Local TV Market Multicasting: A New Paradigm for Digital Rich Media

Tony DeMars (bio)
Texas
A&M University-Commerce

 

Abstract

The Federal Communications Commission mandated that local market broadcast television stations discontinue analog services, and broadcast only a digital signal, as of February 17, 2009.  At the same time, tensions continue to build among consumers, consumer groups, the FCC and the cable industry regarding cable subscription rates that have far outpaced the rate of inflation over the past decade. New media technologies give these two seemingly disparate situations a connection. As digital television emerged in the United States, convergence of technologies began, as companies began seeking ways to change the culture of local market broadcasting by offering digital rich media services.

 

A digital broadcast television signal from one local station is a single channel when the program is high definition; when standard definition signals are broadcast, four or more channels are possible. This so-called multicasting ability means local broadcast stations can be multi-channel program providers, like cable TV. This paper describes the reasons behind rising cable TV rates and shows how the switchover to digital broadcasting offers a new paradigm for multi-channel video program delivery.

 

Local TV Market Multicasting: A New Paradigm for Digital Rich Media

 

As the service continued its progress toward universal availability in the United States, cable television was touted as the ultimate opportunity for consumers to have a choice of all kinds of television programming. Clearly this level of choice has come to fruition. Cable companies, Direct Broadcast Satellite (DBS) providers and Internet Protocol TV (IPTV) services—collectively called multi-channel video program distributors, MVPDs, and used as the descriptive term elsewhere in this paper—offer everything from the mass appeal networks like the traditional broadcast networks and cable networks like USA and TNT to such specialized basic cable networks as SciFi, HGTV and Lifetime. 

 

The availability of hundreds of channels has come at a price, however, and now increasingly citizen’s groups and government officials complain that cable rates have increased much higher than the rate of inflation and that a virtual cable monopoly allows cable multiple system operators (MSOs) to raise subscription rates without limit.  Consumers Union data shows cable rate increases of eight percent in 1996 and 1997, six percent in 1998, 4.5 percent in 1999, six percent  in 2000 and 2001 and seven percent in 2002 (Emling, 2003).  FCC Chairman Kevin Martin says cable rates have increased 100% in the past decade (Ahrens, 2007). Cable companies suggest increased programming costs led to these increases, but Cooper (2003) showed that operating margins—the difference between its revenues and its costs—had also risen dramatically since 1997; Cooper attributes this ability to increase profits to the MVPDs’ monopoly status. (MVPDs overall actually constitute an oligopoly, but the term monopoly is often used by critics to describe the market control in any one given market to the existence of a single cable provider.) The completion of the transition in the United States of over-the-air, free television (referred to as terrestrial TV) from an analog to a digital-only signal on February 17, 2009 could offer competition to this assumed monopoly (dtvtransition.org, 2007).

 

Focus of the Study

 

The groups involved in this brewing confrontation include cable MSOs, Direct Broadcast Satellite (DBS) providers Dish Network and DirecTV, big corporations that own several of the national broadcast and/or cable networks, and local stations—including stations owned and operated by the network that airs on the station (O&Os) as well as network affiliates owned by other companies.  Verizon’s FiOS and AT&T’s U-Verse IPTV services have increasingly become part of this competitive market (Ahrens, 2007). To better understand the dynamics among these types of interrelated businesses, this study will first provide an analysis of the culture of marketplace forces. Then, drawing on the no-win scenario that seems inevitable as costs seem likely to continue to escalate, a new model that resolves the inherent flaws in the current system, based on a consumer culture, will be demonstrated. This study is a proposal for a new paradigm for video services in the United States, argued by demonstrating the issues within the problem as it exists then proposing and explaining a new television channel distribution model.  This research has been an ongoing process of monitoring these developments over a period of several years; MVPD rates to subscribers have continued to escalate each year during this time. Satellite TV and the more recent development of IPTV as another means of providing multi-channel video program services to consumers seem to offer only different technical standards for delivering channels, not true competition to benefit the consumer.

