the policy to continue to evade the intent and letter of ownership caps.

Source -  FCC Proposes to Eliminate UHF Discount,  Broadcasting & Cable

The Coming TV Revolution: Can Over-the-Air Free Broadcasting survive?

A number of trends are coming to a head - and may quickly and radically transform the TV (and other video media) landscape

  Broadcast TV has remained the primary force and driver throughout myriad technological advances - coax birthing cable; VCRs facilitating time-shifting and opening new choices for viewing; satellites transforming signal distribution and leading to an explosion of networks; computer gaming providing an alternative use for TV sets; digital networks & the Web opening the market (especially at broadband speeds); mobile and the "TV Everywhere" potential; social media prompting new levels of engagement; among others.  All these have opened the market to competition, and the explosion of choice has led to shrinking audiences and falling revenues - even with TV ad spot prices increasing.
  Still, the big networks remained the top draws in programming, grabbed the lion's share of national ad revenues, and remained, through its public broadcast outlets, more or less universally accessible.

  That's starting to change.  The audience share for the Big 4 broadcast networks has been falling for almost a half century.  This winter saw one of the Big 4 networks' entire schedule outperformed by Spanish-language broadcaster Univision in the key 18-49 demographic.  In the Winter sweeps, a cable show (A&E's Walking Dead) outperformed every broadcast network regular scripted series program.  If you exclude big sporting events and reality programs, most of the Big 4's current prime time schedule was outperformed by cable TV reality programs (Duck Dynasty, Swamp People) and WWE Pro Wrestling.  That's not a position of strength in the market.

  And then there's the impacts of DVRs and other viewing alternatives. This last ratings year is seeing most scripted programs experiencing significant time-shifting - from 15% to as high as 50% of a shows audience coming from time-shifting - whether through DVR replay, access through Video on Demand offerings, or streamed from network online sites. The shift isn't stopping with broadcasting either; recent studies show that more people are watching Nickelodeon's programming via NetFlix streaming than are watching the network itself.  TV viewing habits seem to be changing.
  Alternative viewing creates problems for an industry dependent on advertising - particularly when a sizable portion of value comes from being able to target times and specific audiences.  One problem is counting those who delay viewing.  That problem's been around since VCRs, although it's really grown significant only recently.  Nielsen's tried to keep pace by developing multiple ratings measures - the original live viewing ratings while introducing new ratings measures that also include delayed viewing within various time-frames.  However, the industry hasn't settled on how to best capture online streamed viewing, so much of that remains unmeasured.  Even with better measures of delayed viewing, much of it occurs through devices that allow users to fast forward through ads or skip them entirely; and VOD and streaming services don't necessarily include the same ads as aired in the original broadcast.  As such, the expanded ratings may capture the additional program viewing, but aren't really helpful in measuring advertising's reach, or adding value to the live ad spots.
  Then there's cord-cutting and the zero-TV homes.  Those terms address different impacts of the rise of online video streaming.  "Cord-cutting" refers to the growing phenomenon of people dropping some or all of their multichannel feeds and relying on a combination of over-the-air broadcasting and online streaming to provide their TV content.  Research suggests around 1 in 10 multichannel subscribers have dropped some or all of their multichannel service (the vast majority dropped pay or more costly advanced tiers while keeping basic service), with another 5-10% considering the move.  While cord-cutting may become a significant problem for those services that are dropped, you would think that it would help broadcasters as the primary source of live TV.  "Zero-TV" homes take things a step further; the term doesn't refer to those without a TV set and who never watch - rather it refers to those who get their TV and video content entirely from non-traditional TV channels.  Primarily from online streaming, online downloads, and recorded home videos (movies and TV programs).  While initially only a small portion of the U.S. TV audience, Nielsen recently announced that it will start including those households in their sampling, and will eventually integrate their viewing into its TV ratings system.  Initial studies suggest as many as 5 million USTV homes fall into the "Zero-TV" category.
  Declining audiences are also evident in drop-offs in advertising revenues.  TV's aggregate share (broadcast and cable) of national ad dollars has fallen below those for online advertising.  Advertising revenues for cable networks surpassed those for broadcast networks a couple of years ago.  At best, TV ad revenues have diminished long term potential.  TV ad revenues, like all advertising media, took a hit in the recent recession, and growth rates have slowed behind other advertising outlets, resulting in a shrinking share of volatile advertising dollars.  TV businesses, like newspapers and cable firms before them, are seeking new revenue streams.
  One potential new revenue source is licensing.  The jump in retransmission fees in the latest round of negotiations, the success of cable and DBS in getting consumers to pay for TV, and the more recent success of online streaming services like Netflix, Hulu, and Amazon Prime, have amply demonstrated the potential value of licensing as a revenue source.  TV and video firms are starting to look in that direction for revenues to replace advertising losses.  In fact, broadcast networks are already scrambling to grab a share of retransmission fees from local broadcasters, creating problems for many local stations.

