TV Channel "Insurance" and Why We Pay It
Colin Dixon, Broadband Media Practice Manager
May 6, 2009
I was reading an interesting piece from the New York Times discussing how cable TV is struggling against the rising cost of the channels they carry. The gist of the article is that the cable subscriptions that you and I pay do not reflect the price increase that the content owners - like Disney - are demanding (and getting!) from PayTV operators. I know, I know, it’s hard to believe our cable rates could be even higher! But this increased cost of content reduces the margins for the operators. Contrasted against this, however, is that, on the broadband side of the house, the margins are getting better for the MSOs since broadband carriage costs are falling.
But what do the content carriage costs (the price providers pay per subscriber) actually look like for all of the content? We are talking about big money here. For example, the top money earner, ESPN, gets an average of $3.65 per month (according to SNL Kagan 2007) per basic tier subscriber in the US. In our recent study, The Scoop on OTT, we found the average consumer pays about $65 per month for PayTV, so of that, $3.65 of it goes to Disney for the right to view ESPN.
All of this makes me think about medical insurance. The lucky people that have medical insurance are really insulated from the real cost of their health care. The result is healthy people, who consume relatively few health care services, subsidize sick people by paying higher insurance premiums. This is hard on everyone but since we’re all likely to get sick sometime we all put up with the cost. This is why the health coverage we buy is called “insurance” and not a “subscription.”
Well, it turns out we PayTV subscribers are actually paying “TV channel insurance.” All of us are subsidizing the sports fanatics since everyone pays for ESPN whether they watch it or not. However, unlike health care many people will never want ESPN. In fact, from the same study, we know that - given the choice - consumers would only subscribe to, at most, 10-15 channels since that is the number they currently watch. This is consistent no matter the number of channels to which consumers currently have access. So, the vast majority of PayTV subscribers are paying a lot of money for things they will never use. This reflects in some of our findings that, although the majority of PayTV subscribers are satisfied with the QUALITY of their service, we see rising dissatisfaction with the VALUE they are getting.
So, is there any chance that the sports fanatics will be able to buy ESPN alone and that everyone else will be able to skip it – in other words, that ESPN will be available a la carte? Disney will NEVER let this happen – at least not without a fight. Today they get almost $300M a month in the US just for ESPN. Let’s say they went a la carte and charged $5 for ESPN. If 10% of current US PayTV subscribers signup Disney would get $40M a month (assuming 80M US Paytv subs.) Disney would have to charge at least $30 a month to break even on the deal. Are folks really going to pay that for ESPN?
So, what do we conclude? Until a la carte is a reality – and throw a dart at a calendar for when that will be – there exists the opportunity for new networks to be born. Go online, go a la carte, build audience and grow with the emerging broadband TV market. In the next 3 years, we expect over 100 million internet-enabled televisions or video nodes worldwide. We’re already starting to see niches emerging online – religion, teen, ex-patriate – as well as mainstream broadcast networks – NBC, FOX, CBS, etc. While Disney simply can’t walk away from the huge ESPN license fees, new entrants will have plenty of time to establish themselves and “insure” their survival.
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