By Joe Flint
For four decades, the number of channels on the cable-TV dial
has risen with seemingly unstoppable momentum, bringing consumers
more choices than ever before.
Sounds great, except most people don't want to pay for all 189
channels they typically get.
Bundling scores of networks together has endured in large part
because the programmers and distributors both made huge profits
from new channels, rising numbers of subscribers and steadily
higher cable bills. Plus, until recently, it would have been a
logistical nightmare for distributors to sell channels
individually.
Now, pushback is building that could finally break the bundle.
Pay-TV subscriptions have peaked in the U.S., and viewers have
alternatives through Internet services such as Netflix, Hulu and
YouTube. Distributors like Verzion's FiOS are trying to find ways
to offer flexibility in pay-TV packages, drawing a lawsuit from
ESPN in the process. And networks including HBO and CBS are now
selling their content directly to consumers without requiring a
subscription to a distributor's big bundle.
Customers "don't want to be paying these huge cable bills for a
lot of channels they aren't watching," said CBS Corp. Chief
Executive Leslie Moonves at the Milken Global Conference in
April.
The typical pay-TV subscriber watches only 17 channels
regularly, according to a Nielsen report from last year. That is a
big reason why a new generation of viewers are finding online
alternatives to avoid paying the average $74 a month it costs for
cable. That basic bundle has expanded to more than 100 channels on
average, according to SNL Kagan, and is required for consumers to
then add on premium networks like HBO or Showtime or specialty
services like NFL Network.
So why does the bundle exist in the first place? It started with
John Walson, often credited as the father of the cable industry,
charging $2 for three local broadcast channels in 1948 in suburban
Philadelphia. Almost simultaneously, cable systems popped up in
Arkansas and Oregon.
For cable's first three decades, its primary purpose was
retransmitting broadcast channels to rural areas. By the late
1970s, that need was met and cable operators started investing in
original programming to boost subscriptions as satellite technology
allowed for mass distribution of a cable network.
"We had to invent more content to deliver," recalled Gus Hauser,
who was chairman of Warner Communications, the cable company that
launched Nickelodeon in 1979 and MTV in 1981. "Once there was
something to sell, the cable industry developed."
At the time, the idea of selling channels individually didn't
enter the equation. Tailoring packages of channels to customers was
technologically challenging, and the costs and management of
billing were seen as prohibitive.
"Back then the rates were reasonable and you could bundle all
these things. It was a bargain for the subscriber," said H.F.
"Gerry" Lenfest, who ran cable systems in the 1970s and 1980s and
is now owner and publisher of the Philadelphia Inquirer. By the
1980s, the typical cable bill was around $15 a month and popular
channels included ESPN, TBS, USA and CNN.
Bundling really took off in the 1990s, when the number of
channels exploded in large part because of new government
regulations. When the 1992 Cable Act allowed broadcasters to charge
distributors to carry their signals, many distributors balked at
paying for previously free over-the-air signals. Instead,
distributors such as John Malone's old Tele-Communications Inc.
encouraged broadcasters to launch cable channels. Distributors
would then pay fees for the new cable channels and continue to
carry local TV stations.
That led to the creation of networks like ESPN2 by ABC, FX by
Fox and MSNBC by NBC, but also gave power to the broadcasters: Each
time a deal was up for renewal, broadcasters would create a new
channel.
The growing power of cable programming led to a consolidation
craze. Disney acquired ABC, putting the Disney Channel and ESPN
empire under one roof. Viacom's big cable channels--including MTV,
Nickelodeon and Comedy Central--merged with CBS. NBC acquired
Universal Entertainment, which owned USA and other channels.
With that, Disney, Viacom and NBC were able to persuade
distributors to carry less-popular channels along with their strong
networks. If you wanted one, you typically had to get them all.
"The history of the pay-TV bundle is the history of a forced
private subsidization imposed upon the American public by America's
largest programmers," said Jimmy Schaeffler, chairman of the Carmel
Group, an industry consulting firm.
Programmers argue the bundle keeps lots of channels afloat that
otherwise would have a hard time surviving.
Now, though, distributors are creating smaller bundles of
channels like Dish Network's Internet-distributed Sling TV, Verizon
Communications Inc.'s new "skinny" packages of popular channels and
Apple Inc.'s planned slimmed-down offering.
And a wave of consolidation could give pay-TV operators even
more leverage. Charter Communications Inc.'s proposed $56.7 billion
purchase of Time Warner Cable Inc. could lead to further disputes
over bundling, particularly since Mr. Malone, a Charter investor,
has said rising sports costs unfairly burden both distributors and
subscribers who don't watch ESPN or regional networks.
Last week, at his holding companies' annual meeting, Mr. Malone
said new Web-based TV offerings and skinny TV packages will put
pressure on the traditional cable TV bundle. "The bundle will come
apart," he said.
Peter Rice, chairman of the Fox Networks Group, said at the
Milken conference in April that the relationship between
distributor and viewer will become a "much more one-to-one world."
However, he warned, "it's going to be a bumpy transition."
Indeed, legal battles over how content is sold have broken out
between ESPN and Verizon FiOS as well as Cablevision Systems Corp.
and Viacom.
ESPN is angered by Verizon's new offering, which doesn't
necessarily include ESPN in the core package. Verizon instead is
lumping ESPN and ESPN2 in a separate sports tier, which ESPN says
is a violation of its contract with Verizon. Verizon disputes that
and says ESPN is "suing consumers to force them into a one-size
fits all bundle."
ESPN may have the most money to lose from any fraying of the
bundle. ESPN, which is distributed in 95 million homes, costs TV
subscribers more than $6 a month--the most in the industry,
according to SNL Kagan.
Cablevision's legal beef with Viacom also has to do with how
channels are packaged. Cablevision claims Viacom forced it to pay
for less-popular channels in return for carriage of MTV,
Nickelodeon and other successful networks. Viacom said the suit has
no merit.
Patrick Parsons, a professor at Pennsylvania State University's
College of Communications, thinks fights over the bundle will soon
be akin to "debates about whether there should be headlights on
buggies," given how fast the means of media consumption is
changing.
"The technology of Internet-delivered TV programming is swamping
the argument of whether cable operators ought to bundle or unbundle
their cable channels," he said.
Write to Joe Flint at joe.flint@wsj.com
Access Investor Kit for CBS Corp.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US1248571036
Access Investor Kit for CBS Corp.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US1248572026
Access Investor Kit for The Walt Disney Co.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US2546871060
Access Investor Kit for DISH Network Corp.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US25470M1099
Access Investor Kit for Time Warner Cable, Inc.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US88732J2078
Access Investor Kit for Verizon Communications, Inc.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US92343V1044
Subscribe to WSJ: http://online.wsj.com?mod=djnwires