Paying for the Goods

A fierce battle ensued at the beginning of 2010 over News Corporation's demands that Time-Warner Cable increase fees for the right to distribute the Fox Broadcasting network. Media behemoths fighting over money? Predictable, but nonetheless significant. The issue is who pays how much for the right to distribute content in all the ways it reaches consumers. Cable television (programming), Amazon's Kindle (books), iTunes (music), and Google (news) are all part of the same continuum in which the mostly flush disseminators are doing better than the strapped creators. Calibrating that imbalance is arguably the biggest challenge the entertainment and information worlds face at the start of a new decade.

The facts are different in each case, but the principle is the same: splitting the proceeds of sales of the product. Fox Broadcasting (American Idol, 24, and so on), like all network television, is free, advertising-supported, and accessible to everyone with a television. Fox cable channels: FX, Fuel, Speed Channel, Fox Reality Channel, Fox Soccer Channel, Fox Sports in Espanol, Fox Business Channel, and Fox News are only available to subscribers who pay monthly fees, which Time-Warner (and other cable systems) funnel back to the programmers at negotiated rates. Now, News Corporation wants a major increase in what cable pays for the right to the broadcast channel also. Network television's dominance of the airwaves has been drastically reduced in recent years because of the drop in advertising revenue and audiences, and because it has not received comparable fees from the cable companies. That's what News Corporation wants to change and, from all accounts, it made headway with Time-Warner, although settling for less than originally asked.

As a way of getting around the Time-Warner-Fox conundrum, Comcast, another of the country's major cable companies, is buying NBC-Universal from GE so it will control the full process from creation to delivery and can set its own terms. The Justice Department will decide whether giving that much power to a single company unfairly limits competition. This is not a new problem. As late as the mid-twentieth century, Hollywood movie studios owned theaters where their films were shown (MGM-Loews, for example), but that practice was ended on anti-trust grounds, the same basis under consideration again today.

Amazon, through the Kindle, is unquestionably the most formidable distributor of e-books. Exactly what that means to Amazon's bottom line is obscured by the fact that the company's financial reports about the device and book sales are presented rhetorically, while the data itself is confidential. After Christmas, Amazon declared that, on the holiday, for the first time, it sold more e-books than printed copies as new Kindle owners tried out their machines. But on that same day, Galley Cat, an industry blog, said that 64 of the top 100 Kindle "bestsellers" were actually free, as are the great majority of digital books because they are out of copyright. The point is that Amazon's profits from Kindle are coming from the distribution device and not from the content. Everyone in publishing knows that Amazon eventually will demand a greater percentage of the margin it gets from the e-books it sells than is now the case.

The biggest question of 2010 will be the impact of the expected appearance of Apple's "tablet," which will have a screen designed for book and magazine reading with the irresistible technology base of the iPhone and iTouch. Apple's supply of content doubtless will be priced--and proceeds divided--competitively. But the history of iTunes shows that the content creators will have to fight for every percentage point of margin over a minimum that will be determined to its advantage by Apple. That is what happened in the music industry, of course, when Apple set the price of music downloads at $0.99 for a single track. While music is now sold in vast amounts that way, the share to the producers is much smaller than it was when they were selling so many CDs.

Finally, there is the question of paying for news, now available for free from Google and other search engines which make a fortune from search-related advertising. The great news organizations--Time, Inc., The Washington Post Company, The New York Times Company--all followed the broadcast network model of free content to mass audiences supported by advertising as a digital strategy. With the rise of the Internet, that model failed. If they had chosen the cable television approach (subscriber fees and distribution payments to supplement the advertising), the current crisis for journalism would, at the least, look very different.
So there is a direct link in News Corporation Chairman Rupert Murdoch's threat to remove his news content from Google unless he gets compensation for it and his battle with Time-Warner over fees for Fox Broadcasting. Murdoch wants to be paid for the information and entertainment his enterprises provide by people who make money from the dissemination of it. Whatever else you think about Murdoch, that argument is reasonable. But the resulting tug-of-war is an eternal one and the record shows that whoever wins this round is likely to take maximum benefit from whoever loses. That's business.

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Peter Osnos is a contributing writer for The Atlantic. He is the founder and editor at large of PublicAffairs books and a media fellow at the Century Foundation.

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