Why Hasn't The Internet Blown Up Cable TV's Business Model?

Transcript

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This is ALL THINGS CONSIDERED from NPR News. I'm Melissa Block.

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And I'm Audie Cornish.

Since Friday, CBS has been off the air for millions of Time Warner Cable customers. The two sides are fighting over how much Time Warner pays to carry CBS. Then a remarkable thing happened. Time Warner offered to unbundle the TV network, meaning only customers who want it would pay for it. That's close to blasphemy in the cable business and CBS quickly shot down the idea.

Yesterday, NPR's Dan Bobkoff took us back to the birth of the cable bundle. And today, he explains why TV networks are battling to keep the status quo.

UNIDENTIFIED WOMAN: Now serving A4...

DAN BOBKOFF, BYLINE: The other day, I walked into the local Time Warner store in New York and attempted the impossible.

MILLER RIOSKO: Welcome to Time Warner Cable. My name is Miller. How can I help you today?

BOBKOFF: I'd like to order some cable.

RIOSKO: Absolutely, I would like to help. What type of services would you like to order?

BOBKOFF: Well, I was thinking of just getting Comedy Central, CNN and ESPN.

RIOSKO: You cannot get those. Unfortunately, due to contracts with our programmers, we cannot sell individual channels.

BOBKOFF: Salesman Miller Riosko(ph) says people actually try this all the time. They ask to cancel channels they don't watch.

RIOSKO: Yes, they do.

BOBKOFF: And there are cable companies that actually wish they could sell you television this way.

BEN HOOKS: Where a customer can pick and choose what they want to buy.

BOBKOFF: Ben Hooks runs a tiny cable system in rural Texas. He wants to sell channels one by one or in small packages. But he says the channel owners, like Viacom and Disney, won't let him.

HOOKS: The way they package everything - can you imagine that if you went in to buy a two by six...

(LAUGHTER)

HOOKS: ...and you had to take a two by four with it?

(LAUGHTER)

HOOKS: I mean....

BOBKOFF: It's a hostage situation. If Hooks wants to give its customers Viacom's MTV, Viacom also makes him buy its unpopular music channel, Palladia. Bundling is an almost unbelievably good business for channel owners. Disney, for instance, gets 100 million cable customers to pay more than $5 a month for its sports channel, ESPN, even if only a fraction of them actually tune in. And when the bill goes up, the local cable guy, like Hooks, gets all the blame.

HOOKS: I guess if I look at it from the programmer's standpoint, what a deal. They don't want this thing to collapse.

BOBKOFF: And this is the paradox. For cable companies like Hooks', and even the guys like Time Warner, these ever-increasing fees are nearing a breaking point. But industry consultant Howard Homonoff says this is the only business model that works. Bundling spreads the cost around for channels, both mainstream and obscure. It's kind of like taxes.

HOWARD HOMONOFF: It is a subsidy. The question is whether overall there's a proposition - a value proposition for the subscriber.

BOBKOFF: He says yes. But many people think there's still something fundamentally unfair about the bundle. Senator John McCain pounded about it on the Senate floor not long ago.

SENATOR JOHN MCCAIN: Not every American watches ESPN. Not every American should be forced to watch ESPN.

BOBKOFF: But experts say if McCain got his way, customers would not be any happier. Needham & Company estimates just 20 channels would survive in an unbundled world. And if a channel like ESPN purchased a loan, it could cost something like 20 or $25 a month. That's why ESPN Vice President Ed Durso can argue that paying for the bundle isn't so bad after all.

ED DURSO: The choice that you get from cable, I think, is one of the most attractive things that you get from that.

BOBKOFF: So the question is: Can the industry preserve the status quo? It's certainly trying. Now, if you want to watch a TV show on your laptop, the website might ask you for a password to prove you pay for cable. Tech companies have gotten less ambitious. Apple is talking with Time Warner instead of competing against it. Intel's upcoming Internet cable service will still have traditional bundles of channels.

The big surprise is that it could be the old line cable companies, not the Internet that drives change. Besides Time Warner's fight with CBS, Cablevision is suing Viacom over forcing it to carry unpopular channels.

Hearing all this makes Ben Hooks, the cable guy in Texas, feel vindicated.

HOOKS: It tells me: See, I told you it's bad because when the big guys get in - and I've been screaming it for years - I say, well, finally, it's getting bad enough to hurt them.

BOBKOFF: And all sides know cable can only get so much more expensive before people cut the cord completely.

Dan Bobkoff, NPR News. Transcript provided by NPR, Copyright NPR.