[opendtv] Analysis: Seven Things That Will Change Cable TV in 2004
- From: Craig Birkmaier <craig@xxxxxxxxx>
- To: OpenDTV Mail List <opendtv@xxxxxxxxxxxxx>
- Date: Sun, 2 May 2004 10:48:38 -0400
Seven Things That Will Change Cable TV in 2004
By John M. Higgins, Allison Romano, and Bill=20
McConnell -- Broadcasting & Cable, 5/3/2004
In this story:
I. Takeover Time
II. Can I Have That =E0 la Carte?
III. DeathStar
IV. USA Changes Stripes
V. Hoping for a Hit Parade
VI. Cable Cops Clamp Down
VII. VCR in a Box
No industry in American business is rocked by=20
change more than cable. And few other industries=20
are whipsawed by such a complex array of forces:=20
technology, Wall Street, government regulation,=20
advertising, and the ever-changing tastes of an=20
increasingly splintered audience.
Cable operators have been regulated, deregulated,=20
re-regulated, and deregulated again. Now the=20
latest hue and cry from Washington regulators:=20
Cable should be under stricter indecency=20
standards. Congress is also mulling a tax for=20
high-speed Internet services-and the idea of=20
forcing cable to sell networks "=E0 la carte."
The deal market is hot again, sparked by=20
Comcast's audacious, though failed bid for Walt=20
Disney Co., which demonstrated more than anything=20
the industry's confidence in uncertain times.=20
Adelphia Communications will be auctioned to the=20
highest bidder soon, and Wall Street is hungry=20
for more deals.
As broadcast networks become more entwined with=20
cable, NBC has emerged with the biggest cable=20
prize of all: USA Network. With one deal,=20
NBC-which already owns CNBC, Bravo, MSNBC, and=20
Telemundo-plans to redefine the scope and reach=20
of a general audience cable channel. NFL on USA,=20
anyone? NBC's influence, not to mention recent=20
cable hits like The Shield on FX and Newlyweds=20
on MTV, makes it all the more crucial for cable=20
programmers to find a breakaway show.
Of all the pressures roiling the industry,=20
though, Rupert Murdoch may be the biggest force=20
that cable operators deal with this year. The new=20
owner of DirecTV, legendary for his tenacity, has=20
vowed to take as many cable customers as he can.
As the business heads into its sixth decade,=20
below are seven things that will transform the=20
cable industry as we know it.
I. Takeover Time
The balance of power is about to shift yet again.
Adelphia, one of the biggest and oldest cable=20
companies, goes on the auction block later this=20
year. And, as the biggest operators look to=20
increase their power, dealmakers are expecting=20
lively bidding.
Adelphia may not be the only operator to go to=20
the highest bidder. Cablevision Systems could=20
pull in as much as $12 billion as a sale=20
candidate once it completes the spinoff of its=20
Voom DBS and Rainbow networks operations. Insight=20
Communications may become a target, too, when a=20
trigger date in its joint venture with Comcast=20
comes up next year.
After a long, long deal drought, dealmakers=20
welcome the auction of Adelphia like a $20=20
billion thunderstorm. Comcast and Time Warner are=20
expected to lead the charge. Interested cable=20
operators see big financial gains out of running=20
the Chapter 11-battered Adelphia, and the auction=20
will doubtless draw additional offers from buyout=20
firms seeking to profit by flipping the systems.
If Adelphia's systems were divided on a market=20
or regional basis-Florida and Los Angeles, for=20
example-prices would surely soar as a=20
free-for-all of financial players and cable=20
operators ensued. Even Cox, which last week said=20
it's not interested in all of Adelphia, would=20
come in to play if it were sold piecemeal.
Nothing even close to this size has come on the=20
market since 2001, when Comcast beat out Cox=20
Communications for AT&T Broadband, paying $54=20
billion. Since then, buyers and Wall Street=20
dealmakers have had to busy themselves with=20
slivers, such as stray systems pruned by Charter=20
Communications.
II. Can I Have That =E0 la Carte?
Operators and networks see "=E0 la carte" pricing=20
as cable's dirty bomb: It might not destroy the=20
industry, but it could render parts of it=20
uninhabitable for some networks.
