Monday October 3, 2011 – Greg Scoblete
It's been a raucous few weeks in the pay-TV space. First, Netflix suffered the mother of all PR debacles as it split its streaming and rental service into two entities, causing rampant consumer confusion and forcing the CEO into a public apology. (To add comical insult to injury, the Twitter handle adopted by Netflix's new brand Qwikster, was already occupied - by a foul-mouthed, pot-smoking malcontent).
News of the bifurcation of Netflix and the company's expectation that it would lose a million more subscribers than they initially thought as a result, sent the company's stock plummeting. Suddenly, formerly bullish analysts were realizing that Netflix's streaming library didn't have quite the roster of attractive content that its disc business did (an artifact of an increasingly anachronistic law that treats digital distribution differently than physical distribution).
Then, Starz piled on, by pulling out of Netflix's service after the two failed to come to terms. It turns out that Starz wanted Netflix to charge customers even more for "premium" movies, above the monthly $7.99 fee for Netflix's current streamed offering.
But perhaps the bigger news, at least potentially, came from Reuters, which reported that several cable operators were "privately working on a plan to force programmers to unbundle their networks and allow customers to subscribe to channels on an individual basis."
This move to "a la carte" programming has long been resisted by pay TV providers, who have argued that consumer choice would leave niche programming to whither on the vine. But now it's appearing like an economic imperative not only for them, but their customers. Take the economics of the pay TV providers first. They are being battered with soaring retransmission fees. In 2010 alone, those fees soared a whopping 46.7 percent and, according to Reuters, have been outpacing inflation in the past decade with growth between six and 10 percent. Do you remember your last 10 percent raise? How about your last 46.7 percent raise?
Typically, pay TV providers handled these increases by passing them along to their customers. But then the global economy collapsed, taking millions of American jobs with it. According to Felix Salmon, a stunning 40 percent of U.S. households today spend all of their income on food, shelter, transportation and healthcare. Even if that number is wildly inflated, it's obvious that the consumer, at least in the U.S., can no longer absorb such price hikes - and the pay TV providers know it.
Netflix and other Over the Top providers were seen as a possible solution for these penny-pinchers - a way to preserve access to content without the steeper monthly fees of a cable or satellite bill. But a la carte pricing could strangle a nascent OTT threat in its crib - if the pay TV and content providers can agree to favorable terms. The content providers in particular need to think long and hard about a pricing strategy that involves ever-escalating costs to the end-user in an era of economic austerity (or, worse, depression). Content may be king, but what good is a kingdom without any subjects?
