Battle For Cable Channel Choice Heating Up

by: Gary Bourgeault

As the pressure ramps up on media companies to offer a-la-carte options to consumers (where customers get to choose the channels they want), the rhetoric is heating up as a-la-carte options would have a dramatic effect on the industry.

The latest volley came from Chase Carey, the chief operating officer at Twenty-First Century Fox (NASDAQ:FOXA). He called a-la-carte "a fantasy" at the UBS Global Media & Communications conference, according to the Los Angeles Times.

Carey went on to say that the real problem is that the distributors are negotiating through the media in order to capture the attention of Washington concerning the issue. Carey is wrong.


Impetus Behind A-la-carte

The reason a-la-carte is growing in demand isn't because content distributors like Comcast (NASDAQ:CMCSA) are using the media to make their case; that's a secondary reason.

It's the rising costs of content that are the issue. Distributors must raise their rates in order to remain profitable after content providers boost their retransmission fees, which distributors must pay to carry the content providers' programming. The continual increases in cable and satellite rates have created a backlash from consumers who are calling for more options, which has provided the real source of pressure for a-la-carte content options.



Since Comcast is the largest distributor of content at this time, it stands to gain or lose the most from a-la-carte content.

On the one hand, Comcast could maintain or cut the cost of its services if consumers are offered an opportunity to pay only for the channels they want to watch. That's because retransmission fees would be lower for people who watched a smaller number of shows.

On the other hand, a-la-carte content could result in lower revenue as consumers drop costly bundles for lower-priced individual channels. This could partially be made up for with revenue from young adults who have never used pay-TV, but who are attracted by the options available to them via a-la-carte.

Either way, costs for content would be much lower, which could result in an overall advantage for distributors.

Twenty-First Century Fox

It's understandable why Carey is attempting to defend the status quo. Fox's ratings for the 2012-2013 season dropped 20% and the broadcaster was knocked out of its usual leading position in the 18-49 demographic, which attracts the largest amount of ad dollars.

Along with other broadcasters, Carey and Fox point toward the lack of measurements for the various smaller screens where people consume media. Delayed viewing is real, but it isn't the most important reason why ratings are down for Fox, or the industry in general. Lower views stem from a lack of quality content, as well as higher costs.

A positive for Fox is its local news strategy, which Carey says is the key to the performance of the company's TV stations.

Nonetheless, ratings for Fox remain weak, as with the rest of the industry.

Sports and HBO

The two companies least likely to be affected by a-la-carte TV would be The Walt Disney Company (NYSE: DIS) and Time Warner (NYSE: TWX). That's because Disney owns ESPN and Time Warner owns HBO. Neither of those properties should suffer no matter what happens with content in the future.

As a matter of fact, Disney's ESPN has been the cause of consternation for a lot of consumers who are not interested in sports, as it's a big part of the cable bill that they want to eliminate. However, for sports fans it's a must channel. While there may be some retransmission fees lost over time, there is pricing power that could make up for that.


For Time Warner, HBO is the movie and specialty show version of sports. Not only does HBO create some very successful series which attract lots of viewers, but it is consistently used as bundle bait to lure new customers into the fold.

I don't think this situation will change in the future, because even if a-la-carte is offered there is sure to be the option of buying bundled content like we do today. That means HBO should continue to be a unique channel for many years to come.


Will A-la-carte Really Happen?

To me the reason why the media companies are yelling so loud against a-la-carte is because the movement seems to be gaining momentum, and Canada has already said that a-la-carte must be offered there in 2014. That will put further pressure on the U.S. to do the same.

I see a-la-carte as being inevitable in the United States. It's only a matter of when, not if.

Investors should keep their eyes on content deals and continue to do their own research on this important subject. It will have a dramatic effect on the TV industry in the years ahead.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.