Pay for Performance for Cable Networks?

Just how much the subscription TV business will change over the next decade is not at all clear.  There is the obvious lure and threat of Internet distribution. 

Somewhat ironically, TV distributors themselves may be helping to push networks toward Internet distribution. In some part, that is especially going to be the case for "niche" programming networks of all types, as video distributors increasingly are not able to continue spending as much as programming costs as they have in the past.

That new limit is directly caused by growing consumer resistance to the size of their monthly bills. 

Verizon Communications, for example, reportedly has begun talks with several "mid-tier and smaller" networks about paying for their channels based on actual ability to attract an audience, according to a WSJ.com report. 

In the past, fees have generally been set based on "subscribers," (the distributor's customer base, and then the tier of service on which a particular channel is carried) rather than "viewers." (ratings) with some allowances for popularity.

The new Verizon proposal obviously will mean lower revenue for networks that are not watched very much. The principle might someday also help distributors with the other parts of their content acquisition cost problem, namely the costs of carrying the most-viewed channels, such as ESPN. 

But a switch to ratings-driven payments is directly affected by the way video distributors package their content. So long as ESPN is carried on the tier with the broadest distribution, it probably won't make much difference whether distributors pay by ratings or "per subscriber."

But all bets would be off if the major distributors created "sports tiers" that allowed subscribers to opt out of paying for ESPN and the other sports channels.

Of course, ironically, such efforts by distributors will increase the attractiveness of online distribution channels such as YouTube, Netflix and other alternatives. 

By optimizing the current business, service providers are creating the foundation for tomorow's business, which will use Internet delivery.