Why the status quo in the U.S. cable business can't hold

The more that I look at the U.S. cable, satellite and IPTV business, the more I realize that "business as usual" is eventually doomed. Cable companies' core business for more than 50 years has been to sell access to bundles of broadcast and cable-only channels, which are accessed through the use of proprietary set-top boxes, to consumers. Starting in the late 1990s, cable operators started adding access to high-speed Internet services, which ride in and out of consumers' homes on available bandwidth not used for video. A few years later, cable operators added Voice over IP telephony services, which use the same bandwidth as high-speed Internet. IPTV companies offer the same service, but in the reverse order: First came analog voice telephony, more than 100 years ago. Then, DSL came in the 1990s for high-speed Internet service, and finally, AT&T, Verizon and others added broadcast and cable-only television channels, accessible through proprietary set-top boxes.

Today's cable and IPTV operators look very similar so far as consumers are concerned, and they both face the same business challenges: Retransmission and carriage fees. Retransmission fees are intended to compensate broadcasters for the use of their programming by video operators. Carriage fees provide compensation to cable network operators. It used to be that some cable networks would pay video operators to carry their programming, in order to sell advertising that would reach the widest possible audiences. Today, however, almost all cable networks charge video operators to supply their programming to consumers.

Until 2008's Great Recession, broadcasters and cable networks got most of their revenues from advertising. Broadcasters kept their retransmission fees low, or waived them altogether if video operators agreed to carry cable channels provided by the broadcasters' parent companies. Cable networks generally also kept their carriage fees relatively low, in order to get into the widest possible number of households. After 2008, however, all that changed. Broadcasters' advertising revenues dropped (in some cases, dramatically,) so they needed to make up for lost income. In addition, broadcast networks, which had been paying television stations to carry their programming, began charging stations for programming or demanded a portion of the stations' retransmission fees. Similarly, cable networks started increasing their carriage fees to replace lost advertising revenues.

Early on, video operators absorbed the price increases from content providers as best they could, knowing that they couldn't pass the increases on to customers in the form of higher rates during a recession. Now, however, not a week goes by where a video operator isn't threatening to drop a broadcast station or cable network because it's too expensive, or a broadcaster or cable network isn't threatening to cut off a video operator. Video operators are trying to disguise consumer rate increases as things like "concierge" services, where they charge for services that consumers used to get for free. And today, Cablevision filed an antitrust lawsuit against Viacom, charging the company with forcing cable operators to license a bundle of 14 unpopular cable networks in order to get access to popular ones such as Comedy Central and Nickelodeon.

This situation can't persist for much longer. In many markets, subscription prices have reached the maximum that consumers are willing to pay, and consumers have gotten wise to video operators' pricing tactics: Offer low "teaser" rates to get consumers to switch, and then start raising rates frequently, and often silently, once their introductory deals expire. Consumers respond by cancelling services, switching video operators, and in the worst case, dropping video services altogether and switching to over-the-air broadcasts and over-the-top Internet video.

Within a decade, I believe that most cable and IPTV companies will be well on the way to dropping their video services. Consumers will purchase their own set-top boxes, and similar functionality will be built directly into new televisions. Some set-top box vendors will also aggregate content. Rather than the plethora of formats for publishing video that work on set-top boxes from Apple, Google, Intel, Roku, etc., a single standard protocol will enable content providers to publish channels and on-demand video that will work with most set-top boxes, and will show up in the devices' program guides. Cable and IPTV companies are likely to partner with set-top box vendors and receive a portion of their revenue from consumer subscriptions.

Consumers would get the "a la carte" cable channel choices that they've been asking for--but at a price. For example, Disney's ESPN might make its primary ESPN channel available by itself to subscribers for $6.95/month--but price the entire ESPN channel lineup at $12.95/month, thus making it more attractive to pay more but get everything. This strategy would work for the rest of Disney, as well as Viacom, CBS, Discovery, Fox, NBC Universal and others.