 

Baker (1998, 2002) provides some important context to this issue, pointing out that varying ideological points of view play a role in perceptions related to media ownership and democracy. Baker categorizes the groups that engage in the discourse about media, society and politics as (a) traditional conservative and (b) free-market libertarian on the conservative side, in contrast with (c) traditional liberal views and (d) the interventionist left on the other side. The debate among these groups involves issues like harmful effects of content on society and the importance of a free media to a democracy. While Baker’s analyses focus more on the relationship of freedom of the press as it perceived as serving democratic ideals, the market analyses and assumptions regarding new media are important to the current study. Baker (2002) argues that the marketplace model of regulation, which has been the dominant ideology of media regulation in the United States over the past thirty years, does not adequately provide for the needs of the people. The struggle in policy-making such as FCC policy on tiers of channels versus a la carte channel availability to subscribers is often framed as a battle between needs of individuals versus corporate power and economics.

 

The Dynamics of Multi-channel Video Program Distribution

 

The Center for Digital Democracy, in its 2003 ‘reduce your rates’ campaign, provides a review of cable rate increases over several years.  The CDD notes that the increase in cable television rates by more than 40% was much faster than the rate of inflation. Since most cable customers have only one cable system from which to choose, the CDD says the cable industry often enjoys high profits with little competition. The CDD adds:

 

Even the Federal Communications Commission (FCC) agrees.  The Commission released its annual report on cable industry prices in early April.  Analyzing data from the 12-month period ending 1 July 2001, the report found that “the overall monthly rate for cable programming services and equipment increased by 7.5 percent.”  The inflation rate, on the other hand, was only 3.43 percent for this same time period (Center for Digital Democracy, 2003).

 In 2004, Consumers Union reported that cable rates were rising at three times the rate of inflation, blaming the increases on “bundling of products and services to further gouge consumers and lack of real competition” (Consumers Union, 2004, p. 1).

 

One underlying problem with cable costs is that consumers are forced to pay for channels they do not watch, rather than having the ability to choose and pay for the channels they want.  The procedure of establishing tiers was necessary on early, analog-based, cable systems. Today, however, with digital cable, digitally-distributed DBS programming and digitally-distributed IPTV services, it is technologically feasible for customers to buy channels a la carte, that is, to select and pay for each individual channel they want. The current system of tiers is essentially equivalent to a grocery store forcing its customers to buy the milk, bread, and eggs they want or need but also to pay for caviar, leeks, lobster, or similar ‘specialty’ items a few customers want but that may be economically impractical to stock for only a small percentage of customers. 

 

MVPDs argue that they would have to raise rates in order to allow customers to buy individual channels instead of buying them in packages or tiers (Cooper, 2003).  The reality is that customers could buy each individual channel for its cost plus a mark-up, as it done in standard retail pricing, and pay for only the ten, twenty, or however many channels are actually wanted.  Consumers Union (2005) reports that consumer’s groups continue their efforts to urge Congress to enact legislation allowing a la carte pricing. FCC Chairman Kevin Martin spoke in favor of a la carte pricing as early as 2005 and continued to show support for it in 2007 (Ahrens, 2007; Hearne, 2007; Helm, 2005).  A blog response to a New York Times article about a la carte pricing recognized a common industry statistic (this one from the Nielsen research company) that most consumers actually only watch about 10-15 different channels with any regularity (Murketing.com, 2007; Nocera, 2007). A la carte pricing would allow customers thus to select and pay for only those channels. An ongoing lawsuit by a consumer group alleges the bundling of cable channels is an anti-trust violation; an initial court ruling in spring 2008 favored the cable companies ability to offer channels in tiers  (Haugsted, 2008).

 

Nocera (2007) investigated a la carte pricing and found it to be a flawed concept.  Nocera notes that previous FCC Chairman Michael Powell led a study into a la carte pricing and determined it would actually cause cable bills to rise. After Kevin Martin assumed the FCC Chairman duties, the FCC and others began discrediting the previous report, and Martin was accused of manipulating figures from his predecessor’s report to make a la carte pricing look promising. Nocera’s (2007) overall assessment is that a la carte pricing would be a disaster for consumers.   Salmon (2007) refutes Nocera’s arguments, suggesting that in an a la carte pricing structure, a channel like ESPN might cost each subscribing household $12—if ESPN continued with its high cost rights deals, like that with the NFL—but a channel like BET, even with a 1200% increase would still cost subscribers less than $2 per household.

