Show me the broadband money

Apr 15, 2002  •  Post A Comment

Broadband is considered by many to be a panacea for the media world’s analog woes- especially when it comes to program costs and content waste spiraling out of control.
But a new report hints that at least initially, it just might be more of the same.
A lot will depend on how cable programmers and operators cultivate niche content offerings and multiple revenue streams. It will come down to how they define the economics of new digital cable services.
There are some early marketplace examples. The New York Times recently took an equity ownership interest in Discovery Civilization, one of many digital channels developed by Discovery Communications, which has mushroomed into global television’s most prolific brand.
But the jury still is out on the cookie-cutter economic success of specialized channels-success that will hinge on new business models developed for content production, effective marketing and squeezing maximum support out of slivers of subscribers and advertisers.
One thing is for sure. Better broadband days will never come if old, strained programming and business approaches are simply slapped onto a new technology platform.
In a new report on programming costs, veteran analyst Richard Bilotti of Morgan Stanley Dean Witter says a majority of cable’s estimated 12 percent to 14 percent cash flow growth will come from digital video and cable modem services. But it’s difficult to identify just what that will be.
Digital video allows cable operators to offer additional services and niche program networks at different price points, allowing for flexibility and broader consumer reach. But those digital tier networks have been slow to develop because broadband’s mass-market rollout has been more gradual than originally expected.
Many new digital networks are paying cable operators “launch fees” for initial carriage and then accelerating programming expenses as affiliate fees pick up over time, Mr. Bilotti said. Such digital tier programming will continue to make up 32 percent to 36 percent of cable’s overall digital revenues, slightly ahead of the revenues generated by analog and digital programming combined.
The good news is that digital program costs should remain relatively low, even as affiliate fees remain minimal and slow to build, he said. However, Mr. Bilotti forecasted that overall gross margins on total video services will contract from 68 percent in 2001 to 64 percent in 2006. It’s a critical point, considering that major program suppliers offer all three forms of content-analog, digital and premium-and that negotiations for each are directly influenced by the price structure paid for the other forms.
Just when digital, in relation to the programming landscape in general, becomes a decisive economic plus is anyone’s guess. But it won’t have the impact originally expected.
Mr. Bilotti estimated that analog program cost increases will be halved over the next five years to between 6 percent and 8 percent annually-not surprising in light of the fact that fewer new channels will be launched. However, analog programming costs still represent a cable operator’s largest expense, or nearly 30 percent of total analog revenues, with basic programming the single-largest component. Out-of-the-park sports licensing fees push cable programming economics out of sight.
But overall program costs will rise slightly faster than revenues over the next several years as cable operators add new services. During that time, basic rate increases will not be enough to offset program cost increases. To fill that gap, operators will be working overtime to upgrade basic customers to digital.
And there’s the rub. Selling new services already is proving to be more of a challenge than originally thought.
But it is premium services-and not new digital video services-that are expected to be the initial hook for consumers. However, digital video subscribers receive almost twice as many premium services as their analog counterparts, Mr. Bilotti said.
Cable operators will gradually push more subscription video-on-demand-showcasing content from HBO, Showtime, Encore and Starz!-to push digital penetration levels above current premium penetration, which is about 50 percent of all multichannel households, Mr. Bilotti said.
The growth of premium networks is contributing to a gradual shift in media usage from advertising-based television to nonadvertising premium services.
Despite all the cable industry rhetoric, the reality is that broadband today is doing only one thing for sure. It is supporting the costly traditional program production and licensing economics with multiple revenue streams that broadcast television can’t match. And that is killing a big part of the TV industry.
The Deals page is edited by Diane Mermigas, who can be reached by phone at 708-352-5849, by fax at 708-352-0515 or by e-mail at dmermigas@crain.com.