Griswold responded:
Ok.
Ok, I agree: shopping channels are license-fee-free to cable/satellite operators, and they do indeed pay commissions. I'm not convinced that a sales commission is the same thing as a "slotting fee," but I agree that it produces the same result: it's an incentive for the cable/sat company to carry the channel on the basic tier.
As to how shopping channel operators allocate the commission to the right company, that's a monumental hassle fraught with errors. Not only do they have to distinguish between cable and sat; they also have to determine which cable franchise within a given zip code the caller is calling from. In the real world, the biggest cable company in the zip code often gets the commission no matter where the caller actually calls from.
BTW, "MSO" stands for Multi-System Operator. I don't think satellite companies would appreciate being referred to as MSOs.
I'm afraid you've got it backwards: in most cases, cable TV and satellite companies pay the programmers for the right to carry the programming. Here are the typical situations:
NON-BROADCAST COMMERCIAL: Non-broadcast adwvertising-supported channels carried on basic or extended-basic tiers are subject to monthly license fees. This fee varies from a few cents per subscriber per month all the way up almost $3.00 per sub per month for ESPN.
Under most licensing contracts for ad-supported non-broadcast programming, channels carried on the basic tier usually incur lower license fees than channels carried on upper tiers. So I suppose you could argue that this fee differential constitutes a "slotting fee" for carriage on basic.
NON-BROADCAST PREMIUM: Non-broadcast advertising-free premium channels (HBO, Showtime, etc.) are subject to an even larger license fee, typically 40% to 60% of the retail price.
C-SPAN: The three C-SPANs, though non-commercial, are largely funded by license fees. However, C-SPAN also receives some foundation support.
NON-BROADCAST FREE: There are several non-commercial services that are free of any fees (no cash changes hands in either direction): religious channels (funded by viewer contributions); NASA-TV (funded by taxpayers); Classic Arts Showcase (funded by The Rigler/Deutsch Foundation).
COMMERCIAL BROADCAST STATIONS: Commercial broadcast station licensees have been trying for years to extract concessions from cable/sat companies in exchange for giving them "retransmission consent" to carry their broadcast signals.
LAUNCH ASSISTANCE: In this one isolated case, programmers sometimes make payments to cable TV companies. In this situation, a programmer may agree to underwrite the capital cost of the equipment needed to add its channel (receiver, descrambler, modulator). If the programming is on an oddball satellite, the programmer may even pick up the cost of the antenna. This payment may be in the form of a check, or it may be a credit against future license fees.
One of the biggest launch-assistance deals occurred when HBO began scrambling its signal. HBO itself purchased the descramblers directly from the manufacturer (Jerrold) and had them drop-shipped to affiliates. As part of the deal, HBO had Jerrold program each descrambler for the specific headend where it was to be used, so it was ready to go out-of-the-box.
After HBO started scrambling, most other programmers followed suit, all using the same Jerrold Videocipher II descrambler. Some (but certainly no all) programmers picked put the cost of the descramblers.
Scrambling caused many cable systems to face an even bigger expense: rack space. Those old VCII descramblers were monsters: each took up four rack units (7 inches). Adding a blank RU for cooling resulted in a total of 8.75 inches of new rack space for each scrambled channel. A headend that once fit nicely in two racks suddenly filled four or five racks.
Some cable systems had to build additions to their headend buildings just to accommodate scrambling. I can assure you that no programmer ever picked up that cost!
The vast majority of cable systems are channel bound, and will remain so until the conversion to digital is complete. Adding new bandwidth to carry new channels right now is all but economically impossible for most cable systems.
I monitor SCTE list, where there are countless posts from cable techs trying to squeeze more capacity out of existing bandwidth. Most of this discussion centers on adding HDTV broadcast signals; the only new analog channel I've heard anything about lately is RFD-TV. After DirecTV and Dish added it, many rural cable systems found that they had to add it in order to stay competitive with satellite.
They're called "avails." Not all cable systems use them.
Large cable systems (>~2000 subs per headend) typically use them to partially offset the license fee. But the cash flow derived from running (or contracting with) an ad sales/ad insertion business rarely comes close to offsetting the entire fee.
Most smaller cable systems don't even do ad insertion (except maybe on The Weather Channel crawl) because the cost of doing it exceeds the potential revenue.