=C0 la carte pricing-letting subscribers buy one=20
channel at a time-is being pushed by cable's=20
critics as a way to let subscribers get their=20
cable bills under control. Why not sell all=20
channels the way operators sell pay movie=20
services, they argue-one channel at a time? If=20
Showtime, why not TNT or MTV? Subscribers who get=20
100 channels watch only a handful regularly,=20
anyway.
The biggest =E0 la carte advocates? Critics of=20
cable's steep prices, particularly Sen. John=20
McCain (R-Ariz.) and influential consumer groups.=20
If ESPN were sold =E0 la carte, the thinking goes,=20
non-sports fans wouldn't have to pick up the tab=20
when ESPN jacks its already high license fees,=20
which are now included in everyone's cable bill.=20
Now the indecency crowd is picking up =E0 la carte=20
as a cause, seeing it as way to let people block=20
South Park without actually paying for it.
McCain dropped a clause calling for =E0 la carte=20
pricing from a bill restricting TV indecency in=20
recent negotiations, but he's likely to=20
reintroduce it when the full Senate votes later=20
this month. In the House, the commerce committee=20
will debate whether to impose it on all pay TV=20
when it votes on a satellite bill this week.
Some cable networks, such as VH1 or HGTV, panic=20
at the idea because they sell a lot of=20
advertising based on people who graze through.=20
And if a network's subscriber base dropped by 80%=20
overnight, so would license fees.
Even in an all-digital world, =E0 la carte pricing=20
could be the kind of marketing nightmare pay TV=20
has been, with an astounding annual churn rate of=20
up to 50%. And it costs a lot to deliver, say,=20
just one channel. Cable operators could likely=20
charge $10-$15 for ESPN but might also have to=20
charge another $15 for basic access.
III. DeathStar
Rupert Murdoch wants to put cable operators out of business.
Both cable operators and networks have plenty to=20
fear now that DirecTV is in his hands. The DBS=20
service is expected to aggressively steal video=20
hounds away from cable with a panoply of new=20
services.
Since Murdoch's News Corp. took control of=20
DirecTV in December, the company has focused on=20
the corporate suite, transforming Hughes=20
Electronics from a piece of a conglomerate to a=20
company singularly focused on DirecTV.
In coming months, DirecTV CEO Chase Carey=20
promises to start deluging subscribers with new=20
benefits. To blunt cable's video-on-demand=20
systems, he plans to provide DirecTV customers=20
with digital video recorders that can give=20
instant newscasts or sports highlights.=20
Interactive-TV capabilities-such as choosing=20
camera angles at a sporting event-that have=20
proved so popular with Murdoch's BskyB=20
subscribers will be imported. Imagine being able=20
to vote for American Idol contestants on Fox=20
network through your TV but only if you're a=20
DirecTV customer. DirecTV already has partnered=20
with telcos to bundle its satellite-TV service=20
with telephone and high-speed data services.=20
Carey could even bring Fox's O&O stations in to=20
promote DirecTV if needed.
DirecTV has already put its targets on notice:=20
financially weak cable operators like Charter and=20
Adelphia, apartment buildings in every market,=20
and ethnic markets.
DirecTV promises to be a lean competitor, too. At=20
first, the company paid programming fees of=20
20%-30% more than cable operators, but Carey says=20
that's ending. Because DirecTV is now the=20
second-largest video distributor, Carey wants=20
license fees more on par with what big cable=20
operators like Comcast or Time Warner are paying.
DirecTV plans to shake up the programming world,=20
too, shoving thinly viewed cable channels onto=20
tiers with fewer subscribers-thereby robbing=20
networks of viewers and license fees. "We are=20
carrying channels in a broadly distributed tier=20
that don't warrant it," Carey says. "And there=20
are channels that are not delivering the price we=20
are paying for them."
The good news for cable operators-and bad news=20
for subscribers: DirecTV claims it has no more=20
interest in cutting prices. Indeed, the company=20
hiked its rates by 5% recently. "We will manage=20
this business to maximize value, and value means=20
profits," Carey says. "We plan to win with a=20
quality product and fair prices, not price wars."
IV. USA Changes Stripes
Will USA Network be the fifth "broadcast" network?
