This is episode 241 of the Community Broadband Bits podcast. John Bergmayer from Public Knowledge joins the show to talk about the "bundle" in the cable industry. Are cable bundles a bargain as advertised? What do customers want? Listen to this episode here.
John Bergmayer: You know the structure of the programing industry and the structure of the cable industry means effectively they're not being served. They’re getting ripped off I believe.
Lisa Gonzalez: This is episode 241 of the Community Broadband Bits podcast from the Institute for Local Self Reliance, I'm Lisa Gonzalez. Cable subscribers often complain about bundling. Being forced to choose from video packages that include channels they don't want in order to get access to the content they do want. Why are we stuck in this model? And what are the ramifications for service providers? Especially now that so much content is available via the Internet. What are some of the concerns smaller cable providers encounter when negotiating for content? This week, Christopher talks with John Bergmayer, Senior Counsel from Public Knowledge who explains why Comcast and Time Warner Cable and other cable companies are so in love with the bundle. They discuss why it's difficult to move past this model and whether or not bundles are a bargain, as they are described in advertising. Or something quite different. Now here's Christopher and John Bergmayer, Senior Counsel at Public Knowledge, discussing unbundling and the world of cable.
Christopher Mitchell: Welcome to another edition of the Community Broadband Bits podcast. I'm Chris Mitchell. Today I'm speaking with John Bergmayer, Senior Counsel for Public Knowledge, a non-profit organization in Washington, DC. Welcome to the show!
John Bergmayer: Yeah, thanks for having me Chris.
Christopher Mitchell: John, can you tell us a little bit about what Public Knowledge does for people that haven't been around to hear past interviews with Chris Lewis and Harold Feld and other great people that you have on staff?
John Bergmayer: Sure, you know, we're a DC based public interest organization, or consumer group. We fight for consumer rights in a number of areas such as, telecommunications, cable TV, copyright policy, Internet policy, things like that. Things that actually pretty much have in common is the concept of accessing information. We want to make sure people can access communication tools and the information that they need from competitive markets and at low prices.
Christopher Mitchell: I just wanted to suggest one other thing, which is that, I think sometimes people thing public interest groups are on wide and business are on the other. Now you guys are often working with business, often creative businesses, right?
John Bergmayer: Yeah, I think that's right. I think, we're a DC based organization which is pretty important. We advocate before the FCC, before members of congress, and we find it's pretty affective to ally with as many people as we can when there's issues that we all agree on. So even though we do fight a lot of the major telecommunications companies all the time, you know, if there's an issue that we agree on, we're not above working with them because we're really just about getting results. And what you mentioned was, frankly a lot of the things that consumers benefit from, also benefits smaller businesses, whether they're start ups, whether they're community broadband providers, anything like that. Those are maybe commercial enterprises or they're doing a thing, they're not just policy and advocacy groups, but never the less, to the extent that we can work with organizations like that, we're happy to.
Christopher Mitchell: What we're going to talk about today is cable unbundling and kind of the economics and law behind how the channels get set. I think the generally question is kind of, "Why can't I just get the channel that I want, and why do I have to pay for so many other channels that I might not want if I subscribe to cable?"
John Bergmayer: Yeah, I think the problem is that ultimately there's a lot of very concentrated market places all sort of working together to create an economic model which is very profitable for sports leagues and some major programmers, and maybe even some major cable companies, that ends up requiring that people buy a lot of programming that they don't necessarily want to watch. I think sports, I mentioned that because I think that's like the key example. Sports programming is actually not as popular as people sometimes think. Maybe 20 to 30% of people might actually watch sports. Things like ESPN, everyone pays for it or when networks carry major sports leagues, everyone ends up paying for that as well. And people who are not sports fans but are who are cable subscribers can never the less end up spending between 8 and $15 dollars a month of their bill just goes just for sports rights. And I think in a more normal market you wouldn't see all these non sports fans, subsidizing sports fans, but the way that market is structured, I think that's the clearest example of the way that people are denied choice, and they end up paying more than they ought to pay.
Christopher Mitchell: Well you mentioned something that I think probably one of the keys to first explaining, and that is that, we're not really talking about one market place or one monopoly, there's actually overlapping monopolies. I think maybe the way to lead into this is to say, if Comcast wanted to just sell me individual channels, could they do that?