The Boflex/ED/Fat Burner ads usually come from the network rather than the local cable system. If a cable system doesn't sell an avail, the network ad passes through by default.
So do the license fees. So does the cost of an ad insertion business. So do many the costs of running customer service.
It's certainly true that cable and satellite companies generate revenue from the markup between the license fee for a given channel (wholesale price) and the incremental revenue derived from carrying that channel (retail price). Losing that programming revenue (net of the cost of license fees, ad insertion, and customer service) will indeed be a net loss of revenue. But it's a relatively small percentage of the company's total revenue.
A much bigger chunk of the revenue goes to offsetting the cost of building, owning, managing, operating, maintaining, and amortizing the infrastructure:
- For satellite companies: signal reception, signal processing, uplink facilities, satellites, TTC (telemetry, tracking and command).
- For cable companies: signal reception, signal processing, headend, distribution network, customer drops.
Under the current business model, this revenue is buried in the price of the basic tier of programming. If direct-sale-from-programmer-to- consumer were to become a normal business model, then cable and sat companies would have to impose a separate network access charge. Just like ISPs charge for internet access right now.
Parenthetically, all this raises a fascinating question. Now that CBS has succeeded in imposing license fees for its O&O stations, what would happen if direct-sale-from-programmer-to-consumer actually became a normal business model? How much will consumers be willing to pay for CBS?
Probable answer: the "network access fee" would include all local broadcast stations whether consumers want them or not. Congress is not about to pick a fight with the NAB.
For that matter, the fee would probably include PEG access channels as well. I doubt that Congress is interested in picking a fight with NATOA and its hundreds of member LFAs.
Gasoline and oil are not advertising media; the revenue received by the producers comes exclusively from the sale of the product.
Motion pictures are not, at least in theory, advertising media; the revenue received by the producers comes exclusively from the sale of the product (theatrical-release license fees, DVD rentals, DVD sales, syndication sales etc.). Of course, the recent rise in product placement provides an additional source of revenue -- and that really is a case of slotting-fee payment!
Advertising-supported non-broadcast television channels clearly are advertising media. The producers receive revenue from two sources: sale of the product (license fees from cable and sat companies) and advertising. As such, the producers have a financial interest in making sure that their products are exposed to the largest possible audience. And that's why cable TV and satellite licensing contracts inevitably stipulate that the channel must be carried on the most-widely-distributed tier, typically basic.
From the producers' point of view, the beauty of this model isn't just the sum of the two revenue streams; it's the way in which the two revenue streams reinforce each other:
- License fee revenue reinforces advertising revenue. There's an old adage in the advertising business that "paid advertising is worth more than free advertising." A consumer who pays for a publication (print or video) is more likely to read/watch it than a non-paying consumer.
- Advertising revenue reinforces license fee revenue. Ad revenue enables the producer to provide a better product (print or video), thus enticing consumers to spend more time reading/watching it, and, by extension, enticing more consumers to buy the product.
Broadcast stations and networks, on the other hand, rely exclusively on advertising revenue (or at least they did until CBS managed to extract retransmission-consent payments). Consequently, broadcast programming must be designed to attract the widest possible audience. Or, as some folks might say, it has to appeal to the lowest-common-denominator audience.
Whether or not advertising-supported non-broadcast programming is "better" or "of higher quality" than broadcast programming is a subject I won't touch. I will conjecture, however, that if non-broadcast programming were so popular with mass audiences that advertising alone could support it, broadcast networks would be carrying it, and advertising *already would be* supporting it.
And that brings me back to the issue that started this thread: the practice of broadcast networks offering programming over the internet. Yes, these programs are free, but they include advertising (apparently unavoidable). And, so far at least, the only programming being offered is the same stuff that they carry on their broadcast networks: 100% advertising-supported.
Non-broadcast programmers are far less likely to offer their products on an advertising-supported-only basis. Not only do they depend on license fee revenue; they also depend on the exposure they get from being carried on the basic tier.
Of course, they could offer their programming for a fee, with or without advertising. But as I've noted before in this space, if every non-broadcast ad-supported channel had to survive on its own as a retail product, its price would rise to retail levels. And if it couldn't survive at that price, it would disappear, notwithstanding your "specious" argument.