With the size and reach of NBC behind it, USA,=20
already a powerful brand, is virtually guaranteed=20
to redefine general entertainment on cable. Think=20
more professional sports, big-budget movies, and=20
original series-and operators will likely get=20
stuck with the tab.
Big-league sports already air on TNT and ESPN,=20
but NBC may look to make USA a bidder on NFL=20
games. NBC used to air NFL games but went to the=20
sidelines in 1997 when the league inked its=20
latest $17.6 billion pact with Fox, CBS, ABC, and=20
ESPN. The rights come up after the 2005-06=20
season. Expect NBC/USA Network to at least be at=20
the table. Another possibility: NBC's NASCAR=20
package, which it currently splits with TNT,=20
comes up in 2006.
Olympic action on USA is assured. NBC already=20
plans to put Olympic qualifying trials on USA, as=20
well as games from the Athens Summer Olympics. In=20
future Olympics (NBC has the rights through=20
2012), USA will be a primary destination.
To pay the way, NBC will likely demand healthy=20
rate increases when some of USA's distribution=20
deals come up over the next year. Operators may=20
scream, but USA-which, according to Kagan=20
Research, averages around 40=A2 per subscriber-lags=20
far behind ESPN and TNT in subscriber fees.
USA will benefit from NBC's promotional machine=20
and deeper programming coffers. The cable network=20
is already on a hot streak, thanks to Law &=20
Order: SVU off-nets and original drama Monk.=20
Expect NBC to make it harder for other cable nets=20
to win an audience. Besides better theatricals=20
and more originals, USA seems a shoo-in to get=20
cable rights to the second Law & Order spinoff,=20
Criminal Intent, given its success with reruns of=20
Law & Order: SVU. And if Queer Eye for a Straight=20
Guy is a guide, expect more repurposing (read:=20
reruns) of NBC shows on USA and, perhaps, USA=20
shows on the mothership.
V. Hoping for a Hit Parade
It is every cable network's single obsession: Find a hit.
A breakout program gives a channel an identity=20
and ratchets up its value. Bravo was hardly a hip=20
destination before Queer Eye. Now its prime time=20
viewership has doubled since the show. But=20
unearthing a hit is nearly impossible. Even the=20
cleverest execs concede that there is no formula;=20
you never know what bizarre pitch could explode=20
into the next Punk'd , MTV's hit prank show.
These days, "anything non-scripted is hot," says=20
Doug Herzog, the outgoing USA Network chief who=20
becomes Comedy Central's CEO in May. Sick of=20
procedural drama on broadcast? Look to=20
cable-always a breeding ground for new genres-for=20
the next wave of offbeat dramas.
What's the next hit? We have a few hunches. Here=20
are some possible breakouts in the hottest=20
programming trends:
Toasting tweens: Tweens, aka kids 9-14, flock to=20
reality on broadcast and live-action comedies on=20
cable. Nick is adding four live-action shows this=20
season, hoping to keep tweens away from broadcast=20
and rival Disney Channel. That includes=20
13-year-old Jamie Lynn Spears, sister of pop star=20
Britney, starring in Nickelodeon's upcoming=20
comedy about a teenage girl at a newly co-ed=20
boarding school, slated for late fall or early=20
winter.
Spinoff Fever: If something works, keep doing=20
it. That's what Bravo President Jeff Gaspin,=20
formerly a VH1 programmer, did at VH1 with Behind=20
the Music. Now at Bravo, Gaspin is cloning his=20
hit Queer Eye with a female version. Queer Eye=20
for the Straight Girl, coming early next year,=20
will dispatch a new team of lifestyle experts=20
(three regulars and two guest stars) to help=20
transform straight girls. We can't wait to see=20
the new Carson. But will viewers get gay-makeover=20
overload?
Showtime Reloads: It's not HBO. It's Showtime.=20
The pay channel's freshman programming chief Bob=20
Greenblatt must be tired of hearing that. But=20
Greenblatt has to deliver an HBO-like hit. His=20
strategy is bigger, broader shows and fewer=20
hyper-niche dramas like Soul Food and Queer as=20
=46olk. Cue his first offering: Huff stars Hank=20
Azaria as a psychiatrist with a troubled home=20
life. Oliver Platt plays his best friend, and=20
Blythe Danner stars as his mother. Greenblatt=20
knows weird family dramas: He executive-produced=20
HBO's funeral home hit Six Feet Under.
