Pay TV's Affordability Crisis

Nick Iluzada

With cable or satellite too expensive for 40% of Americans, drastic measures are needed for TV revenue to keep growing.

Craig Moffett, a media analyst at Bernstein Research, recently wrote a thoughtful report titled "The Poverty Problem." His thesis, backed by extensive economic and industry data, is that projections for pay television subscriptions and prices, as well as broadband and smartphone penetration, must take into account the inability of lower-income consumers to afford new gadgets and services at higher costs. In other words, home entertainment might be getting too expensive for the masses.

This is an important issue that deserves more attention: Moffett's data reveals that after paying for necessities -- shelter, food, transportation and health care -- the bottom 40 percent of U.S. households have virtually exhausted their disposable income. Nothing is left for clothing, debt service, telephone, broadband -- and especially not pay TV.

Indeed, about 15 percent of U.S. households do not have a pay TV subscription, whether with cable, satellite or telco carriers -- commonly referred to as MVPDs (multichannel video programming distributors). And given the recession and threatened government cuts, the after-tax income of this group has been reduced in the past five years, while the weighted-average price charged by the major pay TV carriers has increased by 30 percent.

Unfortunately, the business is structured to deliver an all-or-nothing proposition: You either have pay TV or you don't. There have been some attempts to tier channel selection into smaller bundles, but the inexorable trend is toward raising pricing at the basic (or "lifeline") tier, and matters are likely to get worse.

The increasing battles over retransmission fees for the broadcast companies will exacerbate matters. Today, the MVPDs such as DirecTV, Comcast or Verizon pay out about $32 billion per year to pay channels and broadcast stations, and while the Big Four network stations have more than 40 percent of the viewers, they are getting only 5 percent of the dollars. Each of the four networks has vowed to double or triple the retrans dollars now paid to them during the next five years while at the same time demanding "reverse retrans" compensation from their affiliates. So the MVPDs soon will be paying out billions more than they do today.

How will they maintain profit margins and satisfy investors? Simple: Increase consumer prices, reduce or eliminate retrans payments to the weakest cable nets or go to Congress and ask for "relief."

Sports programming makes the affordability problem worse. All of the major professional leagues except the NFL, plus virtually all NCAA sports, have entered into license agreements with basic tier (or regional mini-pay sports networks) for the bulk of regular- and postseason games. Consumers essentially are coerced into maintaining subscriptions to the channels exhibiting this extremely popular and expensive programming (sports is about 18 percent of total household viewing) or going without.

The issue is not about cord cutting in favor of Netflix, iTunes, Redbox or the others. It's about giving consumers a way to watch channels and programs they scarcely can afford.

A legislative solution likely would be a disaster. Think about Japan's "experiment": When the government decided to make satellite delivery available in the late 1990s, the mandate was to require a la carte channel selection. Three satcos stepped forward, but neither they nor the channel owners was willing to put up the necessary marketing funds or effort to make the system work. Only one operator still exists, and satellite pay TV penetration is less than 10 percent, probably the lowest of any developed country.

Similarly, trying to enact legislation or FCC rules determining which channels should be assigned to a tier would be counterproductive. It wouldn't account for the vastly different technologies at the local cable stations and would involve government bureaucrats making value judgments on whether a particular channel belonged in a particular tier.

Is there a private market-based solution? Maybe. Telcos periodically have offered a low-priced DSL service as an enticement to first-time broadband subscribers. Comcast made a voluntary commitment (as part of taking control of NBCUniversal) to offer a means-tested broadband plan priced at $10 a month. This could be expanded to encompass all cable MSOs. In my opinion, this approach would be unlikely to cannibalize existing revenue.

Or the channel owners could join with the carriers in a usage-based pricing plan (lower pricing for lower usage or lower monthly usage caps). Other ideas? The affordability and access issue is worth our time and efforts.

Kenneth Ziffren is a senior partner at Ziffren Brittenham and an adjunct professor at UCLA School of Law.