The cable and IPTV operators would compete on other services and benefits--who offers the fastest and most reliable high-speed Internet service, the simplest and most useful home networking, the best home automation and security packages, etc. All of these would be services that the cable and IPTV operators would provide themselves--thus, they wouldn't be subject to ever-increasing financial demands from cable networks and broadcasters. By literally wiring their services deep into households, it would be much harder for consumers to switch from one service provider to another, which should decrease churn levels.

The war among video operators, broadcasters and cable networks, with consumers in the middle and paying the bills, can't go on for much longer. At some point, a critical mass of consumers will stop paying the bills, and video operators will have no choice but to spin off their video services.

Is "proved true" or "can't be proved false" the right standard for journalism?

Unless you've been living under a rock for the last couple of weeks, you've probably heard about the battle between Elon Musk of Tesla and The New York Times. Here's a summary:

1. New York Times reporter John Broder took an electric-powered Tesla S sedan on a test drive for the purpose of seeing whether he could drive it from New York to Boston without running out of power. Broder claimed that his Model S ran out of power on the last leg of the trip and had to be towed.
2. Several days later, Tesla CEO Elon Musk tweeted that detailed logs of Broder's test from the Model S showed significant inconsistencies between what Broder wrote and what actually happened.
3. The New York Times replied in part by saying "We, of course, stand by our story."
4. A couple of days later, Elon Musk published the results of the logs on Tesla's blog, pointing out that in two of the three cases where Broder recharged the car, he only did so to a portion of the battery's capacity, and on the leg of the trip where Broder wrote that the battery died and the car had to be towed, Broder had charged the battery to less than 30% of capacity. He also pointed out discrepancies between how Broder set the heat in the car and what the car reported, and also, that Broder drove significantly faster than he reported. Musk wrote that he believed that Broder had deliberately botched the test.
5. On the Times' car blog, Broder gave point-by-point rebuttals for most of Musk's arguments, but couldn't explain why Tesla's logs showed the Model S going much faster than Broder claimed he ever drove. (Tesla's logs showed the Model S getting up to 80 miles per hour at one point, while Broder claimed that he never exceeded the speed limit.)
6. CNN and a group of Tesla owners (among others) reproduced Broder's test (albeit in slightly warmer weather) and said that they comfortably made it from New York to Boston without running out of power and without problems in finding charging stations.
7. New York Times Public Editor Margaret Sullivan interviewed Broder, reviewed his written logs, reviewed Tesla's logs from the car, and talked to owners. She concluded that there was no evidence that Broder or the Times had deliberately botched the test. However, she also found that Broder had done a sloppy job of documenting what he did in the test and couldn't substantiate a number of things that he wrote in his article, that Broder should have fully charged the car when he had an opportunity to do so, and that both Broder and Musk had made misstatements.
8. Elon Musk responded to Sullivan's article with a blog post that thanked the Times for reviewing Broder's article and reporting Sullivan's conclusions. In his post, Musk emphasized Broder's mistakes but didn't mention that Sullivan found that he had made misstatements as well.
9. New York Times Cars Editor James Cobb (Broder's boss) then took to Twitter to attack Musk for "smearing" Broder, who he (Cobb) called a "consummate pro."

When I read Cobb's tweets, it was apparent to me that the John Broder he was lauding wasn't the John Broder that Margaret Sullivan interviewed and wrote about. I responded to Cobb's tweet with my own:

.@NYTjamescobb @elonmusk As your own public editor pointed out, @jbrodernyt was far from a "consummate pro," and you failed to fact-check.

Cobb responded back to me a bit later:

@lenfeldman Unaware of a single error of provable fact. 

Cobb's response shocked me--there were many discrepancies between Broder's article and blog post and Tesla's logs. I didn't respond back, but many others did. My biggest shock, however, was how Cobb defined his standard for reporting: "Unaware of a single error of provable fact."

Since the end of the "yellow journalism" days, the standard for whether or not to go to press with a story has been "proved true." That means that the reporter has corroborated his or her story with interviews from multiple parties, has gathered facts from third parties that also corroborate the story, and has fully documented his or her own efforts to find the truth. However, Mr. Cobb is applying a much different standard: "Can't be proved false." Leaving the entire "you can't prove a negative" argument aside, what "can't be proved false" means is that there's some possibility, no matter how slight, that the reporter's account might be true.