 

The a la carte approach could essentially force elimination of the least-valued channels and therefore eliminate the costs for those from the expenses of the MVPD.  In the current contract negotiation between programmers and MVPDs, program providers often require carriage of their less-viewed channels in order to get the desired channels, such as the requirement from Viacom for carriage of Spike TV in order to get MTV, or, from Disney, the carriage of the Disney Channel, ESPN Classic and ESPN News to get ESPN (Ahrens, 2007). The economics of distribution also seems to favor having more rather than fewer channels; a cable company making a certain percentage of gross profits makes more money the higher the gross revenue.  Cable and satellite companies may be unlikely to generate enough profit from selling a random fifteen or twenty channels to any one consumer at, for instance, a typical wholesale-to-retail mark-up margin.  New distribution methods, such as efforts by phone companies AT&T and Verizon to offer cable channels through their Internet connections, could have more promise of offering cable channels a la carte (Nowlin, 2005), but such an arrangement would require an agreement between each cable network owner and the MVPD. Others also recognize these days that broadband Internet availability increasingly gives consumers a chance to do their own a la carte selections—but with the selection being individual shows made available to consumers on web sites from the likes of Comedy Central or NBC, or for purchase from providers like iTunes (Murketing.com, 2007). Sites like ModernFeed, Veoh, and Hulu may represent an even more drastic change in television program availability to the consumer.

 

There is more to the complex pricing system in multi-channel distribution than simply wholesale versus retail cost.  FCC-mandated retransmission consent/must carry rules have led to the creation of unnecessary extra channels that the big suppliers like Disney have forced MVPDs to carry. The basic agreement has become ‘we’ll let you carry our local ABC station and in exchange you’ll pay us so-many dollars and carry ESPN News and ESPN Classic.’  MSOs understandably then blame rising rates to consumers on increasing cost from program suppliers.  Emling (2003) says consumers are defecting to satellite services that offer lower basic package prices, and at the same time are asking the government to reimpose regulations. Kevin Martin, FCC chairman as of March 2005, and successor to the deregulatory-minded Michael Powell, appears willing to heed the call.  Martin stated his intentions to have the FCC limit the size of cable companies and force cable network carriage based on a law Congress passed in late 1992, but that had not been put into effect (Hearn, 2005).   At the same time efforts in May 2005 by Comcast and Time Warner, the two largest cable MSOs, to acquire number five Adelphia concerned media watch group Center for Digital Democracy (2005).  The CDD noted that based on its presence in the top 20 U.S. markets and its 22 million subscribers, Comcast would have virtual veto power over any new programming ventures. Comcast and Time Warner did ultimately acquire and split Adelphia’s cable systems (Lightreading.com, 2006).

 

DBS providers may have lower distribution costs per subscriber, but the DBS providers—Dish Network and DirecTV—also face annual program cost increases under the current business model. Kagan Consulting Services analyst Robin Flynn, speaking about a recent rate increase by EchoStar Communications Corporation for its Dish Network satellite TV service, points to the fact that although satellite has been able to compete on price, DBS providers have to pay for increased programming costs and must also continue to pass those costs on to consumers (Emling, 2003).  The problem lies in the conundrum faced by distributors—they may attempt to hold the line on price increases from networks, but are caught in a catch-22 because of the backlash they would receive if they dropped a particular channel that a certain group of subscribers would still want.  David Butler, a spokesman for Consumers Union, publisher of Consumer Reports magazine, reiterates the philosophy that cable companies offer consumers the choice of lower-priced packages, or even a la carte pricing so that subscribers could pay only for those cable channels they actually want (Emling, 2003).

