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Why Pay for Free TV?

Joseph D. Jensen
8/29/2013

Much has changed in the arena of US local broadcast television since its beginnings in the 1940s. Today, local broadcast networks still enjoy the protections that were put in place during those nascent years of free over-the-air programming. Cable television began in the same decade as a means to provide better signal quality to homes not able to get adequate reception of these off-air signals.

It is enlightening to compare today's regulatory environment with that of other media. For example, Federal Communications Commission (FCC) regulations require that local broadcast stations be included in the most basic cable television tier. The requirement stands that these local affiliates must be in any package offered to cable subscribers.

In other words, to get ESPN or Discovery channels or any other viewing package, cable subscribers must take the basic package of local programming from the likes of the CBS., NBC., and other broadcasters.

Have you ever considered what this rule would entail if applied to another medium, such as print? The equivalent scenario would be to require readers to subscribe to the local newspaper if they wanted to also subscribe to Time magazine. Such an arrangement would be unthinkable. Yet that's the way it is.

Another interesting rule, one called "network non-duplication," allows a local broadcaster to request that a cable television provider black out any duplicate content that may be presented on a similar cable channel. For example, a local Toledo NBC affiliate can require that the cable company block any prime time programming found on the Detroit NBC affiliate if both are carried on the same cable system. What would be the equivalent in the world of the daily newspaper? The Toledo Blade, as a local newspaper, could require that any stories carried by an out-of-town newspaper, such as the Detroit Free Press, be clipped out of any editions available in the Toledo service area.

Most local broadcasters take advantage of what is called "retransmission consent," which means the local cable provider negotiates with the local broadcast television station for the carriage rights. These days, cable systems could be paying as much as $2 per month per channel for these local broadcasters. These rates have increased dramatically and have contributed largely to the significant rate increases seen by cable customers.

What is ironic, in my humble opinion, is that the cable subscriber is paying to receive what was originally provided free over-the-air (OTA). Gone are the days when most homes had television antennas attached to the outside. Now a cable television provider must pay for these signals and those payments are reflected in the rates paid by cable television subscribers.

Without the appropriate outdoor antenna, many homeowners and apartment dwellers would not be able to receive these local signals consistently. Use of even the best indoor television antennas may not yield sufficient signal to watch all the local broadcast stations. So, the local broadcasters get paid to have their programming reach a larger audience.

Because the local broadcaster's advertising revenue is tied to station viewership, the cable television systems provide a significant increase in the value of the broadcast programming. Yet the systems have to pay dearly for the privilege.

So why are different members of the media, local television broadcast and local newspapers, treated so differently? Why do local television broadcasters see significant increases in the compensation they receive and protections enforced to maintain a virtual monopoly while newspapers are being buried by competitive information sources?

As the disputes continue between multi-channel video programming distributors and the national broadcasters, it is clearly time for a change. The current rules have created winners and losers. In this case, the losers are other media types, such as print, which receives no equivalent protection to the local broadcasters, and consumers who must now pay indirectly for what has been a free service for decades. Meanwhile, the winners are local broadcasters, who continue to enjoy protection by government fiat.

If the local broadcasters want to be compensated for their content like the cable channels, then they should be governed by the same rules. Cellular providers must buy spectrum licenses to conduct business; the same should be true for any other spectrum user. Fair competition in media produces a better product than antiquated government protection.

— Joe Jensen, Executive Vice President – Cable and Telecom, Block Communications Inc., and CTO, Buckeye Cablevision Inc.

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mendyk
mendyk
9/12/2013 | 6:03:56 PM
Re: Digging their own grave
Do you see Aereo as something more than a grandstand play?
jjensen43601
jjensen43601
9/12/2013 | 5:54:02 PM
Re: Digging their own grave
Supplying an antenna to a customer does not provide integration for DVR or guide functionality. It is not a desirable long term solution, in my opinion.

Some of the proposed legislation coulld make the local broadcasters operate more like other programmers. I would be happy to put the locals on their own tier and allow the customers to choose whether they want to pull the signals in by antenna or pay for the value of integrated viewing.

