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October 29, 2010 6:57 AM

Only Ala Carte Can Permanently Resolve Fox-Cablevision Dispute

One of the biggest stories in communications today is the ongoing standoff between Fox and Cablevision over the rates Cablevision has to pay to carry Fox content. Cablevision refuses to pay what Fox wants to charge and therefore millions of Cablevision subscribers have missed out on programming like the MLB playoffs over the last few weeks.

While there's been much gnashing of teeth over the need for the FCC to step in forcefully to resolve this situation, there's only one permanent solution to problems like these: ala carte TV.

"Ala carte TV" generally refers to the ability for customers to decide what individuals channels they want to subscriber to, rather than having to pay for a package of channels determined by their cable provider.

Though far from a new idea, it's most often talked about in terms of how its potential for maximizing consumer value in terms of what they get for what they pay. But I want to point out today how valuable ala carte TV could be for ridding us of these silly disagreements between content providers and cable operators.

To start with it's important to understand the basic model of how TV works.

To deliver TV service, cable operators must pay content providers a monthly per channel fee. This fee can vary dramatically based on number of subscribers and how many additional channels are bundled from a particular content provider. The cable operator compiles a package of channels and then charges customers to cover these costs and hopefully turn a profit.

Where this system starts breaking down is during the yearly negotiations when content providers try to get cable operators to pay more to carry their channels. While you can't blame content providers for trying to maximize revenue, especially those that boast the best ratings, the challenge for cable operators is they have little leverage.

A cable operator can't be competitive without key channels, like ESPN for example. So if ESPN wants to jack up their rates, there isn't necessarily a whole lot cable operators can do other than eat the costs or pass them on to their customers.

It's this dynamic that leads to an annual hike in cable TV prices as well as the tension that creates situations like the current standoff between Fox and Cablevision. Cablevision decided it didn't want to pay what Fox is demanding, so Fox cut off the spigot of their content.

So how can ala carte solve these issues?

It boils down to the simple fact that the current paradigm of TV doesn't allow for true market dynamics to work their magic on keeping value high for consumers.

Sure a channel's viewership has some impact on pricing, but there's no direct relationship between content provider and consumer. Instead, everything's run through the middleman of the cable company.

What I'm postulating is that in an ala carte world where consumers pay directly for the channels they want, content providers will have to deliver enough value to justify charging higher prices, otherwise they'll risk losing viewers.

Right now content providers can raise rates and either get the cable companies to pay them or they take the battle to the court of public opinion, casting cable companies as the bad guy for keeping content away from viewers. Cable companies, then, have been increasingly trying to demonize the content providers for constantly raising rates.

But what if instead of fighting that battle they just got out of the way and instead of being the middle man became the facilitator for establishing direct relationships between content providers and subscribers?

This way instead of having to deal with managing ever higher rates from content providers, they could establish a model whereby they take their cut of whatever revenues are generated through their system and leave it up to the marketplace of content providers and consumers to determine what's a fair price for any given channel.

Of course consumers stand to benefit by having greater control over what they pay for, but more importantly we could establish a new market dynamic for TV content that could solve issues like Fox-Cablevision forever.

Now, I'm not so naive as to think this is really going to be that simple. For starters, I know the contracts content providers have with cable operators are really convoluted and pricing's based on maximum distribution across a system. Also, cable operators have been reluctant to cede their middle man position and embrace the ala carte paradigm because they think they need to play this role to maximize profit.

But I say let's take a hard look at the current paradigm, realize that it's broken, and that there's a better way. Most importantly we have to come to grips with the fact that until we can establish a true marketplace for content, where the interests of consumers are what's directly determining what content providers can charge, we'll continue to have issues like Fox-Cablevision popping up.

So if the FCC really wants to resolve this situation, let's not take the easy way out and just try to fix the symptom. It's time we acknowledge that what's best for consumers is trying to cure the disease of a broken marketplace that's divorced from demand and driven too much by supply.

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