How The Cable Wars Will Hurt Consumers

Three weeks before 24 was slated to return, Fox staged its own cliffhanger. Demanding that Time Warner Cable pay $1 per subscriber per month for the privilege of airing Fox on its systems, News Corp. threatened to pull Fox and the other channels it owns from Time Warner Cable's systems. The parties erected dueling Web sites— and The high-stakes game of chicken, which threatened the constitutional right of New York residents to watch American Idol, ended on New Year's Day with an agreement. Terms were not disclosed. There's been no such happy ending to the feud between Cablevision, which provides television to my home, and Scripps Networks, over carriage fees for HGTV and the Food Network. Both have been dropped. (Bam!)

There's something old-school about these cable slugfests: Rupert Murdoch vs. the bureaucrats of Time Warner; Scripps vs. the unpredictable Dolans of Cablevision; content vs. distribution. (Ken Auletta, please report immediately to the set of Charlie Rose.) And yet these fights are a portent of things to come.

In essence, the old establishment media are now at war with themselves. Content and distribution are at odds, but they're also increasingly under the same roof. Through its Rainbow Media Holdings subsidiary, Cablevision owns AMC, IFC, Sundance Channel, and WeTV. News Corp., which produces enormous amounts of content, owns a bunch of satellite television businesses overseas. Time Warner Cable was only recently separated from its cable-channel siblings at Time Warner. These companies are sniping at one another because of the continuing assault of technology, changing viewing habits, and the fickleness of advertisers. In the past two years, media in general—magazines, newspapers, movies, television, publishing, cable—have been hammered by the recession. We've seen rounds of failures, closings, and layoffs. The industry has joined the 40 percent club—businesses whose revenues, stock prices, and visions for the future have been nearly halved in the past two years.

Broadcast and cable television face serious challenges. Younger people are spending more time online than they do in front of the tube. Internet advertising is much cheaper than TV advertising. Production costs are high. And the DVR allows people to skip ads. Many of the same digerati who in the 1990s proclaimed online media would kill print media now prophesy that YouTube will kill network television.

But while old, established media have suffered some grievous wounds (I miss you, Gourmet), they're not going quietly. The lumbering behemoths may do stupid things (Time Warner merging with AOL, the New York Times Co. buying the Boston Globe as an act of diversification), and they may be slow to recognize reality. But the grizzled veterans still have some preservation instincts. And in addition to cutting costs relentlessly, the old media establishment is now hell-bent on raising the prices it charges to customers. In a range of media, people are being asked to pay more for the same product (or, in the case of many newspapers and magazines, for less of the product). This is one of the dichotomies of our media age. On the one hand, there's never been more free media. On the other hand, in part because of the success of all these free media, people who like particular media distributed through particular channels are being asked to pay more for it.

According to the National Association of Theatre Owners, the average price of a movie ticket sold through September 2009 was $7.46, up 8.4 percent from $6.88 in 2007. The New York Times, Washington Post, and several other newspapers have increased newsstand prices, while many magazines have boosted subscription fees.

Cable networks and broadcast networks are trying the same thing. Forcing cable systems to pay significant sums of money for the privilege of carrying their channels was an option limited to only a few channels, such as ESPN. The owners of cable channels used to be happy just to have their content air on the systems and then collect a chunk of the ad revenues. (When Rupert Murdoch launched Fox News Channel in the mid-1990s, he paid cable companies to carry it.) But with advertising growth declining, companies have to either charge more or risk not being in business at all. (Here's a chart on cable advertising revenues and total revenues.) As Brian Stelter writes in today's New York Times, ESPN gets $4.10 per month, while others get much less. "The Disney Channel, NFL Network, Fox News, USA and ESPN2 each get more than 50 cents. For every channel, the price per month is expected to rise each year." And the cable operators aren't simply absorbing the price increases. As Stelter noted, the same day Time Warner Cable cut a deal with Fox, Time Warner Cable announced a change in rates for subscribers (read: an increase).

While the Time Warner Cable/News Corp. feud was titillating, the real battle between cable and content will be played out in boardrooms in Philadelphia, the headquarters of Comcast. With nearly 24 million cable customers, Comcast is a huge player in distribution. But it also owns or has investments in cable properties such as E!, the Golf Channel, and the Style Network. Its pending acquisition of NBC Universal will bring more cable nets into the fold—USA, Bravo, CNBC, MSNBC—as well as the once-mighty broadcast network NBC. If advertising doesn't come back soon, cable channels will be demanding higher carriage fees across the board, and the cable companies will, with what they assure us is great regret, pass the costs on to us. Just as paid is the new free, more expensive is the new cheap.

Daniel Gross is also the author of Dumb Money: How Our Greatest Financial Minds Bankrupted the Nation and Pop!: Why Bubbles Are Great For The Economy.