Disney loses in "Who Wants to Be a Millionnaire" case

It's an often-told joke that no matter how much money a movie or TV show grosses, no one ever seems to make any money. According the the LA Times, Celador International, the creator of "Who Wants to Be a Millionnaire," filed suit against Disney in 2004, charging that Disney had struck a series of deals between Disney owned and controlled companies in order to make it appear that the show had made no money. (Disney actually claimed that the show has lost $73 million since it first went on the air.)

Celador asked for as much as $395 million in broadcast licensing fees, based on an expert's opinion of the fair market value of the show, plus another $10 million for Celador's share of royalties from sales of show-related merchandise. The jury returned a verdict awarding $260 million in licensing fees plus $9.2 million for merchandise royalties.

At the trial, Celador introduced evidence that Disney had received $515 million in revenue from license fees plus $70 million from merchandise sales. Kantar Media estimates that the show attracted nearly $1.8 billion dollars in advertising revenue over the life of its run. Yet, somehow, Disney calculates that it lost $73 million on the show.

For those of you who never saw the show, it consisted of two chairs, two computer displays, two people on stage, a bunch of spotlights on swivels and some foreboding music. I'd be amazed if it cost Disney $73 million to produce the show across its entire run.

This is an extreme but by no means unusual example of the problems of doing business with the "big media" companies. It's almost impossible to make money unless you've arranged fixed, unconditional payments.

A la carte and the law of unintended consequences

If you live in the New York metropolitan area, you were a pawn in a high-stakes game of "chicken" between Cablevision and Disney, with the Academy Awards telecast as the prize. The issue was how much Cablevision would pay Disney to retransmit ABC's broadcast stations. After the Academy Awards had been going on for 15 minutes, Cablevision and Disney finally came to an agreement.

Now, the cable and satellite companies want the FCC to outlaw broadcasters from withholding their programming and force both parties to accept arbitration. Broadcasters, who have no small amount of political clout and influence at the FCC, argue that consumers have multiple ways of getting their programming, including over-the-air at no cost. If they can't withhold their programming, they'll have almost no bargaining power with service providers.

The service providers are using these retransmission fees as a reason for raising their rates to consumers, which is causing a customer backlash. Even worse, viewers are once again viewing service providers as unreliable. The cable industry has worked for more than a decade to overcome its reputation for unreliability and poor customer service. Now that most of the major service providers seem to have their acts together, program suppliers are pulling channels at a moment's notice. Planning to watch the Academy Awards tonight? Better get that antenna out. Want to make sure you see the Super Bowl? Good luck if the network that carries it is in negotiations with your service provider.

One likely outcome, and one that neither the service providers nor the program suppliers want, is to force the service providers to make channels available a la carte. In an a la carte world, the service providers would pay the program suppliers only for the channels that its customers subscribe to, and in direct proportion to how many subscribe to each channel. Presumably, the program suppliers would set a wholesale price per subscriber, and service providers could mark that price up or down.

Service providers hate a la carte because it will almost certainly decrease their revenues. Customers will be able to trade off fixed packages and a la carte selections, and go with the cheapest option. Tiered pricing plans will be wrecked, since customers will be able to build their own packages.

Program suppliers are scared to death of a la carte for several reasons: First, they'll no long be able to charge service providers for all of their subscribers; they'll only be able to charge for the customers who actually subscribe to their channels. That will result in dramatic revenue drops for many, if not most, channels. Second, advertising-supported channels will no longer be able to represent all the subscribers to a service provider as "potential" viewers; they will only be able to list the actual number of subscribers in a given period. Which would you rather tell advertisers: We've got coverage in 60 million households in the U.S., or 2.5 million households have actually subscribed to watch our channel?

The final, and perhaps scariest, outcome of a la carte for program suppliers is that the service providers may cut back on their channel lineups to just the most popular and profitable channels. Unpopular channels that have been carried so that service providers can support a wide variety of interests may be dropped.