Reality's Next Step: With reality TV fast=20
becoming a crowded category, what's a=20
trend-setting network to do? Find reality spoofs.=20
Upcoming Comedy Central animated series Drawn=20
Together, premiering in October, throws cartoon=20
characters, like a superhero and a fairy=20
princess, in a house together Real World-style.=20
And the show plays on a bigger cable trend.=20
"Adult animation is big right now," says Comedy's=20
Senior Vice President of Originals Lauren Corrao.=20
"We're hoping to capitalize on that." It would be=20
good timing. Comedy hasn't had an animated=20
success since South Park.
More Than A Miniseries: After a self-imposed=20
exile, TNT is back in the original-series game.=20
Its first shot comes in July with limited series=20
The Grid. The six-hour counter-terrorism series=20
stars The Practice's Dylan McDermott and former=20
ER star Julianna Margulies. The limited format=20
takes the edge off for TNT execs. The Grid is a=20
co-production with the BBC, which reduces cost=20
and risk. And limited series, TNT says, attract=20
big name talent (it is a limited commitment) and=20
goes deeper than a one-night movie. We'll see if=20
viewers agree.
VI. Cable Cops Clamp Down
Congress and the FCC are gunning for the=20
foul-mouthed tykes of South Park and the Spring=20
Break bikini bunnies of MTV.
Politicians are threatening to shackle cable=20
with broadcast-style restrictions on indecent=20
programming-and it's not just election-year sound=20
bites. This week, the House Commerce Committee=20
will vote on a measure requiring cable and=20
satellite providers to offer programming on a=20
channel-by-channel basis so that cable-TV and=20
satellite-TV subscribers offended by boobs and=20
bad language can't be forced to take the racier=20
networks.
Supporters like Rep. Nathan Deal (R-Ga.) are=20
trying to tuck the measure into a bill governing=20
satellite TV's carriage of broadcast channels. If=20
this last-minute bid fails, the idea is certain=20
to emerge again when the Senate wraps up a=20
broadcast-indecency bill later this month. Sen.=20
Ernest Hollings (D-S.C.) has promised to push a=20
similar amendment on the Senate floor. Under=20
C-SPAN's cameras, lawmakers will be reluctant to=20
vote against cleaner TV.
Congressional wags give the Senate =E0 la carte=20
measure an 80% chance of passing. Even tougher=20
measures banning sexually explicit scenes and=20
profane language during hours kids watch are=20
likely to get a Senate vote as well. During the=20
political "silly season," lawmakers can't resist=20
giving the public what they think it wants. Yes,=20
imposing broadcast-style indecency rules on cable=20
creates huge constitutional problems, but=20
Congress will leave those to the courts. The line=20
on a cable indecency ban: 65% chance of passing.
VII. VCR in a Box
By pushing new digital video recorders (DVRs)=20
into millions of homes, cable operators are=20
giving subscribers a degree of control that=20
threatens to dramatically disrupt=20
broadcast-network business.
But that doesn't mean it's a great business for=20
cable. At $10 a month, cable operators do not see=20
DVRs boosting the bottom line in a big way. The=20
real value of these devices-which are part of the=20
cable box-is to keep subscribers away from DBS,=20
which have offered DVRs for a few years. Sanford=20
Bernstein media analyst Tom Wolzien says that=20
"glue" would give a mere 2% boost to operators'=20
basic-subscriber counts.
A heated debate is now raging over how much=20
damage the devices will actually do to cable and=20
broadcast networks, since greater control means=20
skipping ads. Up to a third of homes are expected=20
to use DVRs in five years. If you combine ads=20
watched during live programming and the fact that=20
70% of commercials are skipped during DVR=20
viewing, DVR users could be watching 21% fewer=20
commercials in a few years.
Perhaps just as important, it dilutes the power=20
of the "lead-in". Millions of the viewers=20
watching Everybody Loves Raymond have typically=20
continued to watch whatever CBS aired immediately=20
afterward. Even if DVR junkies are watching the=20
commercials on Raymond, they will no longer flow=20
into the next half-hour.
The Yankee Group estimates that PVRs could cost=20
TV networks and stations as much as $5.5 billion=20
in lost ad revenue by 2006.
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