And then there is Aereo...
mendyk
mendyk
9/12/2013 | 3:32:49 PM
Re: Digging their own grave
Do you envision a scenario in which a video service provider does a reverse cord-cut on local stations and supplies customers with free antennas for those channels? Or would that be a cut-off-nose-to-spite-face move?
jjensen43601
jjensen43601
9/12/2013 | 2:53:02 PM
Re: Digging their own grave
As a service provider, we are considering all options. In the current situation, we either continue to raise subscriber fees to cover the cost of programming increases or we find ways to reduce the cost. There is not a lot of flexibility currently offered in our programming contracts. Sigh...
mendyk
mendyk
9/3/2013 | 3:24:14 PM
Re: Money shot
Thanks for the clarification -- in this light, the decision by TW Cable to offer OTA antennas to subscribers makes a little more sense, in a Pyrrhic victory sort of way.
albreznick
albreznick
9/3/2013 | 2:49:17 PM
Re: Digging their own grave
Welcome back, Joe. thanks for the thoughtful responses.  I agree that smaller bundles are coming and that some biundles may get removed from the overall channel lineup because of their high cost. Is Buckeye considering these kinds of moves? Have you heard of other mid0-tier or smaller cable operators who are weighing such moves as well? 
jjensen43601
jjensen43601
8/31/2013 | 8:58:15 PM
Re: Digging their own grave
Carol, It is also an issue for smaller cable operators who do not own content. Many operators are challenged to keep ANY of the annual rate increases put forward to cable subscribers - the money flows to the content providers. As I see it, every year make it more difficult for video subscribers to continue to pay for 300 channels when they may only see value in 30. What you may see in the future is a scenario where programming bundles are removed from the lineup to reduce the year over year increases. If I recall the numbers correctly, there were 1.7 million fewer video subscribers in 3q12 than in 3q11. People are looking for more value outside the traditional video package. That trend will accelerate if a solution is not found.
jjensen43601
jjensen43601
8/31/2013 | 8:43:16 PM
Re: Money shot
mendyk, When this all started, it was the local broadcaster who was fighting for the right to be on the local cable system. The regulations developed allowed the local broadcaster to request retransmission consent on cable. If that failed, they were also given the right to demand 'must carry.' In the current conflict, CBS could demand 'must carry' and resume its place in the cable lineup but would not receive any compensation. Since money is the core of the issue, Time Warner isn't obligated to carry the CBS affiliate if they can't arrive at a mutually agreeable arrangement.
MarkC73
MarkC73
8/30/2013 | 4:40:55 AM
Re: Digging their own grave
Content is king, even Netflix with its huge subscriber base found that out.  And yes, with bandwidth being made anywhere any time, and all the OTT and Multiscreen advances, it's really only a matter of time before someone (or more) secures enough content rights to make a serious play at real time video delivery service to compete with the traditional carriers, and the candidates, are to say the least are many, Apple, Google, Netflix, ATT, VzW, not to mention the traditional guys if they are bold enough.

But it won't matter how good your delivery system is if you don't have what people want.  Though I don't agree that CBS should be paid that much, but then again I don't watch too much CBS programming, I do see content as being the differential.  As Joseph has mentioned, more about the antiquated rules, but why not let the market decide?  The reason is the content providers are in on this.  We can't just choose a la carte stations because they aren't offered that way.  I'd like to see the evolution of content go where users can buy content directly from the providers independent of delivery system.  Delivery providers can still wholesale and provide enhancement to how content gets delivered or get in on the content production like COMCAST has.  But that too leads to some interesting questions, eg. if non-sports fans aren't forced to pay for ESPN and ESPN loses enough revenue, then it will most likely not be the premier sports station anymore.  I mean I want a la carte but I don't want to pay $10 per station either.

...and what's a newspaper?
mendyk
mendyk
8/29/2013 | 2:49:34 PM
Re: Digging their own grave
As flawed as the current ecosystem is, I really don't see it "crashing down." Other than Netflix -- an idea that has yet to be proven out over the long haul -- content providers would rather keep things status quo than get into the messy business of end-user delivery. Disney/ESPN now commands close to $6 per video subscriber for its laundry list of channels, whether or not those subscribers actually watch those channels. It's been estimated that Dis/E would have to price its bundle at $15 a month if it were to go strictly OTT like Netflix, and that would be just to get to the licensing revenues it now gets. Sure, the big content guys (including Dis/E) are dabbling in OTT, but they are looking at a potentially significant revenue hit if things did come crashing down.
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