A “Content Loss Ratio” for Cable Companies?

I’ve been following the debate over ala carte cable TV pricing, and the recent Fox/Time Warner showdown has put it back in the news. Brian Stelter’s NYT article on the topic reveals some interesting revenue figures in the cable industry:

The sports network Versus, owned by Comcast, has been off of DirecTV’s satellite service for three months in a fee battle. More prominently, the Food Network and HGTV disappeared from Cablevision’s lineups in New York and New Jersey on Friday after talks broke down with the owner of the channels, Scripps Networks.

The Food Network costs distributors 8 cents a viewer on average now; Scripps wants a roughly 300 percent raise, according to people briefed on the negotiations. That might seem drastic, but 30 other channels, some with lower ratings, already earn that much. “We were really, really undervalued,” said Brooke Johnson, the president of the Food Network. . . .

[T]he owners of Oprah Winfrey’s cable channel, set to begin one year from now, are hoping that her star power will be worth 50 cents for each subscriber a month. The channel it is replacing, Discovery Health, gets only 12 cents now. Consumers already pay dimes or quarters for most cable channels each month, whether they watch them or not. ESPN earns the most by far, $4.10 on average, and is forecast to receive more than $5 a month by 2012, according to the research firm SNL Kagan. Fox Sports Network gets $2.37 on average.

Many consumer advocates (and the Parents Television Council) have demanded that subscribers get the right to pay only for the channels they want. But Joe Nocera has convincingly worried that ala carte pricing will unravel the whole cable model:

[U]nmoored from the cable bundle, individual networks would have to charge vastly more money per subscriber. Under the current system, in which cable companies like Comcast pay the networks for carriage — and then pass on the cost to their customers — networks get to charge on the basis of everyone who subscribes to cable television, whether they watch the network or not. The system has the effect of generating more money than a network “deserves” based purely on viewership. Networks also get to charge more for advertising than they would if they were not part of the bundle. . . .

According to [one] analysis, if every African-American family in the country subscribed to the Black Entertainment Network, it would still have to raise its fees by 588 percent. He adds, “If just half opted in — still a wildly optimistic scenario — the price would rise by 1,200 percent.”

Ala carte pricing might seriously undermine the diversity of cable offerings. But I do think that the cable companies’ ever-rising rates require some regulatory response. One idea would be to follow the health insurance reform model and limit the amount of profits that the cable companies, as intermediaries, could make. The amount of money health insurance companies actually pay for medical care is called the “medical loss ratio.” It now appears that “both the House . . . and the newly recast Senate [health reform bills] would force insurers to spend the vast majority of premium revenue on medical care for their customers, reducing the amount available for profits, executive salaries, sales and administration.”* Would a content loss ratio make sense for cable companies–that is, requiring them to pay some fixed percentage of revenue for content?

I’m afraid that such a concept probably wouldn’t do much to reduce prices, because content providers are a pretty concentrated industry as well (and, where they’re not, copyright tends to give some level of monopoly power—Lords of the Mafia isn’t much of a substitute for The Sopranos). Likewise, in health care, the power of providers seems to have overmatched efforts by insurers in the 1990s to screw down costs:

One might wonder why consolidation among insurers did not allow them to resist the [medical] providers’ demand for increased payments. The simple answer is that there were two concentrated parts of the market and one fragmented part. The insurers had to choose between fighting a full-pitched battle with the providers or exploiting their own market power vis-à-vis the employers. Raising premiums to employers was a lot easier. In theory, employers could have demanded restrictive networks (at lower prices). But since everyone had agreed that employees did not like restrictive networks, and providers (especially hospitals) were not willing to discount much to get into such networks, there were not many available for purchase. Individual employers could not invent such a product; they could only shop around and find the relatively best deal by customizing other contract terms, such as cost sharing.

I suppose that cable companies, like health insurers, find it much easier to jack up rates for customers than to refuse content providers’ demands for more compensation. (The denoument of the TWC/Murdoch fight is one interesting data point here.) And there’s always the option of merging content and conduit, as Comcast’s proposed purchase of NBC will do. Recombinant conglomerates will no doubt concoct many business models, aided by the M&A kingpins on Wall Street. As Bruce Judson has commented, these “ultimate intermediaries” are now far more richly compensated than the average entrepreneur.

Perhaps the only constraint on these intermediaries’ ability to raise prices will be the decline of the real economy that employs most of their customers. While the ruse of the creative class lures community after community to turn to entertainment, “meds & eds,” and other staples of the weightless economy for growth, Michigan is learning the hard way that soft industries need some hard foundations:

The sputtering Michigan economy is dragging down the state’s once-strong health-care system, offering a preview of how a lingering recession could corrode Americans’ hospitals, savings and health. . . . Years of auto-industry layoffs and benefit cuts to white-collar retirees have left hundreds of thousands of Michigan workers . . . without employer-provided health coverage. . . .

The seven-hospital St. Joseph system lowered its operating margin and projects it will cut $60 million from next year’s budget, about 7% of its revenue. The William Beaumont Hospital system, which traditionally attracted well-insured patients at its hospitals in the affluent suburbs of Grosse Pointe and Royal Oak, reported its first net loss last year.

Admittedly, given the US’s penchant for panem et circenses, it would not be surprising if individuals prioritize the cable bill over health insurance premiums. There are so many compelling stories to watch.

*According to Julie Appleby, “The Senate bill would require insurers to spend at least 80 percent on medical care and quality improvements (85 percent minimum for plans sold to large groups), while the House bill specifies 85 percent.”

X-Posted: Madisonian.

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