TELECOM Digest OnLine - Sorted: Re: Cable TV Races to Keep Up With Consumers

Re: Cable TV Races to Keep Up With Consumers
Sat, 15 Apr 2006 23:01:42 -0400

Clark W. Griswold, Jr. <> wrote:

> The Telcos saw TV over IP as their way of competing with cable
> companies, *as long as the cable model worked.* That model has the
> cable companies charging the consumer, plus collecting ad revenue
> and "slotting fees" from the channels.

> Producers selling programs direct to the consumer take all that
> revenue away from the phone/cable companies, and they don't like
> being just a pipeline supplier.

Whereupon I wrote:

> Slotting fees? That's news to me. Can you provide some more
> information, or perhaps cite a source to back up that statement?

Griswold responded:

> "Slotting Fees" is a term from the grocery industry, where
> manufacturers or distributors pay the grocery store to put their
> product on the aisle endcap. Those fees can take the form of cash,
> extra product to sell at a future date, advertising support, etc.,
> but the most common is a cold hard cash payment to the store or
> chain, based on the number of days the product is displayed on the
> end cap.


> In the case of cable or satellite TV (known as a MSO), the most
> common example of this are the so called shopping channels. While I
> can't provide any direct links at the moment, its been widely
> reported that those channels pay a fee/percentage of the channel's
> gross sales to the cable company. How they handle a situation where
> both cable and satellite carry the same channel in the same zip
> code, I don't know. Maybe they ask the buyer what channel number
> they are watching.

Ok, I agree: shopping channels are license-fee-free to cable/satellite
operators, and they do indeed pay commissions. I'm not convinced that
a sales commission is the same thing as a "slotting fee," but I agree
that it produces the same result: it's an incentive for the cable/sat
company to carry the channel on the basic tier.

As to how shopping channel operators allocate the commission to the
right company, that's a monumental hassle fraught with errors. Not
only do they have to distinguish between cable and sat; they also have
to determine which cable franchise within a given zip code the caller
is calling from. In the real world, the biggest cable company in the
zip code often gets the commission no matter where the caller actually
calls from.

BTW, "MSO" stands for Multi-System Operator. I don't think satellite
companies would appreciate being referred to as MSOs.

> In addition to that, its not unusual for a new channel to offer cash
> to an MSO in order to get picked up and distributed. These payments
> can go on for years until the channel either gets a large enough
> audience to exist on ad revenue and popular enough to extract a per
> subscriber fee from the MSO, or the channel gets dropped.

I'm afraid you've got it backwards: in most cases, cable TV and
satellite companies pay the programmers for the right to carry the
programming. Here are the typical situations:

NON-BROADCAST COMMERCIAL: Non-broadcast adwvertising-supported
channels carried on basic or extended-basic tiers are subject to
monthly license fees. This fee varies from a few cents per subscriber
per month all the way up almost $3.00 per sub per month for ESPN.

Under most licensing contracts for ad-supported non-broadcast
programming, channels carried on the basic tier usually incur lower
license fees than channels carried on upper tiers. So I suppose you
could argue that this fee differential constitutes a "slotting fee"
for carriage on basic.

NON-BROADCAST PREMIUM: Non-broadcast advertising-free premium channels
(HBO, Showtime, etc.) are subject to an even larger license fee,
typically 40% to 60% of the retail price.

C-SPAN: The three C-SPANs, though non-commercial, are largely funded
by license fees. However, C-SPAN also receives some foundation

NON-BROADCAST FREE: There are several non-commercial services that are
free of any fees (no cash changes hands in either direction):
religious channels (funded by viewer contributions); NASA-TV (funded
by taxpayers); Classic Arts Showcase (funded by The Rigler/Deutsch

COMMERCIAL BROADCAST STATIONS: Commercial broadcast station licensees
have been trying for years to extract concessions from cable/sat
companies in exchange for giving them "retransmission consent" to
carry their broadcast signals.

