Tailored Extras Help New Cable Channels Win Carriage

May 4, 2008  •  Post A Comment

The cable and satellite television industries are booming and changing, with hundreds of new channels emerging as audiences break down into narrower niches. How will the cable system operators and satellite TV companies maximize their reach and monetize their products in this rapidly changing landscape? For answers, TelevisionWeek correspondent Allison J. Waldman spoke with television expert Geoff Allen, chairman and founder of Anystream, designer of software products for the broadcast and production environments.
TelevisionWeek: What is the general landscape right now for major media companies and independents that are looking to gain distribution and carriage for their emerging networks?
Geoff Allen: It’s very difficult. When the cable industry first started, it was the opposite. There was an unbelievable amount of bandwidth, but no content. ESPN used to be called the Entertainment & Sports Network, and I remember growing up you’d see “Bartending Academy” on there, you’d see dancing, anything they could do to just fill the time. There was just no programming. Then once cable exploded, there was no bandwidth. And then digital cable came out and there was a lot more bandwidth. So there used to be tons of bandwidth, no content. Then there were tons of content and no bandwidth. Then digital came around and it opened up again and you got the two-tier digital channels.
TVWeek: What about today?
Mr. Allen: There are many issues they have to deal with. The first is that a lot of the cable providers have legacy analog channels, basic cable, 30 channels, plus or minus—and that takes a lot of bandwidth. They’ve added on to that digital cable channels, some of which are still running duplicates of the second tier in digital, only now they’ve added digital phone, which is a big deal, telephony, and also Internet, which is a huge revenue driver for them. And now they have to add HD. So, forget new emerging channels for a second, they’re having a very difficult time growing the off-ramps to get HD versions of the same channels they have. That’s a big problem. That’s why DirecTV has spent so much money on multiple new satellites and brand-new set-top boxes and new dishes. That’s billions of capital expense just so they can open up more bandwidth for more channels and services.
TVWeek: Are satellite providers like DirecTV more anxious to do this than cable operators?
Mr. Allen: Well, yes. If you look at this, traditionally, DirecTV has skewed toward a more affluent user base. It has always skewed higher, more like $70 to $100 per customer, as opposed to the basic cable, $30 to $50. So they have invested a lot more money earlier in this process, and they didn’t have to worry about analog and telephone. They don’t have live video-on-demand, so they have been more focused on building a bigger network. They have had less of the same challenges, but the problem with getting these channels online now is that there’s a limit to the fragmentation.
TVWeek: Do you consider fragmentation a bad thing?
Mr. Allen: Fragmentation is a positive. Remember, in the old days, we had three channels. Then there were four when we added Fox. Then there were maybe 20 channels and they were CNN, TBS, Discovery, TNT and USA. These are all the ones we now talk about as basic cable.
Remember “The Wide World of Sports” Saturdays on ABC, you know, “the thrill of victory, the agony of defeat.” That was like the only weird sports you could get. I would hope and pray that maybe they’d show golf or snowboarding. Maybe once every five months something like that would come up. ESPN fragmented that. They took a big market and fragmented it to just sports people. After that, they came up with a college sports network. After that came a golf channel, then an outdoor life network.
TVWeek: Which became Versus.
Mr. Allen: Yes. This is the beautiful thing about cable and satellite. As you get more bandwidth, you can more narrowly target the customer base. But there comes a limit and we’re starting to see that more often, where it’s not clear that the incremental cost to develop, program, transmit, produce another narrowly targeted channel is generating enough return to not first look at doing it broadband alone. You’re starting to see that—they’re either broadband or an on-demand network. We [Anystream] have insight into growth and carriage. There’s only so much money a consumer is going to pay monthly for content. There are a lot of wars going on, with people saying, “I want this in a premium tier. No, I want this in a basic package.”
TVWeek: Like the NFL Network trying to get on basic cable?
Mr. Allen: That’s a good example. If Comcast agrees to carry the NFL Network, they have to pay for every subscriber every month whatever fee to the NFL Network. If they can’t put that in the premium tier where people pay more to get it, if they put it in basic, then they’re providing value to the consumers, but they’re not charging any more. It costs Comcast to put the NFL Network on, which is essentially why all cable companies want sports tiers or health tiers or whatever, because they don’t want to keep paying more.
TVWeek: What does a network have to do to get carriage?
Mr. Allen: Ultimately one of the major influencers is working with the networks for something extra. Comcast ended up getting some exclusive NFL quick cuts, where after every Sunday, NFL Films would provide all these 15-minute highlights of the games. They were only on Comcast video-on-demand services. If you are a Comcast subscriber in the United States and you have the digital package, that means you get video-on-demand, you have the NFL Network and you can go back and review every game. Even if you don’t have the NFL Game Pass on DirecTV. You get summaries on Comcast. That’s the kind of thing that happens to get carriage. The NFL is one of the most powerful brands in the world, but if they didn’t create a separate product for Comcast on-demand, it would have been hard for them to get carriage.
TVWeek: What’s the main reason for that?
Mr. Allen: There are very real bandwidth limitations, and the cable companies are facing it more than anyone because they’re dealing on technology that was designed in the past and they’ve been upgrading every decade and it’s really, really good right now. But it’s not like what Verizon did by running fiber to every single person’s house in the last two years. It’s not like DirecTV that has so many satellites up there pumping out an unbelievable amount of HD content. So the reason this is relevant is because it costs so much to create a channel and program it and get advertising and distribute it, if you can only get on DirecTV or Dish, and not Comcast and not Time Warner because of their economics, you don’t have a business.
