Pay television has taken its lumps of late, with the emergence of new online providers and federal legislation that would force cable and satellite providers to offer their channels on an a la carte basis. However, the industry has the opportunity to become more competitive and minimize potential regulations simply by adopting advanced analytics that are standard in most all other business sectors.
Despite the Hollywood levels of hype surrounding “big data,” it is largely absent in the area where Americans spend the vast majority of their leisure time: watching television. As a result, consumers, despite paying on average more than $850 a year for content, get less of what they want, and pay television players spend countless time and money squabbling over business deals.
The average American spends more than 34 hours a week watching live TV, according to Nielsen. Nevertheless, the current negotiation approach for cable networks is not closely linked to consumer demand. Instead of tapping into the volume of data and consumer feedback available, the current approach is best described as a contest of wills and brinksmanship.
TENSE TALKS
Negotiations between content companies and distributors result in complex deals that go down to the wire. Recently, pricing within these deals has become so contentious that some cable channels have been removed from distribution. Last summer, negotiations between DirecTV and Viacom dragged on long enough to cause all of Viacom’s cable channels, including Nickelodeon, MTV and Comedy Central, to be unavailable to DirecTV customers for nine days. These types of negotiations have even reached the legal system, with Cablevision’s recent high-profile suit against Viacom’s bundling practices.
Despite the billions of dollars at stake and the months of preparation, the basis for these negotiations is often fairly arbitrary. Typical negotiations revolve around the annual percentage-price increase for the cable channels in question and often rely on historical price increases as a benchmark. This is the antithesis of the quantitative approach, which has become standard in other industries.
There is little correlation between the price that cable and satellite providers pay to carry a cable channel and consumer demand for the network — specifically how much time a customer spends watching it. This means a significant number of cable networks are “misvalued” relative to the amount of hours watched.
MISMATCHED METRICS
For example, TNT has a carriage fee that is more than four times the average, despite having only three times the average hours watched per subscriber — creating an “overvalued” network based on viewing hours. On the other hand, HGTV is “undervalued” based on the fact that its carriage fee is about half the average while the average hours watched per subscriber are nearly double the average cable network.
Of course, hours viewed by subscribers for a given cable network is a simplified metric and does not take into account the full range of negotiation dynamics. However, the gap between carriage fees and consumer value still exists even after more detailed analysis, including consumer demographics, quality of customer experience, aggregating cable networks by owner and other relevant factors. In particular, the pricing is most poorly aligned with consumer value for the “filler” channels that have modest popularity.
This analysis highlights the current disconnect between consumer value and prices paid by content distributors to content owners. Why is it important to relate these prices back to consumer value? Ultimately, the consumer is stuck holding the bill as the distributors pass along as much as of the price increases from the content owners as the market will bear. With the expanding set of cable networks and increased consumer interest in more relevant TV programming, the need to develop a measurable pricing system is greater than ever. If not, consumers will continue to seek alternatives that better reflect their price/value equation — hurting the entire pay TV ecosystem. And, with new competitors like Internetbased distributors Aereo and Netflix that are stretching traditional boundaries, traditional television players need to adopt a more consumer-centric approach.
DODGING POPULISM
Cable legislation from Sen. John McCain (R-Ariz.), filed last month, has refreshed efforts in Congress to end or restrict bundling. While “anti-bundling” legislation has been opposed by groups like the NAACP because it would be unfair to minority consumers, pay TV needs to avoid a populist groundswell that would place artificial pricing requirements on content providers and distributors.
Programming negotiations need to use readily available consumer-value metrics and begin to create even more pertinent analyses. Each player in the TV industry would fare better with negotiated programming pricing based on consumer-value metrics. Content owners would be further rewarded for their more popular content, and cable and satellite distributors would better ensure their pricing is aligned with consumers’ perceptions of value. And this would lead to a big win for consumers by granting them a more direct influence on the creation of popular content in this $96 billion industry.
So, will the pay TV industry join other modern business sectors and embrace a more analytic approach? If politicians and competitors continue to make hay at the expense of the industry in the near future, then we will know the answer.
Stefan Bewley is a San Francisco-based director of Altman Vilandrie & Co., a strategy consulting firm focused on telecom, media and technology.