Until recently, they haven't been particularly successful in
extracting cash payments, but they've had better success in bundling
retransmission consent with carriage of co-owned non-broadcast
programming. As a condition for carrying an owned-and-operated
broadcast station, cable/sat companies also must agree to carry (and
pay for) non-broadcast advertising-supported programming offered by
the station's owner. The number of possible tie-ins this situation
creates is absolutely astounding: Disney (ABC), General Electric (NBC,
Paxson, Telemundo), and News Corporation (FOX) all own non-broadcast
program services.

As it happens, CBS recently succeeded in imposing license fees (cash
payments) for its O&O stations, and it expects to extend the practice
to its non-owned affiliates. Now that CBS has cracked the nut, we can
expect other station owners to follow suit.

broadcast stations (typically, but not necessarily, PBS affiliates)
are free of license fees (no cash changes hands in either direction).
However, NCE stations have mandatory carriage ("must-carry") rights on
all cable systems within their Grade B contours or within 50 miles.

LAUNCH ASSISTANCE: In this one isolated case, programmers sometimes
make payments to cable TV companies. In this situation, a programmer
may agree to underwrite the capital cost of the equipment needed to
add its channel (receiver, descrambler, modulator). If the
programming is on an oddball satellite, the programmer may even pick
up the cost of the antenna. This payment may be in the form of a
check, or it may be a credit against future license fees.

One of the biggest launch-assistance deals occurred when HBO began
scrambling its signal. HBO itself purchased the descramblers directly
from the manufacturer (Jerrold) and had them drop-shipped to
affiliates. As part of the deal, HBO had Jerrold program each
descrambler for the specific headend where it was to be used, so it
was ready to go out-of-the-box.

After HBO started scrambling, most other programmers followed suit,
all using the same Jerrold Videocipher II descrambler. Some (but
certainly no all) programmers picked put the cost of the descramblers.

Scrambling caused many cable systems to face an even bigger expense:
rack space. Those old VCII descramblers were monsters: each took up
four rack units (7 inches). Adding a blank RU for cooling resulted in
a total of 8.75 inches of new rack space for each scrambled channel.
A headend that once fit nicely in two racks suddenly filled four or
five racks.

Some cable systems had to build additions to their headend buildings
just to accommodate scrambling. I can assure you that no programmer
ever picked up that cost!

> This by the way, is a major reason why it is so hard for a new
> channel to launch in today's bundled environment and why the theory
> that niche channels will disppear if ala carte were implemented is
> specious.

The vast majority of cable systems are channel bound, and will remain
so until the conversion to digital is complete. Adding new bandwidth
to carry new channels right now is all but economically impossible for
most cable systems.

I monitor SCTE list, where there are countless posts from cable techs
trying to squeeze more capacity out of existing bandwidth. Most of
this discussion centers on adding HDTV broadcast signals; the only new
analog channel I've heard anything about lately is RFD-TV. After
DirecTV and Dish added it, many rural cable systems found that they
had to add it in order to stay competitive with satellite.

> Finally, most ad-supported channels provide what are called local
> insert ad slots. These are preemptable ads that the MSO can replace
> with their own ads. Think "Boflex", "Pseudo Viagra" and all those
> goofy "Fat Burner" ads, with the MSO keeping all the advertising
> revenue.

They're called "avails." Not all cable systems use them.

Large cable systems (>~2000 subs per headend) typically use them to
partially offset the license fee. But the cash flow derived from
running (or contracting with) an ad sales/ad insertion business rarely
comes close to offsetting the entire fee.

Most smaller cable systems don't even do ad insertion (except maybe on
The Weather Channel crawl) because the cost of doing it exceeds the
potential revenue.

The Boflex/ED/Fat Burner ads usually come from the network rather than
the local cable system. If a cable system doesn't sell an avail, the
network ad passes through by default.

> All of these revenue sources for the MSO disappear when the business
> model for programs is direct sale from the producer or content
> owner.

So do the license fees. So does the cost of an ad insertion business.
So do many the costs of running customer service.

It's certainly true that cable and satellite companies generate
revenue from the markup between the license fee for a given channel
(wholesale price) and the incremental revenue derived from carrying
that channel (retail price). Losing that programming revenue (net of
the cost of license fees, ad insertion, and customer service) will
indeed be a net loss of revenue. But it's a relatively small
percentage of the company's total revenue.

