In today’s hard economy, the subject of rising TV programming fees concerns not just consumers, but pay TV providers as well. Cox Communications, which is one of the country’s oldest cable companies, is challenging the primacy of so-called most-favored nation clauses that give pricing advantages to large pay TV distributors when negotiating with programmers.
Like in most industries, everything is built to be “cheaper by the dozen”. This means that pay TV giants such as Comcast (23 million subscribers nationwide) and DirecTV (20 million subscribers nationwide), can negotiate a volume discount, which allows them to carry expensive cable channels such as ESPN or TNT at a cheaper price than smaller pay TV companies.
According to Cox, the volume discounts provide the big distributors an unfair advantage, since programmers will try to make up for the lost revenue by charging smaller distributors more. Basically, the ones who can afford it least are asked to pay more, while the ones who can afford it most are the ones getting the discount. It’s a perverse incentive that prohibits free market competition and limits consumer choices. It also perpetuates the status quo, which not only prevents incoming competition, but offers no incentive for the established pay TV giants to improve or innovate since customers have no other company to go to.
“As programming costs are shifted disproportionately to mid-sized and small multichannel video program distributors (MVPD), their customers are disadvantaged as higher costs make it more challenging for these MVPDs to develop the innovative services at competitive prices necessary to meet the offerings provided by the largest providers,” Cox Communications said in a statement to the Federal Communications Commission.
While Cox has more than 5 million subscribers (including 1.1 million in Southern California), it does not have the bargaining power of established pay TV providers like Time Warner Cable, Comcast, DirecTV, or Dish Network.
The discounts awarded to the large pay TV providers can be as much as 30% off the standard asking rate for a channel. Although discounts prohibited, Cox points out the Communications Act “does not permit discrimination against smaller MVPDs or volume discounts unrelated to the actual benefit of selling in volume”, which is what the favoured nation clauses that the bigger pay TV companies enjoy are undoubtedly doing.
Cox is asking the FCC to cap the size of the discounts that big pay TV companies can get from a programmer. Should a pay TV distributor receive a discount higher that the allowed cap amount, it should be “required to demonstrate that the discount is tied to actual benefits realized by the programmer,” Cox said in its FCC filing.
While I agree with Cox’s position that there needs to be regulation regarding broadcast and carriage fees, I don’t think the answer is to limit the negotiating power of the pay TV carriers. I think the problem they’re not addressing is that programming fees are out of control and rising despite the fact that the income and spending power of the customer base the programmers are relying on for revenue is steadily shrinking. Limiting the bargaining power of the larger pay TV companies won’t do anything to stop programmers from demanding higher carriage fees overall. While I do agree that there needs to be come negotiating parity between the pay TV companies no matter what their size, the solution Cox is asking for is incomplete at best, and may make a bad situation worse. What can be done to rein in the programmers? For now, it looks like no one has the solutions nor the will to tackle the real problem facing consumers and pay TV providers alike.