5:13pm

Wed August 7, 2013
Business

The History — And Future — Of Cable's Bundling

Originally published on Thu August 8, 2013 6:13 pm

For Time Warner Cable customers in major cities, the battle for the future of television is playing out before their eyes.

The cable company blocked CBS-owned channels as the two sides fight over fees: Time Warner says CBS wants too much money for its programming, and it's trying to keep customers' bills down, while CBS says Time Warner pays more to carry far less popular channels, and it wants its fair price.

You might not realize it, but between a third and half of your cable bill goes directly to pay for channels like CBS or ESPN. Though you'd never see it listed on your monthly cable bill, nearly every channel you get has a secret price. Industry analyst SNL Kagan estimates that, whether you watch it or not, you're paying something like 6 cents a month to the Hallmark Channel, 60 cents a month for CNN, and $5.54 a month for ESPN, the most expensive channel around

But these prices are hidden. They get rolled into the price of your bundle of channels. Needham & Co. estimates that ESPN rakes in $7 billion from cable customers, even though many never even watch the channel.

Bundles In The Bundle

With cable customers unaware of how much they're paying, the owners of television networks have significant leverage. Take a company like Viacom. It owns popular channels like MTV and Comedy Central. It also owns thoroughly unpopular channels like Palladia. But it can tell a cable company that if it wants MTV at a good price, it also has to carry Palladia.

"The way they package everything, can you imagine if you went in to buy a 2x6 and you had to take a 2x4 with it?" says Ben Hooks, who runs Buford Media, a tiny cable provider in rural Texas.

He's among the cable companies getting fed up with this system of bundles. Cablevision in suburban New York actually sued Viacom over this. Bundling is an almost unbelievably good business for channel owners. Disney, for instance, gets 100 million cable customers to pay more than $5 a month for its sports channel ESPN, even if only a fraction of them actually tune in.

In a way, it's kind of like taxes. Cable fees spread the money around.

"It is a subsidy. The question is, overall, is there a value proposition for the subscriber?" asks Howard Homonoff, a cable industry consultant.

Going A La Carte

Homonoff is among those who think this system actually works. But the bundle has taken heat lately. Republican Sen. John McCain of Arizona railed against it on the Senate floor not long ago: "Not every American watches ESPN. Not every American should be forced to watch ESPN."

But experts say if McCain got his way and broke up the bundle, customers might not actually be any happier.

Needham & Co. estimates just 20 channels would survive in an unbundled world. And a channel like ESPN purchased alone could cost something like $20 or $25 a month.

"I think the choice you get from cable is one of the most attractive things you get from [the bundle]," says Ed Durso, executive vice president of administration for ESPN.

The ESPN Story

ESPN wasn't always the most expensive television network around. When it first signed on the air in 1979, it was hokey and carried few popular sports. It was an experiment.

"This was a Wild West time in cable television. Nobody knew what programming was going to be useful," says longtime industry consultant Steve Effros. He says no one knew if the channel would get the money to compete with the big networks for baseball games, and other pro sports.

It was so unproven that in its early days, ESPN actually paid cable providers to get into your living room. The cable providers had the power back then. At the time, most cable systems could only fit 20 channels, so they could be picky about what they offered.

In the 1980s, that began to change. People started to watch these upstart cable channels. That meant more advertising, which meant the networks had more money to produce better shows. That meant even more viewers tuned in, and before long, it was the networks like ESPN that had the power.

"They became a channel that was recognized. The cable operators then found themselves in a position where they had to carry it, as opposed to have the leverage not to carry it," Effros says.

It was at this point that networks like ESPN could flip the table and start demanding big fees from cable providers. The costs have been skyrocketing. Hooks, the cable guy in Texas, says programming went from his smallest expense to his biggest over the past few decades.

"I don't believe sports are going to go away. I think there's going to be a market correction," Hooks says.

The Future

Owners of television networks have every incentive to preserve the status quo. It's too lucrative, and they say it subsidizes niche content and expensive shows with smaller audiences, like Mad Men. This is why, increasingly, when you want to watch a TV show on your laptop, the website might ask you for a password to prove you pay for cable.

And don't expect Netflix and other companies to break the bundle. Apple is now talking with Time Warner Cable, instead of competing against it. Intel's upcoming Internet cable service will still have traditional bundles of channels.

The big surprise is that it could be the old-line cable companies that drive change. Time Warner shocked many when it proposed offering CBS a la carte to resolve the contract dispute. (CBS quickly quashed that idea.) Verizon has proposed paying for channels with a sliding scale based on their actual popularity. Cablevision's CEO even said he sees a day when the company sells nothing but Internet access.

This all makes Hooks in Texas feel vindicated.

"It tells me, 'See, I told you it's bad,' because when the big guys get in, and I've been screaming for years, I say, 'Finally it's bad enough to hurt them,' " he says.

In the meantime, another sports network launches this month. Analysts expect Fox Sports 1 to be the first serious rival to ESPN. SNL Kagan estimates the channel will get nearly 80 cents per cable subscriber. If it's a hit, expect that to rise fast in the coming years, adding yet more to your monthly bill. But all sides know cable can only get so much more expensive before customers cut the cord completely.

