Will Cable TV Networks Kill Their Golden Goose?

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I’ve been dismayed, though not entirely surprised, by reactions from cable TV networks over the launch of Time Warner Cable’s new iPad app earlier this week. A pair of articles, in Adweek and the WSJ summarize various networks’ protestations about the new iPad app, namely that it is an unauthorised use of their content by Time Warner Cable, per their interpretations of their affiliation agreements with TWC.That may well be the case, and TWC may well be pushing the edge of the envelope in this implementation of its larger TV Everywhere goals. However, in my opinion the bigger question that cable network heads should be asking themselves is whether, by resisting initiatives such as these, they want to risk contributing to killing their golden goose, or whether they want to do their part in helping usher in the future? What they decide to do is at the heart of what role the pay-TV industry will play in the online video era.

Ask any media executive whose business model they most envy and invariably they will respond: “cable TV networks!” Why? Because cable networks enjoy a “dual revenue” stream – both monthly affiliate fees received from distributors like TWC, and advertising. Affiliate fees are hugely important because they act as a buffer against periodic advertising downturns (like the one we just experienced following the financial crash) and in times when programs stink and ratings inevitably decline. Though they vary in proportion by network, from a tiny fraction of their overall revenues, to a majority, affiliate fees are consistently important and highly sought after, totaling $25-30 billion annually in the U.S. according to most estimates. Peruse the quarterly financial performance of any publicly-traded media company that owns cable TV networks, and you’re guaranteed to find these among their best-performing assets.

In fact, the dual revenue stream model is so compelling that broadcast TV networks have begun demanding their own version of monthly affiliate fees, in the form of “retransmission consent” payments. These fees are so coveted that broadcasters have gone to extreme lengths, like recently blacking out the World Series and Academy Awards, in order to obtain them.

Given how attractive these cable network businesses are, it’s no surprise that their ongoing health is zealously pursued. Anyone that’s ever been exposed to, or involved in a cable network-distributor renewal deal will attest that no point is too small to be fiercely negotiated over, and that laddered fee increases over the life of these agreements are the norm. Having built hugely successful businesses, cable networks are rightly justified to be guarded about where and how their programming is distributed and what the implications of delivery to any new device or over any new platform are.

And that brings us to TWC’s iPad app, and cable networks’ golden goose problem. Cable networks’ financial health is, of course, inextricably tied to their pay-TV distributors’ health. TWC, and Comcast, which launched its own iPad app earlier this year, and other pay-TV operators who are also doing so, or contemplating doing so, are absolutely doing the right thing. They are in a battle for the hearts and minds of their subscribers, and facing a formidable set of competitors, led primarily by Netflix, which is upping the ante at every turn (see just yesterday’s news that Netflix may now begin distributing original TV series itself). Consumers’ expectations are being set by Netflix and others, and for now anyway, pay-TV operators are playing a catch-up game. To their credit though, they seem to be “getting it,” and the TWC iPad app is another tangible example of progress (TWC has said downloads of its app are already running strong).

In this context, cable networks need to find a balance between protecting their rights and supporting their distributors (their golden goose). No doubt there were months of behind-the-scenes haggling by TWC to formalise its rights to distribute cable network programming via its iPad app (which is available only in subscribers’ homes). Some networks are likely holding out for additional payments. Some likely want further tests. Some likely want more assurances that viewing will be accurately measured, so it can be monetized fully. Some likely want still other things. The problem is that while all these “wants” take time to get addressed, consumers and the market relentlessly move forward.

This is today’s new reality, and reactions to TWC’s iPad app once again show that cable networks, albeit with some notable exceptions, have not yet fully grasped this. There is no divine rule that says people must subscribe to expensive pay-TV services, or that cable networks that are already on the dial must remain there forever. Internet-oriented companies have long known that it is better to release an imperfect product quickly and gain some momentum vs. hold back, in pursuit of perfection. The online video era will not offer cable networks the near-perfection of their traditional operating environment. The sooner they realise this and get on with things, the higher the likelihood that they will help preserve the health of the golden goose so that it may in turn continue laying its precious monthly affiliate fee golden eggs.

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