Prisoners of Cable

Why we can’t break free from our TV overlords
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Kevin Van Aelst

On the Internet, news and entertainment famously want to be free. But in June, tens of thousands of people staged an online protest that was bizarre for its medium. They offered—begged, even—to pay an entertainment company for its content. Almost as strangely, the company told them: “No way.”

The Web site TakeMyMoneyHBO.com attracted more than 160,000 people in 48 hours, each one promising to pay HBO an average of $12 a month for its streaming app, HBO Go, which offers every episode of the channel’s original programming, plus movies, but is currently available only to cable subscribers. The cheeky site might seem insignificant, but it created a media firestorm around the question of cable TV’s future. Jeff Bewkes, the CEO of Time Warner, the media company that owns HBO, tried to dismiss the issue, saying, “The whole idea that there’s a lot of people out there that want to drop [cable] and just have a Netflix or an HBO—that’s not right.” And indeed, pay-TV services added 200,000 U.S. customers in 2011; HBO and Cinemax subscriptions grew by 7 million globally in the first half of this year.

The cable bundle is under increasing popular assault these days, at least as measured by Web diatribes and water-cooler complaints. Nobody likes to feel forced to buy more than they want, and cable television sticks us with eye-popping bills for hundreds of channels that we couldn’t possibly watch even if we wanted to. The argument behind TakeMyMoneyHBO.com and its ilk is that this massive bundle could be easily unraveled and sold à la carte, by channel or even by individual show, if we just broke free of cable’s monopoly. Alas, it isn’t so simple.

Your monthly TV bill—if you belong to one of the 83 percent of U.S. households that subscribes to a pay-TV service—is in fact three bundles nestled inside each other. Cable channels (such as TBS) are bundles of shows. Media companies (such as Time Warner, which owns TBS) offer bundles of channels that they refuse to sell one by one. Finally, pay-TV companies—which I’ll call cable companies for short, but which also include satellite companies like DirecTV and telcos like Verizon—bundle and sell the media companies’ offerings. When you pay $80 or so each month for cable, roughly half goes to the cable company to pay for the cost of building and maintaining the infrastructure to transport the content, and the other half goes to the media companies, which divvy it up among channels.

When you turn on your television, there is a 95 percent chance that the channel you tune in to will be owned by one of just seven media companies, such as News Corp (which owns Fox News Channel) or Viacom (which owns Comedy Central). The Big Seven use their oligopolistic power to drive a hard bargain. Cable providers that want to run Viacom’s popular networks, like Comedy Central, must also agree to buy its less popular channels, like MTV2. After dealing with all seven media companies, the cable providers are left with something millions of households will recognize: a bloated offering of channels at an arrestingly high price. The bundle isn’t something Comcast or DirecTV invented to make their customers hate them. It’s something that the largest media companies demand, in take-it-or-leave-it fashion.

But media companies are not the only players with a big stake in the current system. Channels, too, find it congenial to their interests. HBO is a perfect example: Weaned off its media company, Time Warner, HBO would see its costs skyrocket. It would have to build a streaming infrastructure and pay for its own marketing, customer service, and billing. More than 90 percent of HBO’s content is viewed on a television, versus 1 percent through HBO Go. The channel is not about to blow up its business model for that 1 percent.

The benefits of a stable cable bundle are felt all the way down to the show creators. YouTube is a decent outlet for cheap, straight-to-Internet shorts, but creating a full-fledged TV show is extraordinarily expensive and freakishly risky. Established channels provide advertising, branding, and initial attention, plus steady and predictable financing.

If your cable bundle is a Gordian knot, there are really only two ways to imagine it being undone. It might unravel slowly, if today’s younger and preternaturally distracted generations grow up not caring enough about high-production-value cable TV to pay for it. Or a giant might come along and play the role of Alexander the Great, cutting the cable bundle by creating a brand-new way to distribute content. This would take more than cleverness. It would take a lot of money.

Still, the techies and cordless cry out: “Where is our Alexander?”

