NCTA CEO Michael Powell on High Sports Fees, Aereo and Why Cable Is in a ‘Transformative’ Period (Q&A)

Michael Powell, who is overseeing the National Cable & Telecommunications Association annual market and conference taking place at the Los Angeles Convention Center and L.A. Live through Thursday, comments on Aereo, sports rights fees, why satellite has an unfair advantage over cable and why over the top video services present both an opportunity and a threat to the industry he represents in the second installment of his exclusive two-part interview with The Hollywood Reporter. (Read part 1 here.)

The soaring cost of sports rights has hit home in Los Angeles where 70 percent of the TV homes can’t watch the L.A. Dodgers because of a dispute between the team and Time Warner Cable on one side against half a dozen satellite and cable distributors serving the market over increased fees. Are sports rights fees out of control?

Let me take a very different tact on it. I don’t know if you’ve heard it this way, but I’ve thought about this a lot. And, you know, you don’t need to have an opinion on the facts. Those facts are what they are. Sports costs are high and they keep going up. That’s just a factual statement. All you have to do is look at the NFL price increases for Monday Night Football or colleges choosing to reorganize their leagues in order to command higher media rights. There seems to be an endless movement of both sports programming and the professionalization of sport to a greater value and higher expense. 

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Now does that mean it’s out of control? I find that a harder question, to be honest with you. It’s certainly high and contributes to the price we all pay, but it’s almost more a cultural question than a financial question. Meaning I don’t know what the limits of Americans’ passion for professional sports is. You know, I have friends that make really modest amounts of money, who buy season tickets to the Redskins and as a proportion of their disposable income it’s an amazingly high amount. But they won’t miss it. I know people who practically take off work for the month of March to watch basketball. This country does have a pretty burning obsession with professional sports, the fancy uniforms and stars that get paid $200 million. 

I can understand what’s factually happening in that business, but what I don’t really understand or know is where America’s appetite stops. And maybe we’ll find the bottom because prices will get to a point that are beyond what consumers will any accept. It is a market and I don’t know what is the value of seeing a Dodgers game? I’m a mild sports guy. But, if you go up to Congress and visit offices, there’s plenty of football helmets sitting on the shelf and baseball hats, and, people who will take it passionately. 

The Dodgers are an interesting case because you have both a satellite company and cable companies refusing to pay for something they know their customers want because they’ve decided that the price is too high. They’re going from $50 million in rights last year to $220 million a year. People feel after at least 50 years in this market having some Dodger games on free over?the?air broadcast TV, to have zero now is stunning to them. They feel this isn’t right.

I think it’s certainly transformative. Period. Meaning, you know, usually these right things in a local market eventually shakeout, right? The consumers will be dissatisfied. They’re not seeing it. The companies will draw lines about what they’re willing to pay. It’ll get loud and rough for a while, but historically usually some equilibrium gets found, right? Some equilibrium of consumers getting what they want at some price that they can accept. The distributors stop refusing to pay. I’ve seen this in lots of markets. Consumers hold a lot of power. When they’re mad, companies can’t sustain that pressure for very long before they try to get it figured out. 

Americans consume a scary amount of television. The average number of hours now per household has risen to 310 per month. That’s almost eight hours a day of television being on or consumed. That’s sort of amazing. And what happened is as consumers have moved toward choice and more options, most consumers have moved to paid platforms. So, today, 85 percent or more of all Americans who watch TV are on one paid platform or another. We’re under 10 percent of Americans who watch anything over?the?air. So, the Dodgers might be on over?the?air, but there’s a very small part of the population actually getting it over?the?air. 

The reason that it’s so noisy is very few people really do that anymore. And so, what’s happening is it’s turning into a business about cable carriage. And, you know, a lot of sports have migrated off of broadcast television onto cable tiers because frankly they’re more profitable. And there’s a reason the NFL has an NFL network and there’s a reason MLB games, a huge chunk of them, have moved to cable. There’s a reason that even March Madness, if you wanted to see all the games, you have to be a subscriber. I mean the nature of the sports business has moved there. So, I completely understand and respect the consumer reacting because they’re comparing it to what they’ve historically enjoyed. 