A much bigger chunk of the revenue goes to offsetting the cost of
building, owning, managing, operating, maintaining, and amortizing the

- For satellite companies: signal reception, signal processing,
uplink facilities, satellites, TTC (telemetry, tracking and

- For cable companies: signal reception, signal processing,
headend, distribution network, customer drops.

Under the current business model, this revenue is buried in the price
of the basic tier of programming. If direct-sale-from-programmer-to-
consumer were to become a normal business model, then cable and sat
companies would have to impose a separate network access charge. Just
like ISPs charge for internet access right now.

Parenthetically, all this raises a fascinating question. Now that CBS
has succeeded in imposing license fees for its O&O stations, what
would happen if direct-sale-from-programmer-to-consumer actually
became a normal business model? How much will consumers be willing to
pay for CBS?

Probable answer: the "network access fee" would include all local
broadcast stations whether consumers want them or not. Congress is not
about to pick a fight with the NAB.

For that matter, the fee would probably include PEG access channels as
well. I doubt that Congress is interested in picking a fight with
NATOA and its hundreds of member LFAs.

> The problem is obvious, when you have a system where the pipe is
> controlled by someone who has a financial interest in providing
> content over that pipe, what happens? We learned this lesson when
> oil companies owned pipelines and most retail stations and movie
> studios owned the theaters. Guess what will happen this time around?

Gasoline and oil are not advertising media; the revenue received by
the producers comes exclusively from the sale of the product.

Motion pictures are not, at least in theory, advertising media; the
revenue received by the producers comes exclusively from the sale of
the product (theatrical-release license fees, DVD rentals, DVD sales,
syndication sales etc.). Of course, the recent rise in product
placement provides an additional source of revenue -- and that really
is a case of slotting-fee payment!

Advertising-supported non-broadcast television channels clearly are
advertising media. The producers receive revenue from two sources:
sale of the product (license fees from cable and sat companies) and
advertising. As such, the producers have a financial interest in
making sure that their products are exposed to the largest possible
audience. And that's why cable TV and satellite licensing contracts
inevitably stipulate that the channel must be carried on the
most-widely-distributed tier, typically basic.

From the producers' point of view, the beauty of this model isn't
just the sum of the two revenue streams; it's the way in which the two
revenue streams reinforce each other:

- License fee revenue reinforces advertising revenue.
There's an old adage in the advertising business that
"paid advertising is worth more than free advertising."
A consumer who pays for a publication (print or video)
is more likely to read/watch it than a non-paying

- Advertising revenue reinforces license fee revenue.
Ad revenue enables the producer to provide a better
product (print or video), thus enticing consumers to
spend more time reading/watching it, and, by extension,
enticing more consumers to buy the product.

Broadcast stations and networks, on the other hand, rely exclusively
on advertising revenue (or at least they did until CBS managed to
extract retransmission-consent payments). Consequently, broadcast
programming must be designed to attract the widest possible
audience. Or, as some folks might say, it has to appeal to the
lowest-common-denominator audience.

Whether or not advertising-supported non-broadcast programming is
"better" or "of higher quality" than broadcast programming is a
subject I won't touch. I will conjecture, however, that if
non-broadcast programming were so popular with mass audiences that
advertising alone could support it, broadcast networks would be
carrying it, and advertising *already would be* supporting it.

And that brings me back to the issue that started this thread: the
practice of broadcast networks offering programming over the internet.
Yes, these programs are free, but they include advertising (apparently
unavoidable). And, so far at least, the only programming being offered
is the same stuff that they carry on their broadcast networks: 100%

Non-broadcast programmers are far less likely to offer their products
on an advertising-supported-only basis. Not only do they depend on
license fee revenue; they also depend on the exposure they get from
being carried on the basic tier.

Of course, they could offer their programming for a fee, with or
without advertising. But as I've noted before in this space, if every
non-broadcast ad-supported channel had to survive on its own as a
retail product, its price would rise to retail levels. And if it
couldn't survive at that price, it would disappear, notwithstanding
your "specious" argument.

Neal McLain

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