We're calling out silly things in the TV trade media (like Variety) all the time, but it's pretty rare that I do that for the Wall Street Journal. However, a piece today that suggests that the "TV industry" shrink the number of channels betrays a fundamental mis-understanding of why things work the way they do.
As the TV industry tries to come up with a new business model to deal with the challenges posed by online video, it should consider shrinking the number of channels.
It is doubtful viewers want as many as they have. In 2007, the average household tuned into only 16 channels of the 118 channels available, estimates Nielsen.
Indeed, the explosion of channels was driven by cable operators' need for a marketing tool to convince people to pay for more choice, given the presence of free broadcast TV. That gave rise to a system where channels developed for cable are paid affiliate fees by cable and satellite operators. Broadcast networks, which individually draw much bigger audiences, generally don't receive fees.
That is indeed why there are so many cable networks. Each new network pays the cable MSO (ex. Comcast) or satellite operator (like DirecTV) a fee to carry its feed. More networks = more revenue for the cable MSO or satco.
But what really distorts the picture is the absence of correlation between the size of the fees paid to individual cable channels and their audiences. Viacom's Nickelodeon is the most-watched cable channel, averaging about 1.7 million households a day last year, according to Nielsen. Yet it ranked 10th among cable channels in terms of affiliate fees in 2008, excluding premium channels, estimates SNL Kagan.
Kagan estimates Nickelodeon's annual affiliate revenue was worth $312 a household. In contrast, Discovery Communications' Discovery Kids earned affiliate revenue of $1,871 for each of its 20,000 average daily household viewers last year.
Channels showing live sports, such as Walt Disney's ESPN, draw the most fees per viewer, closely followed by channels owned by cable operators.
The industry can't solve the online-video challenge without dealing with the disparities in these fees. Because broadcasters miss out, cable operators can't stop them offering some of their best shows on the Internet, where they can seek an incremental audience. That has contributed to worries about people turning off their video subscription and using Internet TV instead.
Industry executives like to claim that people watch TV shows online because it is convenient. Maybe so. But some people also want to spend less on their cable bill. And one big factor driving up that bill is programming charges.
A first step toward reinventing the business model would be to link fees paid by TV distributors to viewership, with a minimum audience level set for any fees.
Some niche networks would likely go out of business. That would be a good thing. The TV industry suffers from an excess of supply. Shedding little-watched networks would restore some semblance of economic reason.
Money saved could be returned to customers through lower charges or redirected to broadcasters. That would level the playing field and make it easier for the industry to come up with a coherent approach to the Web.
Of course, cable MSOs would rather pay less for a network than more, and the networks would rather receive more than less (witness the recent travails of the NFL Network), but suggesting that fees from cable networks be tied to their viewership misses the fundamental relationship between cable networks and MSOs at work today.
Cable MSO's scarce resource is bandwidth to the home (which limits the number of channels). In a world where they can basically force bundle those channels to subscribers (which is an entirely different issue, but it's currently a given), their interest is getting the most money per channel they can carry, while simultaneously working to increase the number of channels they can carry.
"Shedding little-watched networks" would certainly benefit remaining cable networks, but why would cable MSOs do that? It doesn't benefit them.