 

Amdur and Dempsey (2003) say that in recent years, cable network giants like Disney, Viacom and News Corporation have raised license fees so dramatically that cable operators may be forced to seek more mergers to strengthen their negotiation position related to what appears to be an annual planned cost increase. ESPN (owned by Disney) raised its affiliate fees by 20% and Fox Sports (owned by News Corporation) increased theirs by 17% in 2002.  License fees for ESPN have almost doubled in recent years and even some regional sports networks costs to the MVPD are almost $2 per subscriber.  With the addition of Monday Night Football to the network in 2006, ESPN is now reported to cost MVPDs about $3 per subscriber—and is typically part of every subscriber’s basic programming package, even though a significant percentage of subscribers never watch ESPN (Murketing.com, 2007; Salmon, 2007).  Amdur and Dempsey (2003) say increases like these account for at least half of the double-digit increases cable operators reference related to their own rate increases. If getting larger is the only means MVPDs have to gain leverage in contract talks with the media giants who sell the programming, the consumer still stands to lose, as noted in the earlier reference to the Comcast and Time Warner acquisition of Adelphia. Specifically, in relation to the high cost of sports channels, critics suggest as many people who subscribe to MVPDs do not watch those channels on a regular basis as those who do, yet all subscribers bear the cost.  As Smith (2002) notes, sports does well among young male viewers, but does not appeal broadly to the majority of the audience.

 

The battle over sports channels has already begun between distributors and networks shown by recent drops by Time Warner cable of networks run by News Corporation and the refusal of Cablevision Systems to pay $2 per subscriber for the YES regional network, set up by the New York Yankees to carry Yankees and the New Jersey Nets games.  Despite these partial efforts at resisting rate increases, the networks still hold the upper hand.  The widely distributed cable networks reach nearly 90 million subscribers, but the biggest cable operator, Comcast serves only about 22 million homes.  The result still leads to the need by MSOs to be bigger—meaning more mergers and acquisitions among cable operators—which seems to create little chance of a solution for consumers (Amdur and Dempsey, 2003).

 

Higgins (2003) notes a typical scenario that perhaps best represents the current battle, since ESPN is one of the greatest examples of a high-cost basic cable channel that all customers pay for but many subscribers do not watch.  The cable MSO Comcast, following its acquisition of AT&T cable systems, served 25% of all cable customers in the nation, perhaps giving them greater clout in battling increasing costs from the basic cable networks.  In particular, MSOs like Comcast were targeting the Disney Company, owners of ESPN, because of that specific network’s cost to the cable system of nearly two dollars per subscriber at that time.  Disney’s offerings of various ESPN channels plus The Disney Channel and ABC Family comprised about 20% of Comcast’s total programming costs.  At the same time, Disney did not hesitate to use its own financial power.  Disney threatened to withdraw its retransmission consent agreement for its ABC broadcast stations on Comcast systems if Comcast would not agree to its terms for The Disney Channel.

 

Some analysts say new regulations could offer relief, giving strength to the current backlash against rising cable costs and efforts by MSOs to battle back. However, in a regulatory climate in which the FCC approved even greater abilities of companies like NewsCorp to thrive in the current TV station ownership oligopoly, new regulations may only marginally reshape the landscape. Therefore, this paper looks to offer a new model of television channel distribution that would have the potential to resolve the MVPDs ability to raise rates. A la carte from cable or DBS is not the panacea some believe it to be; new media technologies allow something better.

 

The New Model for Distribution

 

Companies are allowed to own two local broadcast television channels in a local market and will be allowed to own three in some markets if recent FCC efforts prevail.  Many of these companies are already O&O operations, meaning the network that is on the station owns the station.  The current multi-channel model on MVPDs does not work because program providers have been given the power (probably somewhat inadvertently) by the FCC to force distributors—the cable systems and the DBS companies—to carry channels that otherwise, in a true competitive marketplace, could not survive.  Going back to the grocery store example, if a distributor attempted to carry a product and not enough customers wanted it to make it profitable to carry, the product would not survive.

