Cable could be headed for a wreck, but studios, networks can (and probably will) prevent it

Michael Wolff has a smart take on the future of the cable business in USA Today, arguing that the industry is foolishly trying to stave off a la carte in the face of its obvious inevitability. “TV Everywhere” is doomed to failure, he predicts, because cord cutting is happening, even if not in numbers that make a difference at this moment. He compares cable to the newspaper and music industries, which sat by and watched as their businesses were undermined and then decimated, because the cash was rolling in steadily until, suddenly, it wasn’t.

“The cable programming business — running, practically speaking, on consumer inertia — doesn’t work anymore, and shouldn’t. It’s too costly and inefficient. It will die. This is easy: There will not be a cable business in five years, or at least not a healthy one.”

— Michael Wolff, “Cable Is Taking The Fast Train To Oblivion,” USA Today

It’s a reasonable conclusion, for all the reasons Wolff states.

One of the premises of his argument is that if people find it too inconvenient to cherry pick the shows they want by legal means (because bundling costs too much), they will turn to piracy, as happened with music in the late ’90s and early ’00s, when millions of people decided they just wanted a couple of songs off an album, rather than be forced to by the entire CD. (Ironically, the music industry had a handy solution to this problem during the vinyl era — the 45.)

Time Warner Cable Chief Executive Glenn Britt has warned the industry about the dangers of expensive programming packages. He has called for budget-priced basic packages, especially at a time when the economy has been so bad.

“People who are under economic duress are looking at these big packages and saying, ‘This costs more than I can afford … and there are too many networks I never watch and I don’t care about,” he said late last month on the company’s quarterly earnings call.

When TorrentFreak.com published its annual list of the 10 most-pirated shows of 2012, the site’s founder said that although 80% of such activity comes from overseas, where limited availability is the main concern, there is also a contingent of American consumers that is frustrated that it can’t get HBO’s “Game of Thrones” online without a pay-TV subscription.

Several of them told TorrentFreak they would subscribe to an online-only HBO service, something the Time Warner-owned network is experimenting with in Scandinavia. HBO’s new CEO suggested last month that such a thing might make sense in the U.S. if pay-TV distributors could be persuaded.

Having said all of this, the fact remains that there are a great many large, powerful companies that are heavily invested in keeping the pay-TV ecosystem alive and well, in one form or another.

Cable companies would have long ago offered a la carte if not for the fact that the conglomerates who own studios and networks profit so greatly from the system as it exists today. Cable channels — and more recently, broadcast networks — get a dual revenue stream that they won’t give up easily: money from both ad sales and fees paid by cable operators. Everyone has seen channels go dark for a few days because of a dispute between the cable provider and the programmer over these fees.

To be sure, others in the industry surely realize what Glenn Britt has articulated about price-sensitive customers is true, and so we will probably see some system that allows greater flexibility before very long, as Rogers Communications has tried in Canada.

But they will not embrace true a la carte, because if only a few dozen channels survive (if that many), the chain reaction wouldn’t just topple cable companies. All those studios who rely on hundreds of millions of dollars in affiliate fees would be forced to cut their production costs dramatically, and reduced quality would in turn have a negative effect on earnings. They can’t let that happen.

While Netflix‘s achievement with “House Of Cards” is remarkable, the company makes most of its money from the licensing of TV episodes and movies from the major studios, the same entities who need to make sure that Netflix is an adjunct to, rather than a replacement for, the traditional pay-TV provider. The industry has the power to decide the extent to which it will allow Netflix or Amazon Prime or Redbox Instant to present a challenge to the cable ecosystem.

Walt Disney Co. gave Netflix a big vote of confidence by choosing the company to be its pay-TV partner for movies starting in 2016. However, Bob Iger made it clear that as much as Disney admires the Netflix platform and interface, it would not have done the deal if it had been about television shows. The company still prefers cable as the distributor of shows from ABC, ABC Family, the Disney Channel, Disney Junior and other channels, where it has so many lucrative rights agreements.

In the wake of the Netflix-Disney deal, with other studio pay-TV deals on the verge of expiring at Universal and Sony, cable channels HBO and Starz moved decisively to lock them up.

Meanwhile, there is the issue of live sports, particularly the NFL and Major League Baseball. One of the main reasons some consumers are reluctant to cut the cord is that they wouldn’t be able to see their favorite teams, or marquee games involving other teams, without some kind of pay-TV subscription. The astronomical expense of sports rights means that these contracts will continue to be renewed, in the next five years and beyond, by the same networks who have them in hand right now. Networks owned by the corporate powers who want to keep cable strong.

— David B. Wilkerson