John Bergmayer: No, probably not. I mean Comcast is obviously the largest cable companies so they have a lot more leverage with programmers than most other cable companies or satellite providers do. But never the less, even they sign contracts with the major programmers and what happens is, they sign a deal with Disney, they sign a deal with Viacom where, they're not just carrying one channel, or the popular channels that they carry, their getting bundles, right? So they buy a bundle and sometimes the terms of the deal are that the programs that they carry have to be on consumers basic cable packages. There's a fight between programmers about who gets that prime real estate, that's low in the dial where people are much more likely to watch it and if you can get yourself included in basic cable and everyone has to pay for it, you know, that's great for you as a programmer. But they're is only five or six truly major programmers that end up controlling so many of the channels that people watch and taken all together they end up basically comprising the bundle. And very often the cable companies don't have the option contractually to offer to customers more a la cart choices. Or even if they did, the terms would be uneconomic like theoretically, the ability might be there but customers would end up paying more for more choice which doesn't really make a lot of sense.
Christopher Mitchell: Right. You can imagine a number of scenarios in which you say, "Oh you can get that channel individually but it's going to cost almost as much as a package would have anyway."
John Bergmayer: Right, exactly. You know we talk about a la cart, but that doesn't necessarily meant it's like you go to a sushi restaurant and you pick out each individual roll on a card. It's really just about, okay people are paying too much and they're not getting the choice they want. You know, people subscribe to Netflix at $7 a month and you subscribe to all of Netflix at once, so in a sense that's a bundle. You go to a fast food restaurant and you get a value meal, that's a bundle. Those things can be fine because people have a choice. And there's clear trade offs. I think the problem with cable -- Every time we talk about a la cart people will talk about, "Oh well you know bundling can be economically efficient and conserve all these various values, and they can sort of make less popular content available to people.", all that's true, I'm not arguing the economics of whether bundling makes sense per say. But I think when look at the actual bundles that are available to people, they're just more expensive and much more bloated than anyone would really choose. So it's not just a question about, "What is the better businesses model?" The question is, "Are consumers being served?", and I think that the structure of the programing industry and the structure of the cable industry means that effectively they're not being served. They're getting ripped off I believe.
Christopher Mitchell: You can definitely correct me if I'm wrong, but the sense that I get is that, the bundles being created by the content owners is a big part of the problem. Maybe if the bundles were created by the cable companies more so, they might have different incentives. And certainly if the bundles were created by the users, the subscribers at home. That would certainly be much better from their perspective. It seems like it's kind of -- Viacom wants to throw in a bunch of channels that it knows most people don't want and it's going to force you to take those channels if you want MTV or something like that, and that's sort of the problem.
John Bergmayer: Yeah, I think that's about it. The game is that you're a programmer and what you want to do if you have one or two popular shows, or popular channels rather -- You know, the cable company pretty much need to have them. So you say, "Okay, you can have them but we're going to give you a discount if you take these other channels which no ones ever heard of before, or we'll even charge you less because we're trying to get them out there. We're just looking to make money on advertising for those." So you end up the channels people want and then a bunch of like filler channels end up being there as just part of the bargain and figuring out what you're paying for what channel can be pretty tricky. But then, once the channels on the dial, then you have the ability if you're a programmer, to try to make that the must have channel. I think AMC is the most obvious example. AMC was just like the old classic movies, like you know, classic cable channel that just plays a particular niche kind of content, they weren't making original programming. They're just playing old black and white movies and that's great. But then they start with shows like Mad Men and they start with shows like Breaking Bad and all of a sudden, next round of negotiations with cable companies, they're able to demand a lot more money. And if you just like repeat that through the spectrum you have a lot of channels that once they get on the cable dial, they try to make themselves must have programming and the result is, we do have, I think, better TV shows than ever before, so it's not all bad. But at the same time people truly are paying more and more. The question is, "Is the market actually working properly?"
Christopher Mitchell: It seems to me that the evidence suggests that TV has gotten better even outside of those bundles. Because, it think you mentioned earlier, some folks have an interest in just defending bundles, right? I mean the cable industry pays some people who do nothing but argue with your group it seems like. And so they're going to say whatever they possibly can. But the evidence I would point to, is that HBO is a classic non-bundle channel. It's off on it's own, if I'm understanding the terminology correctly, and they kind of led the way in some ways with some of this great content.
John Bergmayer: Yeah, HBO not only -- It's always been a premium channel, so it's an add on you can choose to pay for or not. But they have such leverage that they're able to even start selling directly to the consumers over the Internet. And similarly you see a great award winning programing being made by Netflix, Amazon, and Hulu and so forth, so I think you're right. We are in a great time for TV. Particularity for these long, elaborate high budget dramas, but also as well for quirky new comedies and things like that. And the fact that they are occurring outside of the cable bundle really shows that it's not really the cable bundle which is the cause of all this great programming. I think it is rather the affect of online competition which is driving higher quality programming. So I think it's another lesson, when you have like a more normal market where people can pick and choose and there's different sources for programing that that's a good way to get quality products out.
