A La Carte TV Finds Refuge in Canada, Sparking Discussion in the US

By Tara Seals October 24, 2013

Canada has taken a step towards a new reality for cable television which, if ported to the United States, could radically overhaul the pay-TV business model. Its incoming Conservative government has pledged to mandate a la carte television packages. Earlier in the year, Sen. John McCain tried to do the same thing south of the border: the Arizona Republican prepared legislation that would let cable customers buy channels individually. But despite consumer interest and political will, don’t count on a la carte coming to America anytime soon. Instead, look for digital innovation in the existing TV landscape.

It’s Happening in Canada

Canada is leading the world in TV subscription flexibility—and it’s about to get even further out in front on the issue. "We don't think its right for Canadians to have to pay for bundled television channels that they don't watch. We want to unbundle television channels and allow Canadians to pick and pay the specific television channels that they want," Industry Minister James Moore said, speaking on CTV's Sunday-morning news mainstay, "Question Period." He said that regulators will soon require cable and satellite operators to allow consumers to pick and choose the channels they want in their package and to pay for.

Canada already has a somewhat a la carte scheme in place in the wake of the Canadian Radio-television and Telecommunications Commission saying that it "strongly encouraged" new, more flexible packages. For instance, the two Big Kahunas in the pay-TV business there are Bell and Rogers, both of which offer viewers a very basic TV offering that includes the main broadcast channels and a few other things. They then have the ability to add additional small groups of cable networks that are organized topically.

Quebec’s Videotron meanwhile offers subscribers the ability to add on five individual channels on top of basic service—a play that Bell in that province has replicated. 

These moves are not true a la carte, but it’s much closer to it than anything we’ve seen in the United States. But would it work if imported?

The Case Against A La Carte

Pay-TV distributors in the States say that content bundling practices force them to take channels they don’t want and can’t monetize, in order to gain access to top-rated cable nets. Cablevision Systems has taken that grumbling to the next level for instance with an antitrust lawsuit against Viacom, accusing the media giant of demanding a $1 billion penalty if the MSO did not agree to Cablevision to carry and pay for 14 unpopular networks, such as Palladia, MTV Hits and VH1 Classic, along with must-have networks such as Nickelodeon, MTV and Comedy Central.

Because of that practice, some say that neither choice nor pricing will improve under an a la carte plan.

 “Consider the microeconomics of the matter: the cable operator will have to offer the channels individually, but it will still have to pay for many channels en bloc, which means that someone will still have to eat the cost of the unpopular channels,” explained the Conservative-leaning Heartland Institute, in a blog. “That unlucky party will be the consumer, because what the cable operator will have to do is price the individually offered channels and/or customized tiers at a level that will ensure a profit or go out of business.”

Or, cable and satellite players may just raise prices on popular channels. For instance, pay TV providers pay ESPN, the most expensive network in the history of pay-TV, more than $5 per month per subscriber, according to SNL Kagan. That’s because live sports is one of the only arenas that offers true differentiation for traditional TV in courting advertisers and positioning themselves against over-the-top alternatives. Forbes estimates that the network brought close to $11 billion in revenues for parent Disney in 2012.

However, only about 25 percent of cable subscribers actually watch ESPN. Meaning that under an a la carte model, operators would be left with the challenge of paying for ESPN on the back of a customer base that is 75 percent smaller than it once was, sending the per-channel pricing up to, in theory, $20 per subscriber per month. That’s clearly unfeasible, meaning that pay-TV will have to perhaps throw other channels into an ESPN package to justify its pricing…which of course gets right back to content bundles. Or, Disney could push back on the amount they spend on sports broadcast rights, a process that would have big ramifications for teams and the sports business model as a whole, which relies on selling broadcast right for a good chunk of their revenue.

In terms of choice, consumers could end up limited there too: many channels don’t have the mass appeal to gain enough paying subscribers to support them financially. Needham Research estimates that moving to a purely a la carte model would eliminate $70 billion in revenue for the U.S. TV industry and that fewer than 20 U.S. channels would survive if consumers had to pay for each one separately.

Networks Go Over the Top?

Of course, the naysayers are not the only ones weighing in on a la carte. For instance, Joe Torres of the public interest group Free Press said that unbundling would be a good thing for niche programming, much in the same way that the Internet has enabled a long tail of content for every interest.

