The Elephant in the Room

Recently the subject of "a la carte" programming has been top of mind for many people in the cable TV community. As many of you know, a la carte refers to the idea that consumers can choose the specific channels or programs they prefer, with each channel or program having its own particular price. Coupled with the spate of $1.99 per download deals recently announced, the idea of a consumer smorgasbord of video has dominated the news.

The a la carte debate has been around for many years, but has never gained much ground. Cable's subscription packages have been very effective for both operators and programmers, and as a result there has not been much interest in tampering with it. Further, no meaningful competitor has offered a la carte programming options, so the risk of losing any competitive ground by maintaining the status quo is low.

In the last few weeks, Kevin Martin, the chairman of the FCC, has come out with a new push to have cable operators unbundle their subscription packages and offer channels on an a la carte basis, with the primary goal being to offer "family-friendly tiers" that are free from "indecent" content. With surprising alacrity, many of the biggest cable operators have responded by announcing that they will introduce some kind of family-friendly tier in the near future.

The FCC's push for these tiers coincides with an increasing perception of a proverbial "elephant in the room" that few programmers or operators want to discuss, but which many consumers, as well as other participants in the video value chain, are well aware of. That "elephant" is the ever-growing disconnect between the subscription packages the cable industry has created, and consumers' TV viewing habits and purchasing preferences.

Today's Subscription Packages — More Choice, Less Value
The cable industry correctly observes that vastly more programming choices have been created as a result of the subsidizing role that large established channels play in supporting newer channels with smaller audiences. There is no doubt that this is true. Startup channels benefit from being included in mainstream packages which allow viewers to browse by them and gain exposure.

But, despite this exposure, many of these newer channels are niche-oriented and only draw relatively small audiences. Research continues to show that consumers do not actually watch more than 12–15 channels. That means that in a 60-channel lineup, the channel surfer stands no better than a 20–25% chance of landing on a channel that they care about. Then factor in the odds that they'll be satisfied with what those particular channels are showing at that particular moment, and the perception that "nothing's on" really grows. This is the paradox that the basic channel lineup represents — lots of choice, but at an ever-decreasing perceived value by the consumer, particularly with rates continually on the rise.

I think the fundamental problem is that cable operators' traditional role as the decision-maker or gatekeeper for which individual channels should be included in the basic lineup, and how others should be placed on tiers, has become anachronistic in the digital age. Consumers want more power to choose, and cable's reluctance to provide this power directly undermines the image that cable is trying to create for itself of being a technology-driven, consumer-friendly industry. The result is that a la carte arguments are perceived as consumer-friendly, while subscriptions, in general, are not.

Aside from potential changes on the regulatory front, cable's current subscription packages are also creating a huge opening for new video aggregators to come into the market and exploit cable's vulnerabilities. If you question this assertion, try to envision Steve Jobs at Apple looking at the status quo and then sitting down with a blank piece of paper with the goal of creating a truly consumer-driven video subscription service. If what comes to mind feels radically different than today's models, then you have a sense how large the elephant in the room is.

Simply put, cable operators and programmers need to figure out a new, more customer-centric approach to subscription services. This approach would allow consumers to create bundles of channels that appeal to them as individuals and reflects a far stronger, individualized value proposition.

A More Consumer-Driven Approach to Subscriptions
The internet and the media services that have been spawned from it (e.g. Netflix, Rhapsody, TotalVid, etc.) present a more simplified, grounds-up subscription paradigm whose primary emphasis is consumer choice. These services all provide a relatively simple value proposition to the consumer: the aggregator creates the library and sets a fair price for the consumer to gain differentiated levels of access to it (limited or unlimited). The consumer then has the freedom to choose the content they prefer, thus optimizing the value of their individual subscription.

This straightforward approach, which always leverages the internet as the customer interface and sometimes as the delivery medium, makes it extremely easy for consumers to place a value on the subscription and its monthly price. It is the kind of clear-eyed business philosophy that is required of companies that compete on the internet, where customer switching costs are very low. It also provides a good model for how new video services are going to be offered — either from cable or new competitors.

A stronger subscription model for cable might be for consumers to choose any 10 channels for $20 per month, or any 20 channels for $40 per month, and so on. This could be modified slightly for surcharges for specific high-cost channels. My guess is that cable operators would be interested in this approach, because they could adjust the prices to preserve their current margins. This approach would also be a real differentiator from satellite offerings and steal some of the thunder from upcoming telco video launches.

The bigger challenge is to get programmers to agree to such a model, which exposes both large and small channels to free market forces. In this more competitive environment, the true appeal of today's channels would be exposed. In the recent a la carte debate, many cable programmers have declared that their smaller or newer channels could not have been funded or developed without the current cross-subsidy subscription approach. By exposing these channels to consumers' unencumbered choice, the truth about which ones should have been funded in the first place will be well-understood. This is not entirely bad news though — life as a 24 by 7 linear network is no longer the only path to profitability. With new distribution platforms like broadband, these channels can be reconfigured for broadband and still do extremely well serving their audiences.

2006 — Video Competition Heats Up
In 2006 we are going to witness an explosion of customer-focused video initiatives. Some of these have already been announced, and some will be soon. They are all being enabled by broadband internet connections, which allow new providers to bypass the cable operator in delivering their new services.

These services will reflect a more grounds-up, free market approach, whereby consumers will have much greater empowerment and choice to put together the specific video content they value. It is far from clear which particular packaging concept will work the best for consumers, content providers and the aggregators themselves. 2006 is going to be a big year for experimentation with things like subscriptions vs. a la carte, fee-based vs. advertising-supported vs. combined models, TV-based vs. hybrid PC-models, live vs. downloaded and fixed vs. portable all in play.

The key challenge for the cable industry is to recognize that tomorrow's successful subscription models will emphasize the consumer's ability to choose the content that they value. Letting go of some of the control they have traditionally exerted is not going to be easy for cable industry veterans. Consumers want the freedom to choose, and in today's hyper-competitive environment, there is no question that someone is going to become very successful providing it for them.