RE: The Economist about Disney and ESPN
1. Yes, there is advertising revenue. I mentioned that earlier. I think that my exact words were that many of these channels "want to have their cake and [and to] eat it to [sic]." In general, they are niche channels, so they demanded high carriage rates, and now they are trying to push into the lowest tier possible to maximize advertising revenue. Ones that are owned by schools are also (IMO primarily) advertising vehicles for the schools, so being on lower tiers has obvious academic advantages, which are important to the school's mission. There would also be an increased profit for a party if it could negotiate rates for one environment and then change the environment to make it more advantageous for the party while keeping the old rates. For example, if a party could negotiate a rate in an environment where there were few customers, but each customer surrendered $2 of value for access to the channel, the party could increase profits if they could keep the same rate and switch to a lower tier where there were many more customers, even though the new customers might only be willing to surrender $1 for access to the channel. However, in an arm's length transaction, that doesn't happen. The cable company would be paying the network for no reason, and parties don't just give up money for the heck of it. IMO, that's where you keep tripping up. You assume that if cable companies are willing to pay high carriage rates for premium channels, then they will pay those same rates for basic. That isn't the case. You are even the one who said that the BTN has two rates outside the Midwest. One rate is a high rate when the BTN is a premium channel, and the other is lower rate for when the BTN is on basic (or some other low tier).
2. You are assuming that the customer wants basic. That isn't a valid assumption. If you listened to what I said, I repeatedly said that the amount of money flowing to each tiers is a product of the customers' desire for those tiers. If A is a low tier, and B is a high tier, and one cannot get B without also getting A, then if:
*customer type #1 was willing to pay for A, but not the added cost of B, all of #1's value would flow to A.
*customer type #2 was not interested in A and would not pay the price of A + B to get B, then customer type #2 would not add any value.
*customer type #3 was interested in A, but not interested in A enough to pay for it, and interested in B, but not enough to pay A + B to get it, then if customer type #3 was interested in A + B enough to pay for A + B, the value would be divided up between A and B by the customers' degree of interest.
*customer type #4 was not interested in A at all, but was interested in B enough to pay for A + B, then all of the value from customer type #4 would be allocated to B.
*customer type #5 is interested in A and willing to pay for it, and also interested in B and willing to pay for the difference, then the price difference between A and B would flow to B and the rest would flow to A.
*customer type #6 is interested in A, but not enough to pay for it, but interested in B enough to pay for it, then all the value would be attributed to B.
You are trying to divide it up in a pro rata manner based on the fees charged to the end customer. That isn't the case. The carriage charges are based on a weighted average of the valued added.
3. "So it would be absurd to make a universal claim without supporting empirical evidence that the willingness to pay for the broadly distributed premium tier is the willingness to pay for those channels restricted to that tier and the basic or basic plus channels are 'free.'"
This is where reading is important. My exact words were: "I really don't care about the BTN" and (in a different, but very post concerning a related theme) "[i]f I was to get HBO, I wouldn't be paying for the BTN. I would be paying for HBO and also getting the BTN." You are trying to put words in my mouth and make me say that everyone who gets premium cable is only paying for premium cable and getting the rest for free. I never said that. I have repeatedly said that money flows in a manner that balances out value received. In an arm's length transaction, if someone gets value, then they pay for it. That isn't just my theory. Say the word and I can cite 80 year old Supreme Court precedent where the Court supported the IRS' position. For you to be right, almost 100 years of tax law would have to be wrong.
If your theory that "it doesn't matter what's on basic, people will buy it just for the sake of having cable" was correct, then every channel on basic would showcase a bunch of high school garage bands who were willing to play for free with minimum production-added value. The cable companies wouldn't lose any revenue, but they would slash costs, thereby increasing profits. If the implications of your economic theories were correct, then either there would be a shareholder revolt in every major media company, or there would be shareholder lawsuits involving every major media company. If your theory that economics don't apply to the aggregate of many businesses is correct, then economics don't apply to anything.
(This post was last modified: 04-07-2013 07:01 PM by nzmorange.)
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