I want my MTV—but hold the MTV2.

I want my MTV—but hold the MTV2.

I want my MTV—but hold the MTV2.

Moneybox
Commentary about business and finance.
Nov. 30 2005 5:09 PM

I Want My MTV

But you can keep your MTV2.

Federal Communications Commission Chairman Kevin Martin threw a small bombshell into the laps of cable executives yesterday. Speaking at a Senate hearing on decency and programming, he suggested that one way for cable companies to address parents' concerns was "to offer programming in a more a la carte manner, giving consumers more choice over which programs they want to purchase." People could opt out of cable programming, opt in, or just buy a bunch of channels for a fixed price. Martin went on to note that he believed an FCC study last year on so-called "a la carte" pricing models—which concluded that such arrangements would (horrors!) reduce TV viewing and harm consumers—was essentially bunk. (Some of the questionable findings were derived from this Booz Allen Hamilton study, which was commissioned by the cable industry.) Now, Martin said, the FCC staff is working on a new report.

Given the cable industry's quasi-monopoly status and the fact that it owns the fat broadband connections into millions of people's homes, analysts have generally believed that cable was the medium least vulnerable to the onslaught of new technology. But in the rapidly changing entertainment landscape—in which the customer, not content or distribution, is king—cable is finding itself under intense pressure to adapt. The irony: The industry's problems are partly of its own making.

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Cable is the media version of the Golden Corral, a place where Americans pay a fixed price and gain the right to consume as much stupor-inducing fare as they wish. The business mentality behind all-you-can-eat chow halls and all-you-can-watch cable companies is actually quite similar. Overwhelm the customer with choice and abundance, and give him a bill that ends in .95 or .99. The schlub will think he's getting a bargain and wind up paying for access to lots of stuff he'll never use. Most viewers confine themselves to a small subset of the channels available on today's digital cable system. In 2004, the FCC reported that "the average cable household watches approximately 17 channels, including broadcast stations."

But in recent years, as more services became available, cable companies like Time Warner, Comcast, and Cablevision added a la carte items to their buffets. Not individual channels like CNN, but tiers of premium movie channels like HBO, adult entertainment, sports packages, pay-per-view events, recording capabilities for the set-top box, high-speed Internet access, digital telephone service, etc.

Aside from diversifying cable companies' revenue streams, the expansion of services has done two things. First, it's increased the cable bill. Basic cable can still cost as little as $40 per month. But add in DVR, premium channels, and Internet, and a household's monthly bill can easily top $200, depending on how many boxes you have. Yes, consumers are getting much more in exchange for the higher bills, but the higher bills raise expectations and can make them feel aggrieved. Second, it has made cable customers see themselves less as people purchasing a utility service and more as consumers picking and choosing from a range of products.

Media consumers have become sophisticated and spoiled. They know that cable companies pay programmers for channels on a per-subscriber basis and then pass through or mark up those costs to consumers. And they also know that this is a golden age of media consumption. Newspaper junkies can read dozens of papers daily, free of charge. A New Yorker can listen to a public radio station based in Santa Monica, Calif. Listeners anywhere can buy commercial-free radio from Sirius. Audiophiles can download songs one at a time or mix and burn their own CDs. TV geeks can easily record shows to watch at their own convenience and then skip through the ads or buy individual episodes of some television shows through iTunes.

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But cable still seems to operate by the old rules, which leaves a lot of customers frustrated. Cycling freaks are angry when their system doesn't carry OLN, the only U.S. network to air the Tour de France. Anglophiles have their knickers in a twist if they can't get BBC America. For the childless, channels like Noggin are no-go zones. Left-wingers have to surf past Fox News Channel, and right-wingers avoid PBS. And yet cable viewers effectively have to pay for—and subsidize—all those channels.

Shifting to an a la cartemenu would surely cause problems for cable companies, which are palaces built on foundations of debt. All of them count on the steady cash flow provided by consumers who pay monthly fees for all-you-can-eat viewing. But the programmers—the people and companies who own cable networks—would really suffer. They'd lose the ability to bully cable companies into carrying low-rated me-too networks (ESPN News) with highly rated networks (ESPN). And startups would have to have different conversations with their investors. Geraldine Laybourne, chairman and CEO of Oxygen Media, told the Wall Street Journal that "we'd be out of business" if cable went a la carte. "Unless we had the total possibility of widespread distribution, we could have never raised the money we raised," she told the Journal. And therein lies the rub. Cable companies and programmers aren't selling your eyeballs to investors—most have minuscule ratings. They're selling your hypothetical eyeballs. Oxygen may be in about 57 million homes, but only a tiny fraction of those homes tune in to Grace Under Fire reruns. Startup channels will have to be valued based on how many viewers are likely to pay for their programming, not on how successful the well-connected founders will be at getting the channel included on a cable roster.

It's unclear whether the FCC will force cable companies to offer channels a la carte. But the technology and consumer mentality is clearly moving in that direction. This revolution will be televised. And ultimately, the cable guy won't be able to tell you how to watch it.