 

The potential for terrestrial digital television is not limited to the United States. Sourbati (2004), in a study of digital television in the United Kingdom, supports the notion that the transition to digital television offers increased functionality of services, suggesting profound implications for communications policy. Sourbati also recognizes that digital broadcasting offers the ability to offer interactive services, online connectivity to the home and a new type of multi-channel environment. This researcher also notes that although the study focused only on the United Kingdom, similar developments were under way across the European Union. Lo (2004) argues that digital television should be used to serve the public interest by allowing ‘open access’ for competitors and audiences to each of the two digital video service transmission networks in Taiwan. Many other studies over the past several years have sought to investigate the potential for terrestrial digital television, but more have been international than domestic in focus.

 

Local market DTV multicasting is a logical model to adopt. The new digital television system mandated by the FCC to be rolled out allows a local terrestrial station to broadcast a high definition signal, but the one channel could be used to broadcast about four standard definition channels.  A report from the FCC on DTV describes its basic operational parameters:

 

The arrival of digital television (“DTV”) . . . promises to be one of the most significant developments in television technology since the advent of color television in the 1950s. DTV has the capability to provide clearer and sharper, cinema-like pictures as well as multi-channel, CD-quality sound. It can provide new uses such as multiple video programs or other services on a single television channel, including data services. The use of DTV technology will also allow television to enter the digital world of the personal computer and the Internet (Federal Communications Commission, 1998).

Multicasting is described by a public television station that has already experimented with such an operation as “One Broadcast, Multiple Program Services.”  The station’s web site noted:

 

Because digital television allows you to pack much more information into the allotted signal, we can transmit multiple channels on the same bandwidth instead of just one. Think of a broadcasting bandwidth as a multi-lane freeway. You can run a big, flashy, wide-load truck carrying HDTV and take up all of the lanes, or you can send multiple compact cars down the same freeway, each carrying specialized programming. When not broadcasting KCTS-DT HDTV on the majority of the bandwidth, KCTS multicasts three SDTV program streams on its digital channel 41: KCTS-DT, KCTS-DT Now, and KCTS-DT Learns. These channels are broadcast in standard definition television (SDTV) programming (KCTS, 2003).

 

The KCTS channels in 2008 include the standard PBS channel, along with KCTS Create and KCTS v-Me.

Examples from the current Austin, Texas television market also provide an understanding of existing multicasting activities in a local market.   KLRU offers a typical PBS style schedule on its primary channel 18 location, a duplicate HD signal on channel 18.1, and what they call KLRU Create on the 18.2 channel location. KLRU explains more about receiving their channels on their web site.  On channel 24.1, ABC affiliate KVUE offers its regular program schedule; channel 24.2 is currently a full-time weather feed.  CBS affiliate KEYE has its primary digital signal on channel 42.1, while promoting 42.2 with ‘coming soon: retro television network.’ NBC affiliate KXAN’s primary digital channel is 36.1 while on 36.2 the station feeds local weather radar. Fox affiliate KTBC offers a page of DTV transition explanation on its web site but does not appear to offer any extra digital channels. Modern digital TV receivers are able to find each of these channel numbers as individual channels, in the same way analog tuners tuned to each existing local broadcast channel.

 

With an understanding of the ‘new channels’ available because of DTV, we can now apply this new model to some specific cases. Each of the following represents variations on this ‘local digital TV’ distribution model. News Corporation/Fox represents a company that could own most of its program supply and local market distribution. CBS Corporation represents a type that could have a partnership with an affiliated company through Viacom.  Disney/ABC represents a type where the program supplier could seek various local market partnerships.

 

The dominant example of how this model of multi-channel distribution via digital terrestrial TV could be implemented immediately is News Corporation, which owns the Fox television network, the DirecTV DBS service, several cable channels, and local broadcast stations. The Fox-owned television stations in New York City are WNYW and WWOR.  In some other markets where Fox has two television stations, Fox owns KTTV and KCOP in Los Angeles, KMSP and WFTC in Minneapolis, WRBW and WOFL in Orlando, and KDFW and KDFI in Dallas/Fort Worth.  At the same time, besides the Fox Broadcast Network, Fox owns or has significant ownership in Fox Kid’s Network, regional Fox Sports channels, the National Geographic channel, The Health Network, Fox Sports World, FX, Fox News Channel, and Speed Channel (Columbia Journalism Review, 2004).

 

In any of these markets, the digital broadcast of each station could have four separate standard definition channels, making a total of eight from the two stations.  In any given market where the company owns two stations, they could have an over-the-air line-up that includes the Fox broadcast network, the regional sports network for the local area, FX, Fox News Channel, Fox Kid’s Network, Fox Sports World, and National Geographic. Some of the similar networks could share the eighth channel, like The Health Network—or a contracted network not owned by Fox. Alternatively, Fox Sports World could share the same channel as the regional sports network for the local area, or other similar options.  Each of the local broadcast stations could have a dominant program identification—for example one channel could be Fox Entertainment and the other could be Fox News or Fox Sports.  If the ownership limit in the largest local markets becomes three stations, even more channels could be made available via DTV.

 

Prime time programming could be in high definition, and, during this time, some of the lower-audience-size networks would not have programming. This sharing of channels is similar in concept to early cable television days when the number of available channels was limited and either satellite piggybacking or channel piggybacking were used to put more different networks onto a limited number of channels (Eastman, Head and Klein, 1989).  Today, the addition of a Digital Video Recorder (DVR—a computer hard drive based video recording system, like TiVo) could allow programming from some of the specialized channels to be aired overnight and easily recorded and played back later by the consumer, thus creating essentially a more diverse program line up when the high definition broadcast minimizes the number of available channels during prime time. 

 

Besides their own video program channels, the local company could act as a carrier for any number of outside services, if it chose to do so.  The digitally distributed broadband-like iBlast service (iBlast, 2004) for example was being marketed in the early 2000s to provide subscribing customers Internet-like content, like downloads of movies, music or computer software (but which apparently did not catch on). Alternatively, Fox could make its current Fox Movie Channel a pay-movie service and sell subscriptions, similar in concept to the early Pay TV experiments.  This application to Fox takes into account that the company currently has one broadcast network, but its recent addition of My Network TV adds other possibilities.

 

Prior to the split between CBS Corporation and Viacom, a similar cross-ownership model applied. Today, it would be more of a business partnership. CBS Paramount owns production studios in Hollywood, 50% of the CW Network and 16 CBS O&O stations—as part of the CBS Corporation.  Some sample local television markets for CBS are Boston with WSBK and WBZ, Dallas/Fort Worth with KTXA and KTVT, Detroit with WKBD and WWJ, Miami with WBFS and WFOR, Philadelphia with WPSG and KYW, Pittsburgh with WPCW and KDKA, and Los Angeles with KCAL and KCBS.  Meanwhile, Viacom owns or has significant ownership control of MTV, VH1, Comedy Central, BET , Spike TV, TV Land, Nickelodeon/Nick at Night, and CMT (Columbia Journalism Review 2004).  Again, as detailed in the Fox example, CBS has the local broadcast stations to distribute eight local channels and plenty of cable networks to fill the slots.  In particular, the CBS Corporation-owned Showtime—as a premium channel currently must share some of its revenue with the MVPD.  Selling local subscriptions, that are easily done via a computer-based reception box, would allow the channels to sold at a lower cost to the consumer but at a higher price than the company now receives, creating a win-win situation.

 

Disney provides yet another example of application.  While Disney owns some local broadcast stations, the company has yet to acquire the level of local market duopoly ownership that would allow it to immediately place several of its cable networks along with the ABC Television Network onto local terrestrial DTV signals. Disney could be the model for a national network supplier that does not have a well-developed local distribution system.  Its networks could be made available to local stations owned by other companies in much the same manner the current ABC network is made available. Each of the channels could be advertiser supported, or channels like ESPN could be offered as a premium if the company desired to continue to negotiate for big sports contracts. Those who want such a channel would be able to decide if the cost provided the desired return.