TVWeek: What is driving all these companies to create more and more new channels?
Mr. Allen: Because those that win, win big. You sign a multiyear, multicarriage agreement and you can count your money. You know every single day, you’re going to get X dollars per sub, per market, plus subscription fees, plus national advertising. That’s not to say that it’s easy. The economics of a national linear cable network are pretty good providing, of course, that you have providers. You have a relatively flat cost of production once it’s there. You get paid every month, per sub, per market, and there’s national and local advertising that comes in. It’s not printing money, but the longer a network stays online, the bigger a scale it gets. It costs X number of dollars to produce a channel for a million or two, it costs you no more to produce it for 30 million or 50 million.
TVWeek: What’s the most important aspect to this equation?
Mr. Allen: It’s all about distribution. Because it is so incredibly difficult to get any new linear cable channels online today, the only ones that typically get to do this are the ones that are huge, that have leverage. Discovery Channel is gigantic, they have Discovery Kids, Discovery this and Discovery that, they can lean on terms in their carriage agreements of their other four channels to get their fifth channel online. ESPN can do this. ESPN wants to launch ESPN2, then ESPN News, then ESPN College Sports Net, they are like an 800-pound gorilla of basic cable. They can do things across their operating unit and, because ESPN is owned by Disney and they have ABC, they can do a deal with “Sunday Night Football” to do something special for Comcast On-Demand through ESPN, if you pick up ESPN Ocho. This happens all the time.
TVWeek: That kind of bundling is also true with NBC Universal and others, too?
Mr. Allen: They can try, but they don’t always succeed. But the reality is … I still remember when none of these companies existed. Discovery Channel should have never existed. It should have been the National Geographic Channel, but they kind of missed that chance. MTV shouldn’t have existed. It should have been the Rolling Stone Channel. ESPN shouldn’t have existed. It should have been the Sports Illustrated Channel. What do I mean by that? They were gigantic consumer brands that owned the targeted, fragmented markets. National Geographic didn’t understand cable; they were a magazine. Discovery said, “No, we’re a media company.” National Geographic now exists on cable, but it’s a show compared to a giant like Discovery. CNN/SI came on years after ESPN and couldn’t get any traction. It has been a very, very long time since a new company launching a new channel has succeeded in any meaningful way.
TVWeek: What about this new Oprah Winfrey Network? Will that become a major?
Mr. Allen: Oprah is someone who could pull it off. She’s a global, billion-dollar brand. Whether it will succeed or not, nobody knows. I’m not privy to the carriage agreement and the give-backs and the ad sales, the terms of the agreements. There was a time when someone could launch an Outdoor Life Network, get carriage and, if you show an audience, build it. Now, unless you’re a major media company, and you’re doing a sister or a spinoff from a vested channel, it’s almost impossible. They are being directed to on-demand. They’re saying, “I’ll give you an on-demand outlet for free if you can promote it on the Web and people get it and we’ll share ad revenue with you, but we’re not going to give you any carriage.”
TVWeek: Are there companies dominating the landscape and gobbling up all the bandwidth?
Mr. Allen: No, I wouldn’t say that. It’s more a battle of the titans. There are really about six players that have huge power and different conflicts of interest. You have ABC, NBCU, CBS, Fox. They own tons of content, tons of movies, they own it, it’s theirs. Those guys drive some of the most valuable basic-cable channels out there—Disney Channel, ESPN, Fox News, MSNBC, Bravo. They own so much that they are a huge power. These major media companies that don’t own distribution but own origination, they have enormous power. They can play finances across all these different properties. That’s the first thing.
The second major players are on the distribution side. This is where the conflict of interest comes up if they also own channels. Comcast has huge power, the world’s largest cable television provider.
TVWeek: Does the public know who owns what? Do they care?
Mr. Allen: Oh, if you’re not in the industry, some of these moves are nonsensical. People wonder, “Why did I just get two or three new channels I really don’t care about?” I can flip through my DirecTV directory and find channels I will never watch. But, trust me, there is a very real business financial deal to get that on there, which may not have a whole lot to do with what you think it does.
TVWeek: Looking into the future, will there be more clarity or more complications?
Mr. Allen: It’ll be generally clear with one exception. The idea that there will someday be 5,000 channels, that’s true. The difference is that nobody is ever going to go through their television to find 4,500 of them. It’s the Internet. That’s where things are going. That’s where it is today.
When I talk about that fragmentation, of three channels into four, into 30 basic, into 70 expanded cable and now 500 in digital and satellite, there is a limit to how far you can fragment an audience that will still demand a full-time viewer. There are a lot of limits on how much consumers are ever going to pay for any more. You can’t keep increasing people’s cable bills. They’re going to start saying, “Stop bundling, you’re charging me too much. I don’t want this stuff.”
There’s also a limit to how much time people have to watch something linear, in real time, sitting down.
When you graph all those dynamics together, you’re getting huge growth of fragmented, narrowly targeted niche networks on the Web and they are starting to work because it’s easier to find it. I just go to the Web site and I get it, and I’m not looking to watch in real time because it’s not episodic programming.
TVWeek: Are the cable and satellite networks going to do something about that?
Mr. Allen: They’re already doing it. Comcast.net, their home page, aggregates lots of video, streams a lot of video that they have online to their users. On-demand videos are hard to find with the remote control, but it’s very easy to find with a Web browser. Time Warner cable is doing the same thing. DirecTV, all of these guys are doing it.


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