Cable’s Packaging Dilemma

Video service providers are caught in a vice, and so are many of their customers. The problem is escalating costs for content access, and contact clauses that it make it difficult for distributors to restructure their service packages in ways that would allow customers to opt out of some pricey offerings.

ESPN charges cable operators an average $4.69 a month for each subscriber. And ESPN contracts mandate that ESPN be carried on the most-popular tier of service. Cable networks such as CNN or TBS charge less than a dollar, says SNL Kagan analyst Derek Baine. 


So if a distributor created a new tier of service without ESPN and other pricey sports programming, and consumers responded, distributors would have to put ESPN back into those lower-priced tiers, which would destroy the retail pricing advantage again.

And even in a hypothetical full a la carte environment, when all subscribers would have the option to buy each channel one by one, ESPN parent Disney Co would likely have to charge about $30 just for ESPN to make up for lost advertising and affiliate revenue it gets from distributors.


In part, the lost revenue would come from advertising revenue on ESPN, and in part the lower revenue would represent the value of the fees Disney gets from contracts that say distributors must carry a number of other networks, to get ESPN, argues Sanford C. Bernstein analyst Craig Moffett.

The end result would likely be that consumers wound up paying more money for just a relative handful of channels than they pay for hundreds of channels today. 


Unless distributors can force major programmers to sign different contracts, it is going to be very difficult to create the lower-cost packages many consumers actually may want, or even tiers that are cheaper because they do not include the pricey sports channels. 

Cable’s ESPN Dilemma