As brinksmanship between service providers and program suppliers becomes a way of life, consumers will increasingly look for alternative sources of programming. If they can't control how much service providers are willing to pay for channels, and are thus constantly at risk of missing shows they want to watch, they'll demand the right to select and pay for channels themselves. If the service providers and program suppliers don't agree, they'll find other ways to get the programs or other things to do with their time. This game-playing has to stop.

The Content Paradox

The "old media" Goliaths like News Corporation, Viacom, CBS, Disney, NBC Universal and Time Warner are often said to be doomed to extinction by the Internet, yet it's content produced and owned by those same companies that's the most popular on the Internet. Those of us in the U.S. may complain about Hulu's limited selection of and time limits on access to content, yet Hulu is envied by content consumers around the world. YouTube would never have gotten to where it is today without all the "old media" content that was (and still is) uploaded for free consumption. If YouTube had depended totally on user-generated content, it never would have reached critical mass.

We may not like the restrictions and limitations that the old media companies put on usage of their content, but they own it, and they have the right (subject to "first sale" rules and other restrictions in the U.S.) to control how it's sold and distributed.

No Internet "new media" companies have content that's in the same popularity class as the old media companies. Producer/Distributors such as Revision3 and TWiT have built very solid businesses. TWiT, Leo Laporte's company, is attracting bigger audiences than TechTV ever did, and judging from Laporte's own comments, it's making a nice profit. However, the audience for all of TWiT's programming is tiny compared to any of the old media sites. Thus the paradox: The Internet relies on old media to drive traffic to new media sites, but the vast majority of original new media properties can't find big enough audiences to sustain themselves financially.

The Internet has lowered the barriers to entry for content producers and distributors down to almost nothing, but making the content available and getting people to read or watch it are two very different things. Building a big enough audience that your content or site becomes attractive to advertisers is much more difficult, and getting people to pay to access the content is even yet more difficult. The old media companies have at least solved the problem of getting people to watch or read their content, but the new media companies all have to start from scratch to build an audience.

Old media isn't having that much easier a time of it on the Internet--just today, for example, Hulu announced that Viacom's Comedy Central is withdrawing its programming at midnight on March 10th, thus removing some of the most topical and popular content from the site. Hulu is widely believed to be unprofitable, and rumors have been flying for months that its parent companies (News Corporation, NBC Universal, Disney and Providence Equity Partners) have been pushing it to adopt a pay model in addition to its existing advertising-supported model. So, simply bringing old media content to the Internet isn't a formula for financial success.

This argument is going to continue until someone releases a breakout hit on the Internet, figures out how to make money with it and builds a profitable, growing media business. Until that happens, the Internet will remain primarily a distribution channel for old media, rather than a viable channel for launching new media.

Who's helped by "a la carte" pricing?

The Fox/Time Warner debacle (which was settled last night) has reopened discussion of a la carte pricing for cable. A la carte means that cable operators would be obligated to allow subscribers to choose and pay for only the channels that they watch. Never watch ESPN? You wouldn't have it in your channel list, and you wouldn't pay for it.

Consumers love the concept of a la carte, because it promises to dramatically lower cable costs. Most people have 20 or fewer channels that they watch regularly, and that's all that they'd have to pay for. However, a la carte is Kryptonite to both the cable operators and networks. The cable operators would have to price their services much closer to their actual costs, which would mean significantly lower revenues. They would no longer be able to offset the costs of cable networks that they have to pay for with cable networks that pay the operators for carriage. (For example, cable operators pay Fox to carry the Fox News Channel, but Fox pays the cable operators to carry the Fox Business Channel.)

Under a la carte, the cable networks could no longer get revenue from every cable subscriber, no matter whether or not they ever watch their channel. Disney's ESPN is legendary for refusing to allow its primary network to be moved to a sports tier; Disney insists on getting paid for every subscriber that a cable system has. If subscribers could pick and choose, Disney would only get revenue from those subscribers who actually want to watch ESPN enough to pay for it. ESPN's viewership numbers, and its advertising revenue, would likely drop significantly.