Christopher Mitchell: We did go a little bit deeper in terms of looking at the different interests of the content providers, versus the cable companies and now I want to make sure we talk about the cable companies, because Comcast, although it is to some extent --Has not as much power as the content providers, it also has substantial ownership and cross ownership with content. But smaller cable companies and in every municipality that does cable, is a small cable company, smaller cable companies, I think, are the ones that really are hurt the most by this. Can you talk a little bit about that?
John Bergmayer: So you're right. Not all cable companies are the same and in fact we're seeing a reintegration of large cable companies with content, so not only did some years ago we saw the Comcast NBC deal, now AT&T, which has it's U-verse system, which is effectively a cable system, is looking to buy Time Warner, a giant programmer. So you're seeing a lot of that vertical integration. The same economics simply don't apply to companies when they're at that scale and when they have their fingers in so many different pies. With the smaller cable companies in particular, a lot in rural areas, you have groups like the American Cable Association that represents the small cable companies, they're thousand really, nation wide, often only with a few thousand subscribers. And they simply have zero leverage against the large programmers. So not only do they have to bundle programming under the same deals, they really have almost no room to negotiate. The way that the market works is that the larger providers pay less on a per subscriber bases. So obviously Comcast is paying more for programming than some one thousand subscriber cable company in rural Georgia or something. But on a per subscriber bases, Comcast gets a better deal because it has more leverage, it has more lawyers, it can negotiate more, it can offer more. As a result these smaller cable companies though, they don't have that so they're barely getting by so on the one hand, they're still cable companies. People feel like they don't have a lot of choice. People see that their bills are rising year after year, and these smaller cable companies sometimes have a pretty bad reputation with their customers just like Comcast or Charter might. But they're not making the same amount of money or any money at all off of video. It's something that they now feel like they started out being video providers, but now video is something they have to offer cause they're customers demand it, but they really find that they make more money just offering broadband, which you don't have to deal with content companies. I mean just think how it is, like you can start like a small community broadband network and there's a lot of work, you have to do in local permitting, and you have to have engineering expertise and there's a lot that you need to know but one thing you don't have to do is have like your business people meeting with like negotiators from Viacom. I think dealing with the Hollywood side of things and the content side of things for the smaller companies can be pretty burdensome.
Christopher Mitchell: This is where I get a little bit frustrated and a little bit red in the face, because it strikes me, you know the federal policy is extensively one of competition. And yet when the rules are structured in this way, that small cable companies who often have a better reputation than the big cable companies, although there's certainly, as you mentioned, there's a number of small cable companies that also have bad reputations But if you're a small cable company probably everything is your reputation if you can expand and the idea is that, over time you would hope that some of these small cable companies could rise up and challenge the big ones in terms of competition. But it doesn't seem like that would be possible given that everything is structured so that the smaller cable companies have to pay more for the same inputs as the bigger guys.
John Bergmayer: Yeah, and it's particularly frustrating because we're moving to -- When the whole system of cable TV started it was just like a technical necessity. You know you had a network and the network carried particular content and then you to negotiate for that content. And there's really no way around it but now with the magic of broadband, you can just provide a high capacity broadband network, and people can get the their video from all kinds of source. It doesn't have to be so closely tied. The way that the market is structured, that's really hard. It would be very difficult to be a small cable company and say, "We're going to drop the video component then, just subscribe to Netflix." Because the content that people want is just not available online yet. We're seeing some motion. You have things like direct TV now and Dish's fling TV which are a little bit more cable like in terms of what you can get online, but we're still not quite there. So they still do have to deal with it. And at the same time, you have these tremendous disparities of barging power. We've had such concentration on the media industry, and on the cable industry too. But what happens is when you have these gigantic programing companies dealing with these small cable companies, there's a real fundamental unfairness because there's this disparity in bargaining power. And similarly if you're just like an independent programmer, you just have one channel, you just have this passion to make programing about some niche sport or maybe serve some foreign language community or something like that, and then you show up at Comcast and they might not give you the time of day because they're spending all their time dealing with the big companies. So you have this concentration which I think is inherently anti consumer and you have these side effects of these giant disparities and bargaining power which I think is real problem that I really wish the FCC would address.
Christopher Mitchell: One gets the sense from what you were just saying, that we may be moving in this constant direction of having more and more content available online. In some ways I worry that it's actually -- We take a step forward, we take two steps back, we take three steps forward we take two steps back -- It seems like the cable companies have a lot of tricks up their sleeve to prevent us from just moving to this world in which that small content creator that you were just mentioning would be able to just distribute across the Internet. I'm curious where you see things going in the near future in terms of this game of whether we have to subscribe to cable packages in order to watch the channels we want.
