Television Is the New Television

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Television Is the New Television Page 10

by Michael Wolff


  Later, curiously, people would pay for cable—and hence for television—in order to get Internet access, as cable companies substituted digital for the original analog signals and added broadband services.

  By the time this conversion to cable was complete, it was not only the much-hated and derided cable companies that were earning fees, but all television programmers as well.

  This was, as so much in television is, the result of happenstance, regulation, and negotiation.

  The system that developed has cable operators paying channels, Fox News, say, or ESPN, on a per-subscriber basis.

  But it was hardly intuitive that cable operators would end up paying content providers—and why should they? Cable companies were providing the one thing that channels and content makers absolutely needed: the way into people’s homes, aka carriage—an audience. With access to this audience you, the content provider, could compete in this new television world and do business the old-fashioned way: you could sell ads. That was supposed to be the system.

  Much like what the Internet would experience, however, it was hard to sell ads into a fractured market, against random content (early cable lacked much form or purpose), on a no-brand channel, for all that much money. It became the age of the Ginsu knife infomercial, a system in which, often, the broadcaster got paid out of a cut of the Ginsu knife sales (or not-for-sale-in-stores collections of oldie hits, or exercise videos).

  The period beginning in the late seventies, and lasting ten years or so, was one in cable without fixed models, with shifting ownership of channels—for instance, HBO, ESPN, and MTV were all speculative or entrepreneurial start-ups, later sold to current owners (and largely sold because they needed further investment). It was also a period in which a new breed of television executives grew up, not so much focused on ad sales and programming, like network executives, but more focused on licensing, marketing (cable channels were niche concepts rather than mass entertainment), and a granular, deep-swamp negotiation with cable operators—a fundamental numbers game involving how to apportion existing revenues to meet everybody’s existing costs.

  This new breed, less focused on advertising and more focused on fees, and all out of the nascent cable industry, came to control the media business: Jeff Bewkes, CEO of Time Warner; Chase Carey, COO of 21st Century Fox; Sumner Redstone, who built Viacom; Tom Freston, who came out of MTV to run Viacom; Bob Pittman, MTV’s founder, who spearheaded the rise of AOL and its merger with Time Warner, and who now runs Clear Channel; Philippe Dauman, the current CEO of Viacom; and Ted Turner, in many ways the originator of the cable programming model with CNN and the Turner Broadcasting properties.

  The singular and necessary accomplishment, beyond getting a critical mass of cable companies to carry your station (for a period this resulted in a lot of ownership trade-offs—we’ll carry you, if you give us an ownership stake), was to get a share of the subscription fees.

  Pay channels without advertising, like HBO, paved the model—they were explicitly paid. But great—indeed viral—campaigns like “I want my MTV” created demand and enhanced negotiating positions for a channel.

  Cable operators began paying Ted Turner small fees in the late seventies to get TBS when, via satellite, it was available nationally to cable stations. (Because of a quirk in the regulatory environment then, since TBS had a local broadcast license in Atlanta, it couldn’t put its signal up on a satellite by itself. Instead, a third-party company did and charged that per-subscriber fee.) ESPN in 1983—when, peculiarly, it was owned by Getty Oil—started imposing larger fees.

  The natural process accelerated in 1984 when Congress deregulated cable rates, which led to the expansion of tiered pricing and more aggressive fee requests from content providers.

  Ultimately as cable use expanded, as cable packages grew, all boats floated, and the very concept of a cable bundle obscured costs and increased margins, meaning that, without announcement, much of television achieved—heretofore unimaginable in the television industry—a second revenue stream. As unexpected, cable fees rivaled and often exceeded advertising revenues.

  The shift from advertiser-supported content to user-supported content also changed the nature of programming, shifting the traditional mass-market emphasis off a younger demographic and putting it on household members who actually made the decision to pay for an increased cable package. From here began to flower the new television golden age, programming focused on a more demanding audience—just as digital media was doing everything possible to broaden its mass base.

  An inversion had occurred: digital media, which began in pay form with a pronounced aversion to advertising, had become entirely free and entirely ad supported, and television, the great advertising hellhole, the commercial Golgotha, had become strongly pay based. A discerning viewer could easily watch all the TV he or she wanted without ever seeing an ad.

  16

  FINDING THE NEW ECONOMICS

  The modern media business really did seem done for, positioning itself for a long and painful decline, and maneuvering—against the background, in the millennium’s first decade, of an ever more transforming and ever more valuable digital world—for minor advantage as, relatively speaking, Rome burned.

  There was clear logic to why the fire was going to consume television. And surely, many of the moves in the past decade were, on the part of the television industry, defensive or panicky ones. However, this fear forced channels to wean themselves off ad revenue. More surprisingly, as channels began to rely on fees from cable companies, those same cable companies came to control the Internet.