 

One of the biggest problems with current MVPDs is distribution cost.  Local, terrestrial DTV eliminates the cost of distribution required by running cable or securing the several satellites required to offer DBS channels. High definition networks currently rolling out could become an ancillary service to the local over-the-air DTV-delivered networks, delivered via satellite or the new telephone company Internet method. The problem with the current TV channel model through traditional MVPDs is that supply-and-demand do not drive the survival of the weakest channels. Local market, over-the-air, free distribution of multiple channels would provide fewer channels, but most of those would be offered free and supported by advertising. This model would assure only the most desired channels would survive, and would prevent companies like ESPN from overbidding for programming like NFL football and simply passing the costs on to a large percentage of person who do not view their channel.

 

Limitations

 

This model assumes consumers will adopt a system that gives them enough of the variety of channels they now receive but that drastically lowers or eliminates their cost to receive it.  Diffusion of Innovations theory tells us however that predicting consumer behavior is imprecise.  Adoption of the new approach would require each consumer to have an antenna, which some people may resist and which some housing situations—from apartments and condominiums to deed-restricted neighborhoods—may limit.  There would also be a concern about consumers who live outside major metropolitan areas, since terrestrial DTV signals may not reach those households.  These would have to be served via IPTV, DBS or some other form of digital distribution—including possible use of Wi-Max or digital cellular signals. Modern economies of scale should make this possible. Broadband video distribution adds a new wrinkle to this proposal. With U.S. broadband penetration now at 57% of the population and 87% of Internet users now connected via broadband (websiteoptimization.com, 2008), services like Veoh, Hulu and ModernFeed point to a potentially significant change in how users expect to access entertainment and information content.

 

The next step in this research should be an audience survey in a major metropolitan area to assess knowledge of DTV and to begin to discover if the new generation of viewers who have grown up with cable TV would be inclined to adopt over-the-air reception technology and make DTV and this proposed model practical. It would seem use of wireless broadband would have a positive relationship with this new type of ‘digital wireless’ service. In fact, Atkin, Neuendorf, Jeffres and Skalski (2003) investigated audience interest in adopting digital television and found a relatively low level of awareness of DTV. The challenge in the ongoing research may be in finding ‘the path of least resistance’ in the minds of people as they become aware of DTV and its potential to them in a non-MVPD world.  As an example, convenience sample surveys were taken over a two-year period in a university introductory broadcast class, with a total of 237 undergraduate students responding. Students were asked first asked,  ‘if you could get most of the channels you currently receive on your TV from cable or satellite, but could get them for free, would you drop your cable or satellite?’ The majority obviously said ‘yes.’  Then, when asked, ‘if you had to buy a new television and install an external TV antenna in order to receive this service, would you drop your cable or satellite?’  Sixty-eight percent answered ‘yes’ to this question, 30% said ‘no,’ and two percent had no opinion or no answer.  Finally, when asked, ‘think of your one favorite TV channel, like ESPN or MTV; if you had to buy a new TV, install an outdoor antenna, and you would lose that channel, but still would receive almost all the channels you like now for free, would you drop your cable or satellite?’  Thirty-six percent said yes to this question, 27% said ‘no,’ and 37% had no opinion or no answer.

 

The new paradigm assumes specific regulatory changes will have to occur. There would need to be some FCC provision for specifying how the network relationship for locally owned non-O&O stations would work, similar to previous network-affiliate regulations.  Such an arrangement would allow a company like the Dallas-based broadcast station group-owner Belo, for example, to not need to have its own national cable channels. The local station in this case would partner with a network distributor in the traditional sense, but for a bundle of networks instead of just the one.  The local marketplace would still consist of some O&Os, some network affiliates, and some independents. Some of the framework for implementing this new approach is already in place—but the best economic model would assume self-production of nationally distributed programming. This approach would have the Fox system, for example, operating most efficiently through the production and distribution of much of its own content, as it is currently capable of doing through an operation such as the 20th Century Fox studios. 

