Addressing the Rising Cost of Video Programming

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 It’s a stressful time for local service providers distributing video programming.  The cost of obtaining distribution rights has grown significantly because of increased pressure from programmers and content producers.  In recent negotiations with local television broadcasters— and their affiliated networks—the prices for access to basic network “must have” programming increased by 200-300%.  The distributors were forced to pay or they had no product to carry.  And, distributors also are being hit with significant price hikes from sports programmers – and, of course, their partners, the sport leagues. 

For many local video distributors, the pain is great.  It is important to note that smaller distributors already pay 20-30% more than larger service providers.  And now they, along with larger distributors, find that already slim margins are eroding further, and there appears little on the horizon to stem the tide.

I’ve been asked by many distributors about whether there is a way out of their dilemma.  After all, even with the advent of streaming video over broadband, most subscribers still want access to a linear video product.  Further, programmers and content producers see real value (revenue) in the existing model where distributors pay a monthly fee per subscriber.  Will these programmers and producers go too far and effectively force subscribers and distributors to bail on the traditional video product? 

Here’s my take on  some of the bigger questions

1. What’s at the root of the problem?
   Because programmers and producers can distribute their product in new ways—such as wireless devices and OTT—the opportunities for disintermediation have increased dramatically.  In other words, the equilibrium reached in the old business model is gone.  All parties in the value chain are seeking a new balance, one where each of them is seeking maximize their value.

2. Do content producers hold all of the power?
   Content may not be king, but it’s very close.  This is what consumers want, and programmers and producers now have many more ways to get it to them.  However, they need modes of distribution, and the better the distribution system, the more value the distributor can extract.  In other words, there is the potential for a deal.

3. Is there anything that service providers can do?
   Not be passive.  There are many ways local service providers can increase their leverage – and they are not mutually exclusive.  For instance, having a better network with a wider variety of more attractive services will increase penetration and reduce churn.  Another way is to get larger by acquiring other firms with significant subscribers (“eyeballs”).  Aggregating their buying power is another.  For smaller distributors, being part of an buying group like the National Cable Television Cooperative has real value.  NCTC deals can shrink the differential paid by smaller operators.  A smaller distributor can also resell or turnover the sale of the video product to another provider – either through linear cable distribution or over-the top (Internet) distribution.

4. What can the federal government do to address the problem?
   The government’s role is to ensure that markets are fully competitive.  As part of approving the Comcast/NBCU merger, the FCC placed a series of conditions on Comcast to ensure smaller video distributors have access to the company’s programming at market rates.  In addition, the FCC is currently investigating whether local broadcasters are illegally colluding when they jointly negotiate retransmission consent agreements.  This same concern has been shared by antitrust officials at the Department of Justice.  Antitrust concerns, in fact, may also arise in other instances, possibly even with rights for sports programming.

For many years the video distribution business was a relatively slow moving and highly profitable business.  Not surprisingly, it attracted new entry, which has only accelerated with the deployment of new technologies.  The distributors that adapt greatly increase their chances of thriving.  But if you stand still, you are liable to get run over.