Deeper Dive—Why economics are driving pay TV disruption, not user experience

Warren Schlichting
Dish Network's top program licensing negotiator, Warren Schlichting, used his Pay TV Show presentation to draw a clear, undeniable, direct line between networks costs and consumer pay TV pricing. (FierceCable)

DENVER—To hear panelists describe the pay TV ecosystem this week at the Pay TV Show, you’d think that most of us were still using Scientific Atlanta set-tops, chained to the local cable monopoly with archaic program guides that took 30 seconds to change channels. 

Cable operators have “been de facto regional monopolies for decades, and they’ve never had to compete on product and experience. You’ve built the entire DNA of your company without having to care about those things," said Philo CEO Andrew McCollum

I think with advanced operating systems like Comcast’s X1, now in over 60% of the operator’s footprint, and TiVo’s advanced UX driving the set-tops of many Tier 2 & 3 cable subscribers—just to name a few examples—that statement is less true than ever. 

I’m one of the growing number of Americans who leverages standalone cable broadband with a myriad of SVOD services (Netflix, Hulu, CBS All Access) and a vMVPD (Sling TV). I can tell you that, particularly for live TV—more specifically, sports—my experience is significantly worse than when I last had a fairly pedestrian DirecTV satellite subscription in 2014.

My one-way satellite service wasn’t exciting and featured no algorithmic search or AI-driven voice control. But it never buffered. I knew where everything was. It was actually fine for what I needed it to do. 

My Sling TV subscription is definitely affordable. And the multiscreen experience is 50 times better than linear TV Everywhere. But I do miss regional sports channels like SportsNet during the NBA season. 

I have no regrets about not having the full bundle. Once the bill passed $100 for 200 channels—only 10 of which I cared anything about—I had reached a threshold. I could cobble together a more personal bundle over the internet for half that price.

I gave up some convenience; nothing is centralized, and I probably need some Wi-Fi optimization to make the streaming work more reliably. But as Rush frontman Geddy Lee once told Doug McKenzie, "50 bucks is 50 bucks." 

 “The primary reason people are leaving cable is cost. The user experience issue is secondary,” said Jeff Shultz, chief business officer for Pluto TV, speaking on the same panel as McCollum.

He drew plenty of pushback for that comment. But Shultz is backed up by plenty of data.

Continuing to crusade against the 5,000% increase in broadcast retransmission licensing fees over the last 11 years, Warren Schlichting, Dish Network’s top content negotiator, drew a clear, undeniable, direct link between networks costs and consumer pay TV pricing in his end-of-session presentation Wednesday. 

Pay TV pricing has risen 50% overall over the last decade. Should it be surprising that the pay TV ecosystem has lost 12 million homes over the last five years?

No matter who is trying to disrupt pay TV, they’re going to have to go through programmers, who face their own escalating productions costs. 

“The reality is, programmers’ costs are going up, too,” noted Tim Connolly, senior VP head of distribution and partnerships for programmer-owned Hulu. He said production costs for some hour-long TV shows is approaching $5 million an episode. 

I don’t doubt the costs of doing business in Hollywood is rising. But for ABC, CBS, FOX and NBC, I’m skeptical as to whether that costs has increased by 5,000% since 2007. 

In any event, the programmers seem to intent on pushing incremental price increases and inefficient bundles (well, inefficient for everyone else) all the way up until the point at which everyone who wants to directly profit off video gets out of the business 

“We’ll do a deal, and [the programmer] say, ‘We’ll see you in five years.’ And I say, ‘I don’t know…’ Eventually, they’re going to force us out of the business," noted Roger Seiken, WideOpenWest senior VP of video programming.

Sitting alongside Seiken at Wednesday’s Pay TV Show panel on smart bundling was CenturyLink’s Steven Sklar, VP of video strategy. He sees a rather unbundled future for pay TV.

Sklar articulated the broad strokes of an emerging video strategy for CenturyLink, which—in the aftermath of its merger with Level 3 Communications—has scrapped plans to launch a virtual MVPD, and is divesting from its Prism IPTV service.

CenturyLink seems content to let consumers use its broadband and bundle their own digital services on top of that.

“We are a believer in SVOD,” Sklar said. “If we can’t create the perfect skinny bundle, let’s give the customer some choices and help them stitch it together."

Several operator executives and analysts pointed to Amazon’s Channels program as the true wave of a future in which programmers get to test their pricing philosophies directly with consumers. 

Parks Research senior analyst Brett Sappington wondered if Amazon might one day give away access to broadcast and cable channels for free, tying the offering to its retail operation. 

“Fundamentally, Amazon sees itself as a retailer,” Sappington noted. 

“At Amazon, we’ve found that a la carte really works,” said Kathy Payne, head of content acquisition management for Amazon, noting that Amazon’s a la carte-oriented Channels program now has “millions of subscribers.”

“They come in buy channels then become Prime customers, as well. All boats rise," she added. "And what we get is more engaged and more satisfied customers.”