Copyright 2013 NPR. To see more, visit http://www.npr.org/.

Transcript

AUDIE CORNISH, HOST:

This is ALL THINGS CONSIDERED from NPR News. I'm Audie Cornish.

MELISSA BLOCK, HOST:

And I'm Melissa Block.

CBS is off the air for millions of Time Warner Cable customers. The two sides are battling over how much the TV network wants to charge Time Warner for access to its channels. Between a third to half of your cable bill pays for individual channels, everything from ESPN to SPIKE and Syfy, channels you may never watch.

NPR's Dan Bobkoff has been looking into the cable business, and he has this look back at the birth of the bundle.

DAN BOBKOFF, BYLINE: This is what it sounds like when negotiations between a cable company and a television network spill out into the open.

(SOUNDBITE OF TV ADS)

UNIDENTIFIED MAN #1: Time is running out, and Time Warner Cable is not listening.

UNIDENTIFIED WOMAN #1: CBS is driving up the price you pay for TV.

BOBKOFF: CBS wants Time Warner to pay a lot more to carry it. Time Warner says CBS wants too much. But it's not a totally even fight. CBS shows have fans.

(SOUNDBITE OF TV AD)

UNIDENTIFIED MAN #2: No "Under the Dome," no "Big Brother."

BOBKOFF: All Time Warner can do is talk vaguely about price.

(SOUNDBITE OF TV AD)

UNIDENTIFIED WOMAN #2: Demanding an outrageous price increase to...

BOBKOFF: Exactly how much Time Warner pays CBS is confidential. And this right here is the foundation of the cable television business. CBS needs cable companies to carry its programming so it gets lots of eyeballs for its advertisers. Time Warner can't live without popular channels like CBS or its customers will flee. They're frenemies. They can't live without each other, but right now, it seems, they can't live with each other.

(SOUNDBITE OF TV AD)

UNIDENTIFIED MAN #3: Say no to Time Warner Cable...

BOBKOFF: You'd never see it listed on your monthly cable bill, but nearly every channel you get has a secret price. Industry analysts SNL Kagan estimates that, whether you watch it or not, six cents a month goes to the Hallmark Channel, 60 cents a month goes to CNN, and get ready...

(SOUNDBITE OF MUSIC)

BOBKOFF: ...$5.54 each month for ESPN, the most expensive channel around. Needham & Company estimates that ESPN rakes in $7 billion from cable customers, even though many never even watch the channel. It wasn't always like this.

(SOUNDBITE OF MUSIC)

UNIDENTIFIED GROUP: (Singing) ESPN, everything worth seeing.

BOBKOFF: This is what ESPN's sounded like when it signed on the air for the first time in 1979.

(SOUNDBITE OF ARCHIVED BROADCAST)

LEE LEONARD: And it's going to be a big part of our future, the "SportsCenter" with George Grande.

STEVE EFFROS: This was a Wild West time in cable television. Nobody knew what programming was going to be.

BOBKOFF: Steve Effros is a cable industry consultant. In the '70s, he says, it was an open question that the special-interest channel like ESPN would make it.

EFFROS: Will ESPN get the money to be able to compete with ABC, NBC and CBS for whatever baseball games, right? Nobody knew.

(SOUNDBITE OF MUSIC)

BOBKOFF: In its early days, ESPN actually paid cable providers just to get into your living room. At the time, most cable systems could only fit 20 channels, so they could be picky about what they offered. But then it's the '80s, people start to watch these upstart cable channels. That meant more advertising. And before long, it was the networks like ESPN that had the power.

EFFROS: They became a channel that was recognized. The cable operators then found themselves in a position where they had to carry it, as opposed to, you know, have the leverage not to carry it.

BOBKOFF: And it's at this moment when channels like ESPN started demanding big fees from cable providers. Which is why for a cable guy like Ben Hooks, this business got a whole lot better for the networks and a whole lot worse for him.

BEN HOOKS: It's really gone crazy, absolutely crazy.

BOBKOFF: Hooks runs Buford Media. It's a cable provider with about 7,000 customers in rural Texas. Over the years, he's watched programming go from its smallest expense to its biggest, with sports channels like ESPN leading the charge to higher prices. But he thinks the business is at a breaking point.

HOOKS: I think there is going to be a market correction.

BOBKOFF: Hooks' hands are tied. He wishes he could tell his customers how much each channel costs. But if he told them, he'd violate confidentiality agreements. And, he jokes, they'd come after him.

HOOKS: I'm told I wouldn't want to be around.

(LAUGHTER)

BOBKOFF: ESPN, as you might expect, has a different view of its pricing. Ed Durso is a vice president there. And he says the total cable package is still a good deal for cable subscribers.

ED DURSO: What you're buying is an array of services and products and choice through cable. And you get all of that, you know, for a price that we think is quite compelling, actually, in the entertainment world.

BOBKOFF: But soon, another network will follow the ESPN playbook. Fox Sports 1 premieres this month. SNL Kagan estimates it will get nearly 80 cents a subscriber on day one. If it's a hit, expect that fee to rise fast in the coming years, adding yet more to your monthly bill. Dan Bobkoff, NPR News.

(SOUNDBITE OF MUSIC) Transcript provided by NPR, Copyright NPR.

Related program: