Football & circus

It’s a classic problem of commercial regulation: politicians and commissioners regulate a consumer-facing retail business, but fail to consider the wholesale supplier of product. The consequence? Often those businesses supplying the end market get squeezed between the escalating price of product and the relatively static price they can charge for said product. Just as often, such a circumstance weeds out smaller or weaker players, leaving the consumer with less choice and/or lower quality, usually as a thoroughly unintended consequence of the regulators’ actions. This is precisely what happened to California when the state deregulated one side of the electrical power business but not the other. Unbundled utilities faced higher and higher costs for power from wholesalers and distributors, but could not pass those costs along to the consumer, and the result, ultimately, was bankruptcy for some large utilities.

Something akin to this scenario plays out across the country with cable operators, though most operators are far from insolvent and most enjoy favorable monopoly conditions in their markets. Cable operators and the providers of programming (broadcast networks) are continually locked in gritty lobbying wars, sending armies of executives, PR people, and lawyers to Capitol Hill to plead their respective cases for or against whatever the bright regulatory idea du jour happens to be.

One small battle in the larger war between cable operators and networks is the recent kerfuffle over the NFL network. As reported this morning on the Wall Street Journal’s technology podcast, the sides cannot reach agreement on the rates for the new network. A related article in the Journal explains:

“Time Warner Cable Inc. and Cablevision Systems Corp. are refusing to carry the NFL Network, launched in 2003, on the league’s terms. Charter Communications Inc., whose controlling shareholder owns the Seattle Seahawks, stopped carrying the network in late 2005 because of a contract dispute. Comcast Corp., the country’s largest cable operator, yanked the NFL Network out of millions of homes after a bitter battle. The NFL tried to stop Comcast by suing, but lost. The case is now on appeal.”

Apparently, the cable operators would like for the new network to be a premium channel, a class which is not as regulated as basic-cable programming…meaning, they can charge the consumer higher rates. The network prefers the basic-cable tier with the widest access possible.

Aside from the ability to charge higher rates for the content, it would seem that the cable operators have finally learned a valuable lesson in their occasional scrapes with broadcast networks, principally ESPN. Namely, operators lose a great deal of leverage with their content suppliers when a network is on the basic-cable menu, particularly if that content is extremely popular. ESPN represents a special case in this regard. Industry studies have shown that rather large numbers of cable subscribers keep their service because of ESPN; if ESPN were not available—or only available as a premium offering—the operators would potentially lose a large number of their subscribers. This fact is not lost on ESPN, as their frequent rate increases demonstrate. The operators hate this circumstance; ESPN has a much freer hand to increase rates than the operators do, thanks to regulation as well as the cost-consciousness of the consumer. Ultimately, such rate increases eat into the operators’ profits as the full brunt of the increase cannot (or is not) passed along to the consumer. Whether or not the cable operators’ margins are unfairly high is another question. (For my part, I think they should be able to charge whatever the market can bear, but that is an argument for another day.)

What this creates is a reluctance on the part of cable operators to expand basic cable service, particularly with a network that is apt to have as fanatical and vocal a following as the NFL network. For the operator there is much to fear from a strongly branded network that need not rely on the strength of the operators’ ‘franchise.’ Such a circumstance tilts the balance of power in favor of the network.

Instead, the operators would rather place such an offering in the premium tier where it can price the product with a freer hand. I can’t really argue with the logic of the operators here. The NFL network is likely to have a relatively small, but loyal, audience, and the most likely consumers of the content would probably fork out premium dollar for access.

Consider, too, that there is a tendency for cable consumers to view their basic-cable offerings with something approaching a sense of entitlement. Once a network is part of the basic service, it would be a very unpopular decision to take that offering away. The operator would then have a grim choice: incur the wrath of its customers or permanently grant the network the upper hand in future negotiations over rates, not something the operators are apt to do, especially after their struggles with ESPN.

Ultimately, this struggle is as much about supply and demand as anything else. That’s why operators keep on insisting in the press that the market for NFL programming is being met, or as the Journal adds:

“The NFL, which has long been able to command top dollar by packaging its games myriad ways, says viewers are still insatiable. But after years of budgetary woes caused by the skyrocketing cost of football, cable executives say they—and viewers—have had enough.”

Of course, it’s mildly ridiculous to see cable operators posing as guardians of the consumer’s pocket book. More to the point, they are tired of seeing their profits eaten up on sports programming, particularly when they have little maneuverability under current regulations to raise the price of their basic service.

This paradigm is already beginning to filter down to amateur sports. College football, while commanding a smaller overall audience, has devotees just as fanatical as the pro version, and this led the Big Ten Conference to form a network to carry its football games (among other sports, one imagines). Except the cable operators are having none of it. According to last week’s Chicago Tribune:

“Just 15 days before the BTN’s launch, DirecTV remains the only major carrier that has signed on with the network. The two sticking points in negotiations are cost per subscriber and the cable companies’ desire to place the network on a sports tier.

Comcast officials are set to meet with Midwest newspaper reporters and editors this week to discuss their views. Little, if any, progress has been made in negotiations between Comcast and the BTN.”

Before the real games kick off, it seems another season has commenced—watching cable operators and network execs spar in op-ed pieces. In any event, it would seem that the Big Ten is late to the party. The league’s execs can make all the arguments they want, but the operators have been down this road before, and I doubt very much that they will repeat past mistakes, unless the hand of regulators compels them.