  Viacom, in 2005, divided itself in two, one part a mostly cable programming company, retaining the Viacom name, and then the other part, a new independent CBS, a mostly network broadcaster. Time Warner, after an assault by activist investor Carl Icahn in 2006, spun off its cable system, TWC (completed in 2009). Comcast, in 2009, bought NBC Universal, a content company.

  Each of these moves suggests doubt about a fundamental direction of the business and is, in some fashion, a circling-the-wagons move.

  Viacom, in part believing the Internet view that advertising will more and more migrate to digital form, pushes off CBS, its still entirely ad-supported broadcaster, in the hopes that, no longer competing with its cable channel brothers at Viacom (MTV, Comedy Central, Nickelodeon, etc.)—out to grab as much of the cable fee piece as possible—it can better negotiate with the cable system overlords.

  Time Warner decides not to bet on cable’s long-term future, both because of the increasing threat of over-the-top delivering of content via the Internet, and, too, because it believed cable was in a steadily weakening position in its negotiations with cable content providers (companies that it itself owns: HBO, CNN, the Turner channels).

  Comcast, an amalgamation of numerous cable systems and now the biggest overlord, sees its own rather bleak future as a utility with a fast-eroding monopoly. Content gets stronger; alternative distribution gets stronger; its own technology gets weaker. What’s more, it is as though it’s always felt embarrassed about itself, a pipe company, far from the glamorous business it serviced. In a bungled attempt, it tried to buy Disney in 2004. Finally, in 2009, it gets GE’s NBC Universal, securing its content hedge.

  The effects of these television realignments play out much more discreetly than, say, the breathless rise of Facebook to its $100 billion IPO, which also happens during this time period. And yet they are quite as transformative.

  CBS’s Les Moonves, that symbol of network television’s lost world, turns an unexpected trick. In something of a Copernican restructuring, in 2005 he begins to put the network back at the center of the television world. The networks, once independent and dominant media entities, had all become part of vastly larger conglomerated ecosystems, vying not just with cable channels and movie and production studios, but also with the interests of the conglomerates’ own local television stations. But n
ow, with an independent CBS, Moonves controlled the network and the stations (heretofore an independent unit in the conglomerate) and no longer needed to heed the interests, or consider the negotiating position, of Viacom’s cable channels.

  In the early years, cable operators had been required to carry broadcast stations—the “must-carry rule.” But in 1992, the rules changed (the Cable Television Consumer Protection and Competition Act) and broadcast stations could opt out of must-carry. This seemed like only a subtle change because obviously it was in the interest of the broadcasters to be carried by cable. But it began to open up a negotiating position. What was the point in paying for a cable bundle if it didn’t carry the local CBS affiliate, say? Still, certainly for Viacom-CBS, until the split the emphasis was on cable fees, with network retrans rights thrown in as the cherry on top.

  Moonves radically shifted this, effectively taking over the negotiations for his individual stations and adding the leverage of the network itself. The threat of losing a local station would not, in negotiating terms, remotely compare to the threat of losing an entire network (the cable systems had effectively gone national through a process of acquisition—so this was something of a sudden-death negotiation; either the network faced devastation without carriage, or the cable company faced devastation without one of the key broadcast networks). And within ten years these retrans fees would be a quarter of the size of total broadcast ad dollars (with syndication and foreign sales making up another quarter of the pie). In other words, Moonves had reinvented broadcast television; a lagging business became a growth industry.

  Meanwhile, Time Warner, having spun off its own cable company—next to Comcast, the nation’s second largest—became itself an effective pure content play. (It had already jettisoned its music company; it would soon get rid of its troubled AOL division; and it would eventually spin off its magazines.) Time Warner’s essential business became its negotiation with cable operators for HBO, CNN, and the Turner channels. In a remarkable turnaround, Time Warner, which had, not long ago, nearly broken itself with a bet on a digital future, saw its cable fees rise so quickly that, in little more than half a decade following Icahn’s play for the company and his call to streamline it into a pure content play, its share price had doubled (a doubling even without cable, AOL, and publishing—all spun off to the shareholders).

  Comcast, for its part, found itself with its NBC Universal acquisition in an ultimate schizoid business, owning two companies whose health depended on the competition with each other. NBC Universal with its network and its cable channels needed to be wholly focused on raising the fees it derived from the cable operators, notably Comcast, hence creating a strangely zero-sum game—Comcast paid NBC, which then gave the money back to Comcast, its owner (Comcast bought out GE’s remaining interest in 2013). Now, it was possible to look at this functionally closed system as a decent hedge—Comcast wasn’t going to win, but it wasn’t going to lose either. It balanced the push-pull of the business.

  What did confuse it, and even threaten it, was the prospect that content—including its own—might migrate to a competitive distribution system. As streaming began to grow, it became a threat—morphing from straw man to real man—in all cable negotiations: from the cable side, the specter of cord cutting was used by cable operators as leverage to hold down and hence preserve content licensing fees; from the content holders’ side, the threat was that content would migrate faster to new distribution platforms without higher cable fees.