The gadget war among the largest U.S. tech companies started on computers, shifted to phones and tablets, and is moving, slowly but certainly, back toward that original home screen: the television. Some tech evangelists pray that a swashbuckling disrupter might radically transform how (and how much) we pay for TV—the way the Internet made newspapers effectively free, or the way Napster and Apple forced music labels to sell their songs à la carte for 99 cents a pop.

Apple has realized that it doesn’t have to beat Comcast and Verizon to own your living room. It only has to join them.

But more bad news awaits these hopefuls. The tech giants now eyeing television—Apple, Google, Microsoft—don’t care about à la carte programming as some philosophical ideal. They see the television as the next logical battleground in the fight for your attention and your money, and their plans do not intuitively lead to an anti-bundling strategy.

Take Apple, for example. The company already produces Apple TV, a device resembling a hockey puck that streams content from the Internet to your television. But some observers predict that the company is on the verge of offering something much bigger—a sleek screen that does to the TV market what the iPhone did to the cellphone market. The most fully imagined vision of this so-called iTV comes from a mammoth report issued in February by Jefferies, a global investment bank. In its most expansive form, iTV might offer live programming, a gaming platform, full Internet access, and apps like Netflix and a Skype “on steroids”—all combined with a voice-and-gesture interface that replaces our hideous remotes, and all deliverable to any Apple device.

A full-blown iTV would complete a hat trick of screen domination for Apple—phone, computer/tablet, and TV—and the ability to move video between devices might create a kind of “halo effect” that would make each product more alluring. But Apple is primarily a hardware company, and its profits lie primarily in selling you devices. To change the economics of television programming, Apple would need to take on the cable providers by striking deals with media companies, starting with the Big Seven. That’s just not happening. Instead, as The Wall Street Journal reported in August, Apple is working with cable providers to bring content to Apple TV and its potential successors, having long ago ditched the idea that it wanted to be in the business of haggling with Viacom over the right cost of the giant media company’s channels. Apple has realized that it doesn’t have to beat Comcast and Verizon to own your living room. It only has to join them.

With Apple’s TV project looking less than Alexandrian, some tech evangelists have transferred their excitement to Google, which announced in August that its new Fiber network will soon begin delivering ultra-fast Internet and TV to the residents of Kansas City. But Kansas City is just a pilot site, and as James McQuivey, an analyst at Forrester Research, explains, “In a strange way, what they’re promising isn’t disruptive at all.” Google isn’t changing the TV game. It’s simply building a super-fast Internet network—in one medium-size market—and adding a traditional cable bundle to make its offer competitive for residents who already get their Internet and TV from Time Warner Cable. Even if this project proves a spectacular success, taking it nationwide could cost between $100 billion and $200 billion.

Finally, there is Microsoft, whose ambitions to build a cable competitor (by using the Xbox to sling video streamed through the Internet to your TV) hit a wall in January when, like Apple, it concluded that after dealing with the media companies, signing up customers, and streaming the content, it would have no advantage over Big Cable in price or service. Instead, Microsoft is simply working with the cable companies: Xbox Live, Microsoft’s Internet-enabled gaming console, offers a kaleidoscope of content that includes TV-on-demand from Comcast, plus HBO GO, Hulu, live baseball from MLB.tv, and an array of apps and video games. This all-aboard strategy may in fact pose dangers to cable in the long run: one of Big Cable’s challenges will be keeping audiences’ attention from flitting to other forms of video entertainment, and Xbox Live lets you very easily toggle from one form of entertainment to another, all on the big screen in your den. But you get the option of first-run, premium TV only if you buy a cable bundle.

Other challengers may emerge. Netflix, for instance, is now producing original content—like the David Fincher and Kevin Spacey project House of Cards and a new season of Arrested Development—and will be providing it directly to subscribers of the streaming service. But Netflix plans just five such shows—and it won’t be selling them à la carte. What’s more, it has found these shows very expensive to underwrite. House of Cards alone reportedly sold for $100 million, nearly half of what Netflix paid to secure the rights to dozens of older CBS shows such as Cheers and Frasier; Netflix’s profit margins, meanwhile, have been declining. Ultimately, if many deep-pocketed companies were willing to bankroll a large number of good shows and sell them individually, the oligopoly of existing media companies would be threatened, and the bundle might be broken. But there’s little sign that this day is coming anytime soon.