John Bergmayer: So if you want to be an online video provider, not only do you have to reach customers, you have to reach customers over broadband connections. So you have issues with net neutrality there you know, that's like a big area that Public Knowledge works on and that affects -- it has to do with zero rating and whether there are bandwidth caps and whether their interconnection is congested and things like that. And if you don't take care of those technical details and it's not even possible technically to be an online video provider that can offer people a watchable video service, you don't have a chance. So that's one set of challenges and when you're competing against cable companies that want to protect their own business you can see how you have the incentives maybe not working in your favor. At the same time you have to get access to programing. If you want to compete with cable like no you can't just offer your own programing. I mean you can, you can be like Netflix with it's original shows but then you're not really going to be a full substitute. People aren't necessarily going to cut the cord. Some people will, but people who really depend on or who really like the programs they can get on cable, if they can't get it online, they might not be willing to cut the cord and go online. So you've had a lot of companies try and fail to reproduce the cable bundle online. And only now do you start to see some companies that are able to sort of break through the regulatory barriers, the legal barriers and the economic barriers to offer something which is sort of cable TV like, but who are those companies? You have Dish and Direct TV basically. And those are giant pay TV providers. They're able to do it because they -- You know the satellite guys were in a bind because they don't offer broadband, so ultimately they saw that they had to adapt at some point. They have to start offering new services and they were much more willing to risk basically cannibalizing their traditional satellite customers in favor of online customers because that's where they saw their future. The cable companies themselves, maybe have the business and technical ability to this but they didn't have the incentive to do it. That's better than nothing, but it's still pretty far from the vision of a truly open and competitive Internet where almost anyone can come up with a new company and you can have a new Internet video company that goes from nothing to being huge in just a matter of years. Instead what you see is some of incumbents slowly shifting their operations online. So that's not all bad. It could be good for some of the small cable companies if maybe in 10, 15 years, because these things take time, Maybe they can shift to just sort of having a deal with something like AT&Ts Direct TV now. But what were not getting is the truly open and competitive video market place that the Internet has the potential to offer. But that potential isn't just going to happen all by itself.
Christopher Mitchell: So I think a key question for you being in DC is, what can congress do about it?
John Bergmayer: There are a few things. The FCC had a preceding that the previous FCC opened up, which is really just about making sure that smaller programmers are not prevented from selling their programing online. We have a similar issue that we faced a number of years ago with satellite TV. Satellite was a new technology. Policy makers saw that it had the opportunity to maybe introduce competition to cable. They knew that it couldn't just happen by itself. So we passed a number of laws, including what is currently Section 628 of the Communications Act called Program Access Rules. Which made it so that cable companies couldn't prevent programming from being carried by satellite. So the result was satellite TV providers were able to offer pretty comparable packages to what cable was offering and they started to be pretty successful. And it was really succeeding in bringing some new competition to the market. Then we know what happened next, is that broadband came along and that just really cemented cables advantage over satellite. But at the same time we do have like a lesson from history of what it takes to really -- If you want new entrance to offer video services, that's kind of what it takes. You have make sure that they can get the programing that they need without being locked out thought restrictive contracts that keep people from selling to them. And you have to make sure that they can somehow reach consumers and satellite it was making sure they have spectrum and with Internet services it will be making sure they have basically access to bandwidth to -- last mile bandwidth to reach consumers. Those are the sets of policies I would look for Congress and the FCC to do. It's just right now I'm not that optimistic that they're going to take such a proactive approach to promoting competition.
Christopher Mitchell: Well maybe if Time Warner from channel -- CNN in particular continues to annoy the president, he'll strike back against the content owners and cable companies, one never knows.
John Bergmayer: I think right now were in a time where it's very hard to predict what's going to happen in two weeks much less what's going to happen in three to six years. But at the same time, even in that environment we're going to do what we can to make sure that the video market place evolves in a way that is positive for consumers and competition
Christopher Mitchell: Great. Well I think you may have your work cut out for you but we're definitely supportive. And I want to thank you for taking time to talk with us about this issue.
John Bergmayer: Yeah, it was fun, thank you.
Lisa Gonzalez: The was Christopher and John Bergmayer, Senior Counsel of Public Knowledge, discussing cable companies and bundles. We have transcripts for this and other Community Broadband Bits podcasts available at MuniNetworks.org/broadbandbits. Email us at Podcast@MuniNetworks.org with your ideas for the show. Follow Chris on Twitter, his handle is @CommunityNets. You can also follow MuniNetworks.org stories on Twitter, the handle is, @MuniNetworks. Subscribe to this podcast and all the podcasts in the ILSR family on iTunes Stitcher or wherever else you get your podcasts. Never miss out on our original research. Subscribe to our monthly newsletter at ILSR.org Thanks to Admiral Bob for the song, Turbo Tornado, license to creative comments, and thanks for listening to episode 241 of the Community Broadband Bits podcast. Have a great day.