Time Warner Cable offers a la carte option to CBS

The Verge is reporting that Time Warner Cable CEO Glenn Britt has made a new proposal to CBS in the form of an open letter (PDF). Time Warner Cable stopped carrying CBS's television stations and cable networks last Friday (except for CBS Sports Network, which is covered by a separate agreement.) Trade reports indicate that Time Warner Cable is currently paying $1.00 per subscriber for CBS, close to CBS's industry average of $0.85 per sub. CBS is reportedly asking for $2.00 per subscriber.

Time Warner Cable's new proposal is that the cable operator can either take its previous final offer, which would continue to make CBS available to all subscribers, or it could make CBS and its affiliated networks available to individual subscribers on an "a la carte" basis. CBS would be able to charge Time Warner Cable's subscribers whatever it likes, and CBS would get 100% of the revenue.

The choice between Time Warner Cable's offers isn't clear, because we don't know for certain how much TWC has offered to pay, how much CBS is looking for, or how many of TWC's subscribers are likely to pay separately for CBS if it goes a la carte. That last number also affects how much CBS can charge advertisers, since it would only be able to count the subscribers who actually pay extra for CBS as part of its potential audience, not the entire Time Warner Cable subscriber base. Here's a quick example:

Time Warner Cable had 11.7 million video subscribers as of June 30, 2013 (PDF). Assuming that CBS gets $1 per subscriber, that means that CBS would get $11.7 million per year from TWC, not including Showtime, CBS Sports Network or its other premium networks. At $2 per subscriber, CBS would have to sign up at least 50% of TWC households in order to bring in the same revenue--but they'd actually have to sign up more, because instead of selling to a single customer (TWC,) it would have to sell to 11.7 million households, and there would be significant marketing and promotion costs. CBS would pay TWC for some of that promotion; other parts would have to be done by CBS through its own stations and networks, and through other media.

The impact on ad revenues would be based on how many TWC households CBS signs up. Let's say that CBS only signs up 50% of TWC households, or 5.85 million households. That means that there would be almost 6 million fewer households that have the potential to watch CBS's hit shows. Some of those households would switch to other video providers, and some would watch CBS's stations over the air, but there would be an inevitable drop in CBS's ratings in some of the biggest markets in the U.S., including New York and Los Angeles.

CBS has said that it will consider the proposals and respond soon.