Cable’s proposition to consumers is simple: if you want the new, good TV shows, you need the bundle. Straight-to-Web television, like YouTube’s Premium Channels, is free, but the vast majority of it isn’t very good. Netflix and Hulu have deep reservoirs of great content, but the vast majority of it is old—traditional media companies would never give a cable competitor a sweetheart deal on new TV shows, for fear of killing their cash cow.

As a monthly fee, cable feels like a rip-off. But as hourly entertainment, it’s not.

The problem, of course, is that TV entertainment is getting more expensive every year. Asked to name his most pressing business concern, Marcien Jenckes, the senior vice president of video services at Comcast Cable, didn’t hesitate: “The rising cost of programming.” Consider that in 2011, ESPN agreed to pay the NFL almost $2 billion a year for the rights to Monday Night Football—a 73 percent increase over their previous deal, reached in 2006. To make back the money, ESPN’s parent company, Disney, will demand higher fees from Comcast, which will turn around and ask some 22 million subscribers to pay more each month.

At some point, consumers may decide, en masse, that they won’t be force-fed anymore. But that hasn’t happened yet. The HBO Go campaign was just the latest revolutionary yelp of the “cord cutters”—those who’ve canceled their cable subscriptions to rely on video streamed over the Internet via Hulu or Netflix. One report estimated that more than 2.5 million people canceled their cable subscriptions between 2008 and 2011. But despite hard times, total pay-TV subscriptions held steady at about 104 million.

In the past few years, a Cambrian explosion of video and gaming content has created a new world of distraction for audiences on their computers, phones, and tablets. But plenty of families apparently like what they’re getting for $80 a month, compared with the alternatives. In fact, when Time Warner Cable offered a cheaper package of channels called “TV Essentials,” the company reported that most new customers opted for a more expensive package in order to get desired channels like ESPN.

Maybe these families are just being economical. Compared with onetime mass-entertainment purchases, $80 is a lot of money. But in a four-person household where each member watches three to four hours of TV a day—the national average—that comes out to only about 20 cents per hour of entertainment. That value is six times better than a magazine you buy off a stand and read for four hours. It’s 20 times better than a two-and-a-half-hour movie watched in a theater. If you bought the Xbox game Madden NFL 2013 in September, you would have to play it for two hours every day until the Super Bowl to get the same per-hour value. As a monthly fee, cable feels like a rip-off. But as hourly entertainment, it’s not.

The knottiness of the cable bundle is discouraging news for many consumers, who are surely thinking, If music was so easy to disrupt, why is video so hard? Well, for many reasons—downloading a single song is much easier than live-streaming an event to your computer; the demise of the music industry has taught every content owner to cling ferociously to rights. But ultimately, one reason trumps all others. Television is good entertainment because it is produced in painstaking, costly fashion—and as much as we hate our cable bills, someone has to pay for that. Indeed, it’s no accident that as pay-TV has proliferated, and costs have risen, we’ve also entered a golden age of television. Twenty years ago, who could have even imagined something as lush as Game of Thrones, as stylish as Mad Men, or as morally fraught as Breaking Bad?

As for the cord cutters, they should be thanking those families whose monthly cable bills enable the production of the shows they love to watch on Netflix or Hulu. Today’s pay-TV subscribers are in effect subsidizing the cord-cutter experience by paying top dollar for first-run programming, while the Cordless soak up the offerings more cheaply in later windows. Without cable, there wouldn’t be HBO Go. There might not even be HBO. Great TV only seems cheap to the Internet’s enfants terribles because media companies insist on charging for it elsewhere—and more than 100 million households still think the price is worth paying.

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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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