All of this helps set the stage for the major networks knee-jerk reaction to two innovations fostering the "TV Everywhere" concept: Dish's Hopper with Slingbox, and Aereo.

  Dish's Hopper started as a DVR-type service with two particular twists: it would automatically record every network prime-time program, instead of only those selected by the viewer; and it included technology that allowed viewers to skip all commercials during replay.  To handle the volume of the entire prime-time schedule, much of the program storage would be in Dish's cloud rather than in the subscriber's set-top box.  These factors were enough to get most of the major broadcast firms to challenge Dish in court, trying to prevent its implementation.  Then came another innovation when Dish announced the integration of Slingbox technology, which allows viewers to stream content received at home to Internet-connected devices anywhere.
  With the first announcement of the Hopper service, major networks sought to challenge the legality of the service and technology, largely on copyright and intellectual property grounds, and seeking an injunction that would prevent Dish from implementing and offering the service.  In particular, CBS, and its CEO Les Moonves, not only reacted negatively, but badly.  After the Dish Hopper with Slingbox was voted "Best of Show" at the last CES (Consumer Electronics Show) by C/Net (owned by CBS) editors, Moonves' office ordered them to remove the device from consideration, and to not report any more news or information about the technology or service.  (This was after promising C/Net complete editorial autonomy).  Moonves also threatened to pull CBS off the Dish DBS system if they didn't stop promoting the commercial skip function.  (Revealing also his ignorance of DBS operations and rules: first, Dish doesn't carry the network, they carry local broadcast stations which are CBS affiliates and FCC rules prohibit network interference with local station operations; second, unlike cable, local station carriage rules state that if a satellite service carries any local station, it must carry all local stations in that market.)

  Aereo's technology allows users to access local broadcast signals through the Internet.  It's primarily a place-shifting technology (like Slingbox), rather than a time-shifting technology (DVR, Hopper).  As such, it's impact is to expand the potential audience for local broadcasters, so it's less clear why broadcast networks and station groups would be in opposition to a technology that would only expand their reach and their audiences for advertisers.  Still, a number have joined forces to file a lawsuit aimed at prohibiting the service, again mostly on copyright grounds. (I've speculated it's just because they want to grab a share of Aereo's subscription fees).  A number of the broadcast networks, Fox publicly, have threatened to pull their programming from over-the-air distribution if Aereo and similar "TV Everywhere" technologies are allowed to continue.

  The central question in the two lawsuits is whether the services fall under the guidelines established in the 1984 Betamax case.  In that landmark case, the Court ruled that technologies that technically could be used for copyright violations were legal if they also had substantial non-infringing uses (primarily under "fair use" exemptions).  Among the specific qualifying "fair" uses were time-shifting and/or place-shifting legally acquired content for private use - key features of the challenged services.  Initial rulings in the two cases with respect to seeking preliminary injunctions to ban the services while the case was in progress went against the network/broadcaster groups.  Both judges found that the services had viable "fair use" arguments that would need to be addressed more fully in court, and thus denied the petition for a preliminary injunction.  A Fox spokesman went a bit overboard reacting to one of the rulings:

"the court has ruled that it is OK to steal copyrighted material and retransmit it without compensation."

