nzmorange
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RE: The Economist about Disney and ESPN
(04-04-2013 12:01 PM)Frank the Tank Wrote: (04-04-2013 11:19 AM)nzmorange Wrote: (04-04-2013 10:53 AM)Frank the Tank Wrote: (04-04-2013 10:02 AM)IceJus10 Wrote: (04-03-2013 11:32 PM)nzmorange Wrote: I doubt the channels care if "the cord is cut." They will simply "air" the shows on their website, but charge a fee (ESPN already does this with ESPN 3 and many schools already do this with their webpages in the athletics section) and sell advertising space (see HULU, ESPN 3, Pandora, Youtube, and so on). Or, they will bundle their content with other channels and sell it to a 3rd party to "air" on their website (i.e. Netflix or Hulu Plus). The cable companies might get screwed, but the networks won't.
Networks will get screwed too... many streaming companies run in the red or at very low profit margins... networks are investment darlings thanks to the guaranteed fees paid to them by cable companies... without those fees, which can make up to 75% of a cable network's income, things are HARDLY as rosy - even for mighty ESPN.
Oh yeah, the networks will fight against a la carte with everything that they have. Believe me, they care. That's why so many of these channels don't budge an inch when it comes to basic carriage vs. sports tier carriage. The carriage fee might be negotiable, but basic carriage in and of itself isn't. These channels would rather stay off the air than give in on that issue (see the Longhorn Network, the Viacom dispute with Comcast, the Fox dispute with DirecTV, the Pac-12 Network disputes with everyone, etc.). The difference between being on basic cable compared to the sports tier is massive.
No. You're wrong. The two are very related. If ESPN had a carriage fee of $0.01 instead of $5.50 (or whatever it is right now), then it would be on basic. Programming that has a passionate following belongs on higher tiers, because the main revenue driver is enthusiasm, and carriage rates monetize that. Programming that has a general following, but little enthusiasm from any significant group belongs on low tiers, because it gets better ratings which are monetized by selling advertising to as many people as possible, and more people have basic than premium. LHN, BTN, and the Pac-12 Network are trying to have their cake and eat it to. When negotiating, it is rational to aim high and then bend downward. Those networks negotiated high carriage rates, which is appropriate because their viewers are passionate, so the programming belongs on high tiers, and now they are trying to negotiate their tier down as low as possibly to maximize the number of viewers who see their content. Cable companies aren't stupid, so they aren't willing to go all the way, and the school/conference networks are bending down, and the two parties are meeting in the middle.
That's the point: it IS on basic right now even at that high carriage price. They know that DirecTV can't go to market without ESPN if Comcast has it and vice versa. I can get shows like Mad Men and Breaking Badby other methods, but sports are exclusive, which makes them increasingly more valuable to cable companies. I think ESPN is one of the few channels that would survive in an a la carte world (it's really an NBC Sports Network-type channel that would get crushed), but that doesn't mean that it wants anything to do with that world.
1. Tell that to my cable provider. They didn't get the memo.
2. NBC Sports would just have very high carriage charges and the people that desperately care about F1 and/or ND would pay for it. They wouldn't get crushed. For them to get crushed, they would have to be over-paid now, and that isn't the case. Unless there is a synergistic relationship between channels, where having one channel makes another channel more desirable, then The channels are being paid FMV. The FMV of the channels is equal the highest value combination of carriage charges and advertising revenue. X number of people will pay $Y to have access to the channel. On average, X-Z people will watch the channel. On average, each of the (X-Z) people will be N% more likely to buy B goods. The value of that to B is equal to the volume of B's sales times N% times the difference of the product's price and variable costs times X-Y less the cost to make the advertisement. The total value of the channel is equal to (X*$Y)+([value to B]*number of advertising slots). In an efficient market, each channel will get FMV. The market isn't 100% efficient, but that's not because there is a tier system. It's because there is a finite amount of competition. The fundamental market forces don't change because the channel is sold in a tier system as opposed to a la carte. It looks different because channels are budled together, but that doesn't change the fact that customers will only pay subscription fees equal to, or less than, the utility that they get in return, and cable companies will only pay networks less than or equal to what customers will pay for the channel less business costs (i.e. administrative, cost of capital, equipment expenses, and so on). In a tier system, individual people are over-paying for certain channels, but that is balanced out by the fact that they are underpaying for other channels. Oxygen might be worth $0/month to me, but ESPN might be worth $10/month to me. However, Oxygen might be worth $10/month to my gf and ESPN might be worth $0/month to her. In the end, we both end up paying $10/month for the tier. If it was a la carte, I would pay $10/month for ESPN and I wouldn't have Oxygen. My gf would pay $10/month for Oxygen and $0/month for ESPN. At the end of the day, in both models, $20/month changes hands and $10/month is allocated to ESPN and $10/month is allocated to Oxygen. Obviously it gets more complicated when you add more viewers and more channels, but the basic idea is the same. Tiers just incentivize people to have more channels, which increases the liklihood that they will become attached to programming in a channel that they otherwise would not watch, which is value added by the cable companies. In an efficient market, some of that value translates into lower carriage charges for the networks. The reason why there is so much push back from cable companies when someone tries to add niche programming on low tiers is that the 1. the carriage fee associated with niche programming increases the cost of the tier, which either directly cuts into cable-provider profits, or gets passed on to the customer, reducing the number of customers who have access to that tier, which cuts into cable-provider profits. Furthermore, when a channel is added to a tier, and the channel doesn't carry its weight, then it sucks up the viewers who don't really care what they watch. This hurts ratings for everything else on the tier, reducing advertising costs. Those channels either want higher carriage fees to make up for the loss, or for the cable provider to lower rates, and thus attract more customers.
The above is a little oversimplified, but it gets complicated quick.
(This post was last modified: 04-04-2013 05:47 PM by nzmorange.)
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The Economist about Disney and ESPN
