Cable discounts could pinch programmer profits

While the prospect of cable operators offering a la carte pricing any time soon remains slim, the discounted tier is clearly taking root.

In the wake of a wave of subscriber losses that cable operators contend are largely driven by the shaky economy, Comcast has quietly expanded a low-cost trial offering in select markets that not only provides fewer channels than basic cable but additional options that group together select channels by programming genre.

The package, known as MyTV Choice, began testing in Charleston, S.C. last week, after being deployed in western New England and Seattle over the summer.

The expansion comes on the heels of Time Warner Cable’s announcement last month of plans to expand its own discounted tier, TV Essentials, across its East Coast footprint. Like MyTV Choice, the tier is made affordable by leaving out some of the channels that are the most expensive to operators in monthly fees paid to programmers, including Disney-owned ESPN.

While these tiers have had minimal traction in the marketplace to date, their increasing visibility at the nation’s two biggest MSOs raises new questions. The prospect of even slight growth for discounted tiers could impact the bottom line at content companies since they get paid on a per-subscriber basis for the channels that get left off. And for consumers, Comcast’s variation on the discounted tier with MyTV Choice may be as close to a la carte as they’re going to get.

“To assume that no one is going to take these packages is pretty naive, especially because Time Warner Cable tested the package with at least some success with very limited marketing,” said Michael Morris, media analyst with Davenport & Co.

The deployment of new tiers is intended to give price-sensitive consumers an alternative during tough economics times to the increasingly costly standard subscriptions. Cable operators suffered huge sub losses in the second quarter of this year.

Last month, a Reuters report raised the specter that cable-industry woes were prompting some smaller operators to introduce a la carte programming — a controversial possibility given that programmers and MSOs have long held such an arrangement would destroy their current business model.

Another factor was an expensive new long-term ESPN deal for NFL rights that spurred reports Dish Network was looking to ditch the all-sports network from its channel lineup rather than pass on to consumers the cost of expected fee hikes.

ESPN charges MSOs an estimated $4.69 per sub per month, according to SNL Kagan — roughly four times the second-most expensive network, Time Warner’s TNT ($1.16), which is also not available on Comcast or TW Cable’s low-cost tiers. Nor is News Corp.-owned Fox News Channel (78¢).

Every dollar spent on discounted tiers won’t go to content-company coffers, argues Morris, who calculated that even a 1% drop in ESPN’s sub base could cost Disney $60 million in affiliate fees.

“Investors are unlikely to worry about 1% or 2%,” said Morris. “But what if it grew to 10% or 12%? That would be real financial impact.”

That said, sources familiar with affiliate agreements note that tiers can only become so popular before they violate MSOs’ contractual agreements with programmers. Most channels require placement on the first or second most penetrated channel packages an MSO offers.

Too much traction for a tier would trigger the re-insertion of the channel, which would prevent the very discounting that fuels the tier’s appeal.While TV Essentials has gotten a lot of attention since its rollout last November, discounted tiers have been around for years. Comcast, Cox, Cablevision and Dish Network are among those that offer them with negligible returns.

Some saw TV Essentials as an empty gesture to please Wall Street, where cable operators have been roundly criticized for not being nimble enough against upstart competitors like Netflix.

But unlike typical discount tiers, Comcast’s new tier is designed to appeal to consumers looking for price as well as flexibility. MyTV Choice offers a “My Starter” tier for $25 or a “My Starter Plus” tier for $45, the latter retaining various ESPN channels removed from the former package. In addition, there’s $10 supplements for channel packages themed around kids, news, movies and entertainment. The offering varies a bit city to city as Comcast figures out the best approach.Breaking the cable bundle up into discrete blocks isn’t a new notion; Comcast even consulted with cable companies abroad that employ the model before pursuing its own, including Canada’s Shaw Communications and Australia’s FoxTel, according to a spokeswoman.

But Comcast’s model may represent the only realistic middle ground between the unlikely prospect of consumers cherry-picking channels and the existing bundles of channels that leave little room for flexibility. Even operators wanted to do a la carte — and no major MSO is on record as saying such — they lack the rights and technology to implement it anytime soon.

Said Morris, “I don’t think true a la carte is ever going to happen. At this point it appears structurally impossible.”

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