  This has resulted in an interesting dynamic - Hopper's commercial skipping currently only applies to the the broadcast networks' prime time recordings, and Aereo only redistributes over-the-air broadcast signals.  In other words, those technologies pose issues only for broadcasters. Thus, the renewed interest in "going cable."  It's not a totally new idea for the networks - as early as the 1990s networks looked at cable network licensing fees and thought about grabbing a share of that revenue stream.
  However, it would only work if they abandoned over-the-air broadcasting fully, which would have serious impacts on their own advertising revenues (resulting from the reduced reach and audiences) and the profits from their owned-and-operated local stations (which typically cover losses from network operations). Multichannel coverage has expanded to around 90%, which can qualify as "national" coverage, but there's also the question of whether multichannel operators, and viewers, would be interested in paying for programming that has been proudly touted as free throughout its history (particularly at the price the broadcast networks think they're worth (which is in the range of $10-25 dollars per subscriber per month). 
  Frankly, if they can't draw significant audiences for "free" content, it's not clear why viewers would be willing to pay heavily for it.  Even if the broadcast networks settle for an additional $50 per month per subscriber (for the Big 4 broadcast networks), that would be a huge jump in cost for multichannel subscribers.  It seems likely that a lot more people will drop those channels or services (if possible) with such a price hike.  Multichannel distributors are already moving sports channels into separate tiers (with much smaller reach) in response to concerns over $5-10 monthly subscription increases driven by skyrocketing sports licensing fees.  These jumps are also fueling talk about implementing "a la carte" pricing models (where subscribers pay only for pre-selected channels).  Big price increases would clearly drive demand down (shrinking potential audience), and economic research on "a la carte" also suggests "a la carte" pricing results in huge declines in demand, and thus audiences. And further significant drops in audience would clearly result in sizable drops in advertising value and revenues.

  The move would also significantly impact local broadcasting, removing a large amount of a station's most popular programming, which would also have to be replaced.  Studies suggest that losing a network affiliation can cost a broadcast station as much as 75% of its value, and could result in half to two-thirds of local TV broadcasters running significant losses and most likely ceasing operations.  Including those owned and operated by the networks parent companies.  Are those companies willing to write off some of their most profitable assets in the hope that they can pull big bucks as a cable network? 
  Then consider the PR nightmare of viewers facing price jumps of $50 or higher a month, just to access what they've always been told is "free TV".  And then consider how Congress and the FCC would react to something that would significantly damage (and possibly kill off) free over-the-air broadcasting). 
  The reaction really seems overblown, particularly when considering that the actual economic impact of these new technologies and services is likely to be minimal.  Sure, commercial-skipping may reduces the value of ad spots, but those aren't being counted now anyway.  In addition, keeping programming accessible longer, and available over more devices in more places actually increases the potential for viewing. The net impact of these technologies on the financial bottom line is likely to be minimal.

Source -  Tech upstarts threaten TV broadcast model,  IT Business Net

Edits - had to clean up some language and missing phrases. Added a la carte issue

Paywalls - Private Boom, Public Bust

A large-scale global survey of "high-end decision makers" suggests the end of the open Web will come quickly.  The survey, from pricing consultant Simon-Kucher & Partners, found that the content executives expected that 90% of online content was likely to be behind a paywall within three years.  Two-thirds of media companies indicated that they expected to introduce fees for most of their online content within the next few years.  A quarter of media companies indicated that the move would significantly increase their profit margins at the expense of the public.

Paywalls, by imposing costs, deflate demand.  Even if we're talking online about commercially produced content, restricting access will have a meaningful detrimental impact on access to, and use of, content.  That not only impacts the media companies that create and/or distribute content, but impacts individuals, society, and the public sphere as well.  In an increasingly information-driven economy and society, restricting access to information (or even information about information) is not in the public interest.  And the impact of paywalls would be significantly more problematic when thinking about journalism, science, educational and cultural content.  And if the fees are high enough, that will encourage individuals to shift their focus to the 10% that will likely remain free - the propaganda and unchecked and unfiltered content that critics already rail against.  Shifting almost all content behind paywalls will also create a new digital divide - this one expressly between the rich and the poor.  It also won't make advertisers in paywalled media happy.
   If the Web had grown up behind paywalls, users may be more accepting of fees - but we've had generations used to free content, and they're likely to resist being asked to pay for things they're used to getting for free.  The 'free for all" culture has already contributed to the rise of political movements in some European countries.  Pushing a new digital divide for higher profits isn't likely to be widely welcomed.

