1. Rising Retransmission Consent Fees for Sports Programming
Comcast agreed to pay $4.38 billion for its NBC Universal subsidiary to carry the four Olympics from 2014 to 2020. You would think this would be cause for celebration at Comcast and disappointment at Disney (home to ESPN which also bid for these Games). Yet stock prices for Comcast fell with the initial news of their winning bid while Disney’s increased initially.
So the fact that Comcast/NBC executives have seemingly overbid for these 4 Olympics suggests that they either (a) have an undisclosed financial model in mind that will at least mitigate past Olympic losses or (b) were irrationally desperate not to lose one of their most prized sports possessions.
In any event, the inflated carriage rates for sports programming reflect a rise in retransmission consent fees generally. For example, News Corp. saw a 100 percent jump in the retransmission-consent fees it collects from cable and satellite affiliates that carry its TV stations during its second fiscal quarter for 2012.
The hike in retransmission-consent fees helped it offset increased costs at Fox for Major League Baseball rights, along with decreased political ad revenue at its TV stations.
2. Low-Cost Programming Tiers without Sports Channels
At a time when cable MSOs are confronted with a growing cord-cutting segment of the public, MSOs can ill-afford to overcharge subscribers for sports programming that doesn’t interest them.
Skyrocketing retransmission consent fees for sports programming has led some MSOs to offer a low-cost programming tier that does not include popular sports channels such as ESPN.
For example, Cox Communications Inc. confirmed a report that it has begun to roll out a US$34.99 per month "TV Economy" tier that includes local networks and about 20 expanded basic channels, including Discovery Channel and Nickelodeon, but does not include ESPN, the most expensive channel of the lot. The price also includes a rental fee for one standard-definition set-top, a spokesman said, adding that Cox intends to offer TV Economy in all markets. The move, which follows the launch or trial of similar, no-frills video packages from MSOs such as Comcast and Time Warner Cable, is coming into play as cable operators seek out ways to slow the flow of fleeing customers that have been hit hard by the economy or are otherwise looking for less expensive TV alternatives.
Meanwhile, the broadcasters are hinting that the low-cost programming packages cannot become too popular because MSOs are contractually obligated to include ESPN in their most popular programming tiers.
Thus, Disney executives suggested that low-cost programming packages offered by a few major cable MSOs would be problematic if ESPN ends up in anything but the most popular tiers from affiliates.
In other words, one reason why the MSOs haven't made the low-cost packages a priority is that they could violate carriage deals with ESPN and parent Disney if the packages were to become more popular than the expanded basic programming packages that are home to ESPN.
"I just want to make sure you understood this. The MVPDs (multichannel video programming distributors) have always had the opportunity to offer small packages. What they don't have is the opportunity to offer ESPN on small packages. The deal basically requires ESPN to be offered on the first or second most popular tier offered by the carrier," Disney CFO Jay Rosulo said on a Disney earnings call Tuesday.
ESPN supplies Comcast, Time Warner Cable and other cable and satellite affiliates with two minutes per hour of local advertising inventory. That has made the network one of the biggest sources of local ad revenue for cable affiliates, which can sell ads to car dealerships and other local media buyers during ESPN's coverage of NFL, MLB and NBA games. If ESPN were to be moved to a sports tier, or not made available to the vast majority of pay TV subscribers, local ad revenue at cable MSOs could take a hit.
Offering low-cost programming packages help MSOs appear more consumer friendly, and allow them to tell regulators that they are offering consumers more options. But until Comcast, Time Warner Cable and Cox reach carriage agreements with ESPN that would allow the distributors to place the network on a sports tier or any tier other than expanded basic, it's unlikely that the MSOs would invest in marketing low-cost programming packages.
3. MSOs Pushing for a la carte?
At the same time, MSOs are developing plans to force the content owners like Viacom Inc., Discovery Communications and Walt Disney Company to unbundle their networks so operators can gain more control over how they price and assemble their subscription TV packages. Ultimately, this trend points in the direction of an à la carte regime. The concept, which will certainly meet with fierce resistance from programmers, is gaining traction among MSOs as they fret over rising programming costs and continue to see video subs leave in droves in favor of less expensive video options.
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