What do you think about Aereo — a challenge to cable that doesn’t pay retransmission rights fees — now being decided by the Supreme Court? Broadcasters hate it but isn’t it also a threat to cable and satellite’s business?

I think there are different opinions. Let me just deal with the facts. You would assume satellite guys feel threatened. They actually have filed in the Supreme Court in favor of Aereo. And the reason is, is I think they at least envision maybe they would offer a companion service of just the broadcast channel and that would allow them to lower their retransmission cost.

I read the briefs of the broadcasters [in the Aereo case].. Their great fear is that their content would be suddenly available in the market, in possession of someone receiving it at a dramatically lower price point. And they claim to need in retransmission expense. That could blow a major hole in their businesses especially if cable operators and satellite operators rush to do this in order to circumvent retransmission expenses. So, it just kind of depends on where you sit.

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So, I’ve chosen not to get too entangled in this one. I don’t know the answer and we have members on all sides. But it’s not an easy thing to sort through peoples’ incentives here. This is another example of where we started. Convergence. Here’s a signal that the government created a service called “broadcasting,” which is something’s free over the air and modern technology has found a way to grab it and distribute it in a new way. It’s only been made popular because of the Internet. I think we’ll see things like Aereo or versions of things like Aereo for a really long time because the disruptors are out there and they have the tools to do things we haven’t seen before. So, however this case comes out, I think we’ll see something like it again.

There is a law that cable subscribers must buy the basic tier of service. Do you want that to remain the law?

We support eliminating it because I don’t know where the market will go. The government trying to preordain what American consumers have to buy is an inappropriate thumb on the scale. Meaning I just don’t know why the United States government ought to tell the American consumer before you buy anything else, you have to buy these particular channels as a matter of law. Well, why, particularly when you don’t impose that rule on other distributors? For example, DirecTV doesn’t have this rule, but they’re the second-largest distribution provider in the United States. So, a DirecTV customer doesn’t have to buy those channels as a perquisite, but if you happen to use Cox, you do. 

What sense on Earth does that make? And I just think that even if content guys and cable companies figured out flexible packages that the market might like, the idea that the government could stand in the way of that makes no sense. I think it made a modicum of sense 20 years ago when cable had 90?something percent of the market and broadcasting was watched over the air at a much higher level than it is today. But today cable only has 50?something percent of the market and the other providers don’t even follow the rules. I think it should go away.

And then, of course, you have the over?the?top providers who are not subject to any of these rules. Are they a threat?

My honest opinion is it’s an opportunity and a threat. It actually doesn’t present itself in a singular way because we’re in two businesses. I think most of the cable CEOs would be quick to admit that the rise in Netflix’s consumption has been extremely positive for their broadband business. People want broadband more; want higher speeds and better tiers because they want to watch more streaming video. So, there’s certainly one part of our business that has grown and prospered by virtue of these developments and that’s a positive. We also think it leads to happier customers and, you know, giving them fewer reasons to leave means giving them a good broadband experience as part of the packages. 

But I think as we see the service evolve, Netflix goes from being for example, a small upstart service to the largest video distributor in the country, if not the world. Right now, they have more subscribers than Comcast. They’re a big player now and I think we are able to see the impact of over?the?top. And I think even [Netflix CEO] Reed Hastings frequently talks about it as almost more as a compliment to cable service than a direct substitute. There’s more symbiotic?ness there than you think. The broadband piece. But also because his business model is not to do some of the really powerful live things that consumers still demand. I mean I think I’ve heard Netflix say things like we’ll never do sports, we’ll never do live news, we’ll never do premium first?run programming that isn’t of our own creation because it’s more expensive than we want to pay in our business model. I mean consumers like that stuff.

And so I can see a world where you’re still going to want to have cable to watch March Madness and the first season of Breaking Bad when it’s running. Then for library content and watching original series they produce, you’ll have Netflix. I have both and I like both. And I have Apple TV.. They coexist in my video home. And my instincts are the market’s going to move more like that. 

Now threats; I think it’s a threat to us in that we better innovate. We better make the navigation experience better. We better make boxes simpler and easier to use. We better match the elegance and the innovation of over?the?top and the Web or shame on us. Our service will suffer and our subscribers will leave us. So, the threat is also a challenge to invest and get better, which I think any industry needs.