Cable’s 40-year Wait
By Stewart Schley
In the post-neutrality era, John Malone may finally get his wish: payments from programmers
As always, John Malone was a step ahead.
I was barely into a preamble about how the digital application Snapchat was turning the tables on the pay-TV business model when he stopped me in mid-sentence. “I know,” Malone said. “I tried.”
This was July 2016. Malone, the chairman of Liberty Media, had agreed to an hour-long interview with Broadband Library, running through seminal moments in cable’s technology history. What Malone had “tried” doing, long ago, when he was CEO of the industry giant Tele-Communications Inc., was to convince programmers that they should pay — rather than be paid — for distributing their video signals through cable television systems.
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That idea seems preposterous in the context of today’s multichannel pay-TV business, where companies like 21st Century Fox, Disney-ABC, Discovery Communications and others collect billions of dollars in rights fees from their cable affiliates. Comcast alone spent $9.7 billion through the first nine months of 2017 for TV channels and video-on-demand programs.
But during the 1980s, as new cable channels were beginning to percolate, Malone believed the balance of power was on cable’s side; that programmers, hungry to reach American households, should be willing to pay for the right to ride the pipe.
The reality, as it turned out, was different. Cable companies proved to have a bigger economic need for content than programmers had for distribution. Or maybe the programmers were just better negotiators. Either way, cable ended up with a virtuous cycle where more channels attracted more subscribers, which created more cash flow to plow back into more channels. It all worked beautifully, so that in the end Malone and his colleagues had little to complain about. Both camps made money.
The same symbiosis hasn’t translated to the new age of “over the top” video. YouTube rides over the same pipe that puts HBO and ESPN into the nation’s homes, but it shares none of the bounty with the cable guys — the guys who borrowed the money, climbed the poles, strung the strand, metered the signals and sunk those pale-green node cabinets into lawns. YouTube doesn’t produce recurring subscriber payments, divvy up revenue splits (ala HBO), or open up the occasional advertising avail that can be sold by cable affiliates, even though it depends on the same network infrastructure MTV and ESPN do.
Malone, a major investor in cable operations domestically (through Charter Communications) and internationally (through Liberty Global) could only watch from the sidelines as a new breed of OTT programmers drafted on cable’s infrastructure. What’s more, he believed Netflix, Google and others enjoyed outsized influence in Washington, D.C. “I look at the state of play today and I just see these global networking companies that are riding on other people’s infrastructure, like Facebook and YouTube and Netflix. They have the best of all worlds. They have really no capex, they have global reach, and they have politics,” Malone told me.
Malone was well aware of the business model flip-flop being brought to bear by Snapchat that same year. The online content sharing application, with a user base of 100 million, was doing what Malone had attempted to do decades ago: It was getting programmers to pay for a berth on the equivalent of a modern-day channel lineup. In this case, Snapchat’s “Discover” platform offered positions to a limited number of programmers, some of which compensated Snapchat for the privilege via revenue-sharing arrangements or outright payments. It was the same vision Malone had been forced to abandon as a prominent cable operator in the 1980s. Now, here was an OTT application bringing it to reality.
But times are changing. The recent reversal of net neutrality regulations, assuming it holds up against legal challenges, creates the possibility for broadband industry participants to rewrite the rules that govern relationships with content providers.
It may be possible, with the right business arrangements and with a keen sense of marketplace delicacy, to devise business models that create new economic alliances between cable distributors and Internet content providers.
Emphasis here on the word “delicacy.” The entire subject of net neutrality is loaded with combustible material, so much so that FCC chairman Ajit Pai, the main architect and energy force behind the repeal of the old rules, canceled a planned appearance at the recent CES event in Las Vegas after reporting he’d received death threats. NCTA — The Internet & Television Association — has been careful to state the cable industry will abide by an important manifesto going forward: no compromising IP traffic that flows over cable’s broadband pipes. “We do not and will not block, throttle, or discriminate against lawful content — and we will be transparent with our customers about these policies,” Comcast policy strategist David Cohen has explained to anyone who will listen.
But the pledge to preserve an open Internet doesn’t mean cable companies can’t negotiate business arrangements with content providers that depend on fast IP connections to the home. Comcast and Liberty Global, for example, are among cable companies that have reached business arrangements with Netflix which are designed to produce “win-win” results. Comcast leverages its marketplace presence and customer relationships to encourage more consumers to sample and subscribe to Netflix; presumably, the two companies divide the spoils through a revenue-sharing arrangement.
Malone outlined his vision for a changing-of-the-guard in an interesting if overlooked 2013 interview with Wired magazine, where he described a new ecosystem. “I wouldn’t be surprised if you’d see over-the-top service providers that are wholesale to the cable operator, retail to the consumer, and that are bundled and discounted with the broadband connectivity side of the product offering,” Malone told the magazine. “As that transpires, I think it’s going to change the game pretty dramatically.” What Malone was describing was a familiar view of the cable company as a go-between, a middleman connecting content to customers, and collecting a toll for doing so.
How this post-net neutrality vision might be rendered in specific product offerings isn’t clear yet. But let’s let our imagination run. It might be possible for cable companies, for example, to aggregate like-minded IP services and package them in a bundled offering over a dedicated slice of bandwidth. Perhaps it’s a grouping of health-and-fitness services rendered in 4K video resolution. Packaging them into a $2.99/month retail offering, applying quality of service treatment and excluding them from counting toward bandwidth caps (if there are any) might give cable a chance to offer a differentiated product that renders a high-quality, appealing user experience.
At the same time, there may be a chance to realize what Malone (and others) theorized decades ago: a way to get paid by the content community. Borrowing a gambit from Snapchat, it may be possible for ISPs to do business with participants that want to be part of popular service bundles — and are willing to pay to be there.
In this instance, nobody’s blocking, throttling or denying access to anything. What ISPs could do, however, is organize, optimize and apply QoS-assured bandwidth to certain online applications backed by the full participation and willingness of content providers. If that happens, Malone might still get his wish. He’ll just have gotten it 40 years later.
Stewart Schley,
Media/Telecom Industry Analyst
stewart@stewartschley.com
Stewart has been writing about business subjects for more than 20 years for publications including Multichannel News, CED Magazine and Kagan World Media. He was the founding editor of Cable World magazine; the author of Fast Forward: Video on Demand and the Future of Television; and the co-author of Planet Broadband with Dr. Rouzbeh Yassini. Stewart is a contributing analyst for One Touch Intelligence.
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