Source -  90% of online content to be held behind paywalls in three years media company survey suggests,  The Drum

Analyst suggests a la carte pricing for cable disastrous

With the FCC and the DOJ looking into cable pricing policies - with a focus on why consumers are not given the option to pay only for the channels they want (a la carte pricing) - analysts are pondering what the impact of a la carte pricing would be on the cable and other multichannel video programming services (MVPS).
  One, Laura Martin, an analyst with Needham & Co., suggests that the impact of an imposed a la carte pricing strategy could be a disaster for cable and consumers both.  Using the FCC's own numbers, she calculates that with a la carte pricing, the cable industry would lose 75% of its advertising revenues and 15-20% of its subscription revenues.  In addition, going to a direct consumer purchase model will cost consumers and additional $5 billion annually, as with the loss of advertising value, channels and programmers would need to increase their prices to consumers. Finally, she estimates that only 5-10 hit channels would be profitable enough on a stand-alone basis to survive unbundling (another 125 channels examined would likely become uneconomic to produce).  The long-term impact of unbundling could put more than a million jobs in the cable, networks, and TV production companies at risk.
  Information economists have long found that the bundling of information goods can have substantial benefits to consumers and to society.  Bundling tends to reduce price, while giving consumers access to a wider range of information sources.  With bundling, consumers also benefit from being exposed to valuable information and content that they might not have specifically been looking for.  Bundling also encourages the development of new channels, promoting diversity.  That added diversity, and the ability to access sources as needed (particularly in unanticipated circumstances) benefits society generally, as well as the consumer.  Forcing unbundling, particularly if the government doesn't also allow for those who wish to take advantage of the bundled services, would be harmful for society, most people, and a broad swath of media industries and firms.  If the FCC and DOJ are truly acting in the public interest, they need to test the impact of unbundling and the offer of a la carte pricing before imposing it on all.  I suspect that if they did so, they'd quickly find the economic, social, and political costs would overwhelm any putative value of the move.

Source -  Federal intervention could slam TV biz, analyst warns,  Variety

Debt Ceiling Efforts May Impact Media

One of the things that I fear politicians don't understand clearly (or just choose not to consider) is that actions have consequences.  The deal Wednesday to raise the debt ceiling and trim the budget certainly had clear consequences as the stock market dived, with the Dow Jones average falling more than 500 points in one day.  Caught in this were many media stocks - a range of cable and DBS related stocks lost 3-7% of their value.

During the fractious debate, one of the 'revenue enhancements' that some politicians pushed was to fast-track plans to auction off a large portion of the broadcast spectrum to mobile operators, generating revenues that could be claimed as budget cuts (see earlier post).  The idea of an auction is not new - there have been discussions for years concerned with how much spectrum will be converted, and at what cost in terms of current and potential uses by broadcasters. The concern is not so much about an auction per se, but that Congress would look at this solely in terms of maximizing potential revenues, without considering consequences or competing uses for the spectrum.  The idea of using spectrum auction revenues was dropped in the final debt limit bill after an extensive PR and lobbying effort by the NAB, but other bills to push the auction have been proposed.
Identifying some of the potential consequences, the NAB suggested that more than 200 full-power local television stations would be forced off the air.  Another concerned group is a coalition of low-power TV (LPTV) stations.  LPTV exists by exploiting gaps in spectrum coverage, often providing minority-interest programming.  The NAB indicated that as many as 3000 LPTV signals could be lost with the proposed spectrum grab, many of which target ethnic communities with foreign language programming.

These and other potential consequences should be considered and weighed in any decision on how much spectrum is to be reclaimed from TV broadcasters, and what alternative uses are considered.

Source: "Wall Street pounds cable stocks" Fierce Cable
"In spectrum battles, Mom & Pop TV loses", Gigacom

Local Broadcasters Try for Relevance (Fun With Numbers)

Some recent headlines in trade magazines proudly proclaimed Local Broadcast TV's massive contribution to the U.S. economy -  claiming responsibility for generating $1.7 trillion annually (7% of GDP) and 2.52 million jobs.  The NAB-funded study is being used to help broadcasting in policy discussions with the FCC over having to give back unused or underused radio spectrum.  As NAB head Gordon Smith said, "Decision-makers now debating spectrum policies need to be cognizant of the millions of people and thousands of businesses reliant on the unparalleled impact of local TV and radio for economic survival."