  But then, in a sort of slow-motion awakening, Comcast put two and two together and began to understand that the cord could not actually be cut; or if one part of the Comcast cord was cut, another part of the Comcast cord became all the more vital.

  Through a series of happenstance moves—perhaps some of the greatest happenstance in modern industrial history—cable companies had become the main provider of digital access.

  In the beginning (if by beginning we mean the mid-nineties) there were two lines into most homes: twisted pair copper from the phone company, and coaxial from the cable company. Both of them highly regulated, both of them with potential to deliver broadband speeds, both of them requiring technology upgrades on the telephone and cable networks outside the home to make them able to carry broadband signals.

  It turned out to be easier and cheaper at first for the phone companies to do this—first with the interim, mid-speed technology of ISDN, later with truly high-speed DSL—neither of which required particularly costly changes to implement. By 1998 DSL was being rolled out by all the Baby Bells, marketed as an upgrade over dial-up Internet service.

  Meanwhile, @Home, a start-up backed by various cable operators, had launched in 1996 as the cable industry’s broadband alternative to DSL. In fact, at the time, a big chunk of the local cable systems were not capable of delivering Internet service without significant investment into their networks to allow the two-way data traffic necessary for an Internet connection to function. Despite investments from TCI, Comcast, and Cox, and having comarketing deals with most of the others (Charter, Cablevision, Rogers, etc.), @Home was at the mercy of its partners’ pace of upgrades. (@Home as a company was also eventually crippled by its disastrous merger with search engine Excite in 1999, and ended up going bankrupt in 2001 in the wake of the dot-com collapse.)

  The cable companies were eventually goaded into those necessary upgrades by the need to provide digital service, primarily because of competition from the expanded channel offerings of the satellite services DirecTV and Dish. Upgrading their systems to carry digital signals allowed a vast expansion of the cable dial by giving them the ability to squeeze more channels onto their network than they could with their older analog tech (and thus additional tiers of programming they could charge for), and eventually offer HDTV programming. Digital of course also finally made IP traffic possible, not to mention telephone service using voice over IP technology.

  By 2002, the major cable companies were rolling out their own branded broadband services—Comcast, for example, launched Comcast High-Speed Internet that year.

  The promised speeds of cable broadband were higher than DSL speeds in most markets, which was one important marketing advantage. But the real leap forward in high-speed sales for the cable industry in the mid-2000s was the introduction of bundling—offering voice, TV, and Internet at a steep discount if you took the three together. Comcast, for instance, launched its Triple Play bundle in 2005.

  The phone companies were concurrently rolling out their own even higher-than-DSL-speed fiber optic services, which could offer competing bundles—Verizon FiOS, for example, launched in 2005 as well.

  But the fiber installation cost was significant—as much as $750 per home—and the public markets began to balk at Verizon (FiOS) and AT&T (U-verse) making that kind of investment when those same companies were investing significant capital in building out the wireless networks they also owned. By 2010 Verizon had announced it was winding down its FiOS rollout, meaning big chunks of its coverage area wouldn’t be getting it at all (Boston, for example, has never seen FiOS). They’ve placed their bets on the wireless business instead. (The analysts liked this because wireless pricing is essentially unregulated, whereas pricing of services over the fiber connections is subject to the state and local regulatory oversight that applies to POTS—plain old telephone service.)

  Hence, Comcast, heretofore deeply worried about the future of its main business, woke up to discover that it controlled the primary way to get Internet access and, indeed, that there were few scenarios in which it could lose.

  Then, in 2013, Moonves, employing both the leverage that he had amassed and his own extraordinary wiles, faced down Time Warner Cable (that is, the cable company spun off by Time Warner, precisely in a bid to raise the leverage of content), and in a move for higher fees took CBS off the TWC system. CBS stayed dark until TWC capitulated one month later.

  In part, as an effort to increase the
cable leverage against content providers, and, in part, because TWC had seemed to handle itself so poorly, it almost immediately became a takeover target.

  Comcast, with its new understanding that it could hold control over the two primary video distribution platforms—cable and IP—agreed to buy TWC for $45 billion. At the same time, AT&T made a deal for DirecTV.

  The specter of these two deals (whether regulators permitted them to go through or not) suggested a return of video distribution back to a level of centralized control not seen since a three-network world, precipitating the great net neutrality debate, itself an opportunity not just to transform policy, but to jockey, television style, for advantage.

  17

  NO NEUTRALS IN NET NEUTRALITY

  Television is a function of government regulation. Its nature, its business, its winners and losers have largely been determined by regulators and lawmakers in an almost one-hundred-year effort to control or decontrol or change control of an expanding technology.

  Imagine the existential predicament: how does government respond to a force likely to change the way people behave, think, get along with one another; a force that will redistribute and concentrate power, make favored parties rich, and sideline or bankrupt out-of-favor others?

 

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