Under Mr. Cobb's standard, Mr. Broder's practice of keeping sloppy notes and writing things that he couldn't verify is perfectly acceptable: If Mr. Broder says that what he wrote actually happened, and there's no one else in the car and no other means to provide independent verification, that meets the "can't be proved false" standard. The problem, of course, is that unbeknownst to Mr. Broder, everything that he did with the car was recorded, in minute detail, by Tesla.

Let me be clear--there are times when the "can't be proved false" standard is perfectly acceptable. Reviews of movies, plays, concerts, etc. fall into that category, because they're records of the personal opinions of the reviewers. A reviewer may write "This was so-and-so's worst film to date." Even though it's written as a statement of fact, it's clear that it's the reviewer's opinion. Car reviews can also fall under that standard, since so much of what's written in a car review is the reviewer's subjective opinion. However, what Broder did with the Tesla S wasn't a car review--it was a news story, to determine if it was possible (and practical) to drive an all-electric-car 300 miles from New York to Boston. The appropriate standard was "proved true," and Mr. Broder didn't do that.

I hope that the "can't be proved false" standard is unique to Mr. Cobb, not a reflection of general editorial standards at the New York Times. However, I'm going to be reading everything in the Times with a much more jaundiced eye from now on...at least until the newspaper officially repudiates Mr. Cobb's position.

Barnes & Noble: Controlled landing or slow-motion liquidation?

Barnes & Noble just ended a bad week: First, It announced that it plans to close as many as 200 of its superstores over the next ten years. Then, a few days later, IDC released its global tablet shipments report for Q4 2012, which found that while the worldwide tablet market increased 75% in Q4 2012 year-over-year, shipments of  Barnes & Noble's Nook tablets actually fell 27.7%, from 1.4 million units in Q4 2011 to one million in Q4 2012. Those numbers added to the gloom from the company's quarterly financial report issued in early January, which stated that B&N's sales from bookstores and its eCommerce site in the holiday quarter fell 10.9% year-over-year, while its same-store sales for stores open at least 15 months fell 3.1%. Revenue at Barnes & Noble's Nook Media unit, which includes Nook devices, eBooks and college bookstores, fell 12.6% year-over-year.

The question to some observers isn't what the company will look like once it closes a third of its stores over ten years--it's whether B&N will even be in business ten years from now. The signs aren't good. As an example, take same-store sales, one of the most important financial indicators for retailers, because it only looks at sales growth in stores open a year or more, not new stores. In Barnes & Noble's case, the same-store number for the holiday quarter was -3.1%. However, that -3.1% is an average. Some stores probably had year-over-year increases, but no one outside Barnes & Noble really knows for sure, and that's a critical factor in whether or not the company's plan to close a third of its stores will work. If B&N has a relatively small number of poor-performing stores, the company can close them as quickly as possible and concentrate on the successful stores. However, if sales are falling across most of B&N's locations, a 33% reduction plan won't be nearly enough to stop the bleeding.

Another example is B&N's failed merchandising strategy. Nothing that the company has tried has done anything to improve its stores' performance. It cut back on its music and video departments and used that space to create dedicated display space for its Nook tablets and eReaders, which are usually prominently featured at the front of its stores. However, its Nook business is actually falling faster than its retail business in general, and it's adding to same-store sales declines. It replaced some of its book display space with an increasingly large assortment of toys and games, but that isn't improving same-store sales, either.

Barnes & Noble's situation is looking uncomfortably like that of Borders and Circuit City, both big-box retailers that closed stores and experimented with a variety of merchandising changes, only to find themselves bankrupt and in liquidation. That's where the "controlled landing" vs. "slow-motion liquidation" question comes in. If B&N starts closing stores, and that results in sustainable year-over-year same-store sales gains, the company's plan to slowly weed out poorly performing locations is likely to work. However, if the same-store declines continue, even with fewer stores, B&N will have to dramatically increase its pace of store closings or come up with even more radical merchandising changes that actually work. As much as I want to see Barnes & Noble's retail stores survive, especially now that Borders is gone, my gut tells me that the company is going down the slow-motion liquidation path.