“I think this would be a boost to independent programming and diverse programming,” he told NPR’s Renee Montaigne. “I can have the ability of the public to choose me, instead of having to rely on corporate cable gatekeepers to decide whether you're going to carry me or not.”

Analyst Craig Moffett said that while that very well may be true, it’s unlikely that such a radical shift will appear in the U.S. marketplace anytime soon. “Unless you just blow up the whole business model - and look, there are plenty of people that would happily push the detonator themselves, but it's much, much easier said than done,” Moffet told NPR.

However, there are other aspects to evolving consumer choice to consider, primarily in the over-the-top space. Torres for instance noted that online video and OTT gives viewers access to shows whenever they want, so in many ways, we already live in an a la carte world.

Nationwide, the average pay TV bill was $86 in 2011 and is expected to reach $123 by 2015, according to the NPD Group, even though consumer income and spending is expected to remain flat. That sets up an incentive to look at different choices for video entertainment options. MSOs however have been hanging onto their aggregator model and subscriber loyalties by leveraging the TV Everywhere idea to offer programming on various devices live and on-demand, via the cable operator’s online portal and dedicated mobile apps. The content that makes it to OTT services is after-air date programming and usually not even current-season fare, with some exceptions, like Amazon’s deal to stream Under the Dome episodes just four days after broadcast. In other words, cable has used its position as the main revenue source for content owners to somewhat fix the race in terms of content access for the Netflixes of the world, thus staving off mass cord-cutting and pushing traditional OTT services into more of a complementary position to traditional TV.

But increasingly there are rumblings as networks themselves mull the decision to go a la carte. Google Play for instance is now offering HBO GO episodes in its streaming service for Android devices without a cable subscription—a radical change of model for the premium cable net. It also is offered as a standalone subscription service in the Nordics, but here in the U.S., has been very loyal to its pay-TV distributors.

“In addition to the mountains of revenue at stake, the HBO – cable relationship is legendary,” said Beth Ard, director of segment strategy and marketing for digital entertainment at Level 3 Communications, in a blog. “Back in the 1970s, Home Box Office was launched on the early cable system Manhattan Cable, now part of Time Warner. Many point to properties like HBO as the catalyst that drove consumers to pay for TV delivered on cable systems rather than watch broadcast TV over the air for free.”

Now though, times have changes, and most people pay for cable, satellite or IPTV in the U.S. and all operators offer HBO. Digital distribution would allow HBO to convert loyal viewers to an OTT version of its service, cutting out the middle man and keeping distribution profits for itself.

“When you are a franchise player, how can you resist the opportunity to go out in the market and get the money you deserve?” said Ard. “With proven Internet ad revenue and subscription commercial models in play, it does not appear to make business sense to forego the OTT opportunity.”

Ard also thinks that the floodgates will soon open as premium nets and niche channels flee the cable coop in search of wider exposure and more revenue as online-delivered services. “One day soon, all premium TV content will be available on every device and will not be under control of the cable operators,” she predicted.

Cable’s primary consumer boon is the fact that it brings content together in one handy-dandy interface with content discovery options and a single remote control. In other words—convenience. Ard suggested that there’s a way to marry the concept of a la carte and engender consumer choice while salvaging revenue by playing up this traditional role in the living room.

“Consumers want a place where they can build their own TV line-up from all content available on the Internet,” she said. “They want to learn about new content that will pique their interest based on their current viewing patterns. Today’s opportunity for cable is to get very good at content curation and continue the lean back experience, a problem that has yet to be solved on the open Internet.”

Indeed, this is already emerging: hybrid offerings from regional IPTV players in particular are beginning to go this way—a basic channel lineup is combined with access to OTT Web options within one branded user interface for an offering that is cheaper and more flexible in many ways than traditional TV. Is it true a la carte? No. But it does give consumers more flexibility in building their own personal content stables.

Bottom line? “As pay-TV costs rise and consumers’ spending power stays flat, the traditional affiliate-fee business model for pay-TV companies appears to be unsustainable in the long term,” said Keith Nissen, research director for The NPD Group. “Much needed structural changes to the pay-TV industry will not happen quickly or easily; however, the emerging competition between S-VOD and premium-TV suppliers might be the spark that ignites the necessary business-model transformation of the pay-TV industry.”




Edited by Stefania Viscusi

TechZone360 Contributor

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