 

Local market duopolies would be allowed to exist.  Duopolies, or ownership of two services of the same type, like two television stations, would need to be the generally accepted standard. Regulation within the new model should allow duopolies in any size market that includes at least six broadcast DTV stations, but limit national ownership in such a way that there would be at least several ‘big companies’.  This new model would also assume that small-market areas would still need to be served via cable, DBS or IPTV, but could also consider a local microwave (wireless cable) or broadband service.  Current technologies in which competing companies like AT&T and Comcast offer bundled phone, Internet and TV channels make this approach feasible. Clearly the proposed DTV-based model works better for major metropolitan areas than those regions with a limited number of local stations.  The large media owners typically are most interested in owning stations in the largest markets because of the revenue potential versus smaller markets, and that ownership desire probably would not change.  However, instead of the most recent 35% nationwide-reach ownership limit imposed on television group owners, new regulation could limit owners to no more than three or four duopolies out of the ten largest markets and no more than six or seven out of the top twenty markets—or some similar means of allowing at least several large companies to find an efficiency of operation nationwide as well as in local markets.  This new distribution method also does little to reverse the trend toward fewer companies owning more of the media.

 

Finally, the largest limitation is the inevitable resistance to change and the potential loss of businesses such as specific local cable companies. Proposing a new way of looking at something familiar often creates cognitive dissonance for many involved in the potential changes. However, just as regulations prevent cable networks from creating a monopoly by owning their own networks and cable systems and denying their networks to competitors like DBS, delegating the same availability of cable networks for digital television broadcast stations provides similar competitive advantages. If a local cable or phone company or DBS provider, under the threat of this competition in distribution, maintains a viable business in its own right, consumers would likely still buy their service and all ranges of distribution could survive, but better competition would exist, providing a better economic outlook than the current model gives many critics.

 

Conclusion

 

What this new model provides is the opportunity to put television channels back to a more realistic supply and demand basis.  Terrestrial broadcasters have been mandated by FCC policy to provide only a digital broadcast signal effective February 17, 2009, despite the fact that the majority of their viewers do not pick up their signals with an off-the-air antenna. Given the choice of purchasing an antenna and going back to having more free channels than pay channels, but while maintaining an environment of multi-channel availability, it is realistic to assume many consumers might like the free option. Anecdotally, this may be evaluated by considering free versus pay sites on the Internet. Sites that start as free often have a hard time later getting consumers accustomed to paying for the service.  In this new television channel distribution model, advertising supported channels will survive because they will have enough actual specific interest from a large enough viewership base.  This customer base of the best channels will appeal to enough advertisers who will want to advertise, creating enough revenue for profitability and thus prove the viability of the channel.  The current system of forcing all the customers to pay, for example, for ESPN, despite the fact that many cable subscribers do not watch it, will be brought back to reality.  ESPN would no longer be able to continue bidding higher and higher rights fees payments, since they would no longer have the feeling of unlimited raises in rates from all subscribers to offset those costs, and those who do select it in an a la carte system would be able to decide whether the drop the channel when the cost gets too high. The amount paid for the rights would be held in check by the real marketplace demand for the programming.  Much as CBS did with its affiliates in asking them to help pay for the cost of the 1998 Winter Olympics when viewership did not meet promised levels, a network like ESPN could negotiate with local stations to help pay for large sports contracts if desired. Just as insertion adverting on local cable systems provide revenue for local cable systems, channels distributed digitally can be supported by local insertion onto the digital over-the-air srvice.

 

In this new model of multi-channel distribution, based on serving local markets with national production quality, as was the original model of television network/affiliate distribution, actual marketplace demand will allow the most-desired programming to survive. The best local pay channels can survive when there is enough demand, allowing profits to be made over costs.  Similarly, video on demand movies and other similar pay per view programming can still be offered—as part of a service like iBlast where the program may be downloaded, or as a live special event on one of the available channels that may already be a subscription channel. Premium pay services may even be irrelevant in this new model, as broadband movie services continue to roll out from the likes of Netflix and Vudu (netflix.com, 2007; vudu.com, 2007).  Beyond the basic costs versus returns, one company having several local channels will still allow local broadcasters to offer channels that lose money or are not designed to be profitable.  This model matches that of grocery stores having ‘loss leaders’ to draw in business or networks like NBC paying high rights fees to keep Friends in its last years because of what the show did for its overall network image and marketability.

 

Ultimately, in this environment of marketplace regulation, this new model of multi-channel video distribution through the new terrestrial digital television signals provides the best opportunity for true competition and a true supply and demand business model.

 

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