ESPN and Fox News are very popular, so they'd probably survive in an a la carte environment. The survival of marginal cable networks would be much more problematic. Most cable networks claim all of the subscribers to their cable systems as potential viewers, and set advertising rates (at least in part) based on those numbers. Marginal networks would see their potential viewer numbers drop dramatically under a la carte, and their revenues from cable operators would drop as well.

A few years ago, I interviewed a European IPTV operator that launched its service with a la carte pricing. The service was very popular, but it consistently missed its programming revenue goals, so it quietly replaced a la carte with the tiered pricing model used by US cable operators. The European operator found that it lost few subscribers and significantly increased revenues. (The operator's market was so competitive that even with tiers, its service was only 1/3rd the price of comparable cable or IPTV service in the US.)

A la carte pricing would be the fairest approach for consumers, and it would introduce true supply-and-demand pricing to the cable business, but it would probably also result in the failure of many existing cable channels. The forces favoring a la carte simply don't have the political or financial clout to make it happen in the U.S. at this time.

Comcast/NBC Universal: It's Not AOL Time Warner

Comcast's acquisition of 51% of NBC Universal from GE has been derided by some observers as the second coming of the AOL-Time Warner deal--two big media companies merging with few real synergies. On the contrary, I think that it's a very good deal for both companies--but it's not without risks.

AOL was "circling the drain" before the merger with Time Warner--subscriptions rates were flattening out, churn was increasing, as were subscriber acquisition costs. The company was hard-pressed to find growth, so it instead engineered one of the dumbest mergers in U.S. history, getting one of the biggest media companies in the world to essentially give itself to AOL. (Let's be clear...the merger was dumb for Time Warner but brilliant for AOL.)

By contrast, NBC Universal is in far better shape than AOL was. NBC's broadcast network is a mess, and the Universal movie studio is questionable (as it's been ever since MCA was acquired by Panasonic years ago), but its cable networks are generally strong, well-run and profitable. It's the cable networks that formed the primary reason for Comcast's interest.

The FCC is almost certainly going to require Comcast to either divest NBC's owned-and-operated television stations in markets where Comcast has cable systems (in Chicago, Philadelphia and Washington, D.C., among other cities) or its cable systems in those same markets. I suspect that it's the television stations rather than the cable systems that will be sold off.

Antitrust arguments against the merger are going to be a lot harder to make; for years, Time Warner owned Time Warner Cable (the second-largest cable operator), a movie studio and a collection of cable networks at least as powerful as those of the Comcast/NBC Universal combination without running afoul of antitrust regulators. Comcast has already pledged to make NBC Universal's cable networks available to competitors. The deal is likely to get done without major concessions beyond those required by the FCC.

The NBC television network can be fixed; it fell from first to fourth place in little more than a year, and one or two years of strong program development could turn things around. (To do so, however, Comcast will have to get Jeff Zucker and his cronies away from the network and install a new programming team.) Universal is a bigger problem, in that Comcast will be its sixth owner in less than 20 years, and no one in that time has figured out how to return the studio to success. The solution may be to sell off Universal in parts, keeping its library and selling off the ongoing studio operations.

NBC Universal's digital assets have been called a key reason for the deal, but I think that they're clearly the tail in this deal, not the dog. The most important digital asset is Hulu, but NBC Universal is a minority owner. Comcast will get a seat at the table, and Hulu will get to play in the TV Everywhere initiative, but it's not going to negate News Corporation's and Disney's interests.

I've learned from my own sources is that Comcast is working on its own low-cost, Roku-style set-top box to make its Xfinity service available on television sets without having to replace millions of existing set-top boxes. This could become the "official" mechanism through which Hulu will get to television sets.

In short, this deal makes sense for both Comcast and GE: Comcast gets control of a treasure trove of content, decreases its costs for distributing some of the most popular cable channels (they become internal transfer costs instead of outright expenses) and gets partial ownership of the Internet video distributor that poses the biggest risk to cable operators. GE gets out of the entertainment business without taking a financial bath, and can focus on industrial, medical and financial areas. The merger will almost certainly go through.