So where did those totals come from?   

• $60 billion and 300K jobs come from broadcasting, or from industries that support the broadcast industry (that's 3.5% of the claimed total that comes more or less directly from broadcasting)
• $135 billion and 833K jobs come from multiplier effects (the ripple effect that comes from broadcasting's employee spending).
• $986 billion and 1.38 million jobs come from "the additional economic activity generated ... as a forum for advertising goods and services."  What's that? - I'm guessing they are measuring a portion of all the economic activity that advertisers engage in.  The study gives a number of reasons for counting stimulative activity, but no information on how those numbers are derived.  In essence, it seems likely that they've come up with another multiplier effect.  (Not indicating how these numbers were derived is frowned upon in academic research)

There are several problems with combining the latter two components into a "generated by" result.  First, consider the estimated "stimulus" from advertising. Local broadcasting had about $42 billion in advertising revenue in 2010. To get $986 billion, one must presume that every dollar spent for advertising on local broadcasting  stimulates more than $23 dollars in GDP.  That's an extremely high multiplier.  If the same held true for all advertising revenues in media (about $140 billion in 2010), then you could claim that advertising "stimulates" around of one-quarter of all GDP. (And wouldn't it be fairer to claim that this "stimulus" impact is really from the advertising itself, rather than any unique distributive features of broadcasting)
Another problem with using general multipliers is that actual impacts are likely to vary geographically, and across different types of activities.  The study may partially address this, in that the full report also breaks down impacts by state.  But there's also a problem with that, as broadcast signals don't coincide with state boundaries and so any impacts can't be isolated to specific states.  All this raises questions about the validity and accuracy of these estimates.
But the biggest problem is a general one with this kind of analysis.  In treating these numbers as distinctive, it assumes that none of those economic activities would take place in the absence of broadcasting.  That is,  the 300,000 employed by broadcasting wouldn't be working or spending any money to support themselves and their families, or that the $42 billion in advertising wouldn't simply shift to other media - or if it did, then it wouldn't have any "stimulus effect" elsewhere.  In claiming that broadcasting is responsible or that it generates this amount, the report is implying that in the absence of local broadcasting, all of the direct or indirect economic activity associated with broadcasting would go away.  It's not a very reasonable presumption, if you think about it, 
(And thinking about the "stimulus" from advertising - shouldn't that be credited to the advertisers?  All broadcasters do is distribute the message.  The arguments the study uses to claim a stimulus effect are almost all a result of the information content of advertising, rather than any unique aspect of local broadcasting as a distribution system.  So shouldn't that almost 90% of the claimed impact generated by advertising be credited to the advertisers rather than broadcasters?).
Now, this kind of "multiplier" argument is fairly widely used, particularly by politicians and others hoping to inflate the significance of certain economic or political activities.  But as long as the assumed comparison is to a total lack of economic activity, it grossly overstates the real impact that can be traceable to any particular economic activity - the difference between the impact of that activity and the impact of its alternatives. This kind of analysis is (intentionally) highly misleading.  If you think about it, this argument is really saying that
To make the case that broadcasting is responsible for multiplier or "additional" activity, you really need to make a case as to how much would occur economic activity local broadcasters contribute, directly and indirectly, compared to other options - such as how much might result if the all broadcast content was to be distributed via IPTV and broadband systems, rather than local over-the-air broadcast stations.  You could then realistically claim that local broadcasting is responsible for the net difference, positive or negative.
It's a nice try, though.  It may work with policymakers who use the approach themselves (and also tend to be fairly ignorant of economics).

Updated: Fixed some typos, and extended discussion of "stimulus" claims.


Source: "Local broadcasting generates $1.17 trillion to annual GDP, study shows", Broadcast Engineering
Study report: "An Analysis of the Importance of Commercial Local Radio and Television Broadcasting to the United States Economy."