IP Democracy: TWC's Britt is Right. Content Costs Will Drop.

The WSJ has this illuminating interview with cable veteran and Time Warner Cable CEO Glenn Britt in which Britt makes the case that cable operators won't keep paying high license fees for TV networks if the migration of video content to the ad-supported Internet continues.

There is a model today for financing TV programming where the cable networks rely on subscription revenue as well as advertising revenue. As cable companies, we are in effect retailers. We buy programming wholesale, we put it in a package, and we sell it to subscribers.

On the wholesale side, we are guaranteeing revenue to the networks. That allows them to turn around and go to movie studios and other producers and to have the programming created.

This whole formula works quite well, and has resulted in arguably the richest choice of programming in the world.

Programmers shouldn't think that if they put the same content on the Internet for free -- at the same time we're showing it -- that we're going to pay the same wholesale price as we were paying before.

Well, there are no signs that the mass migration of TV content to the Internet will end and it's therefore safe to assume that cable operators will ultimately pay content providers less in license fees. But, and I've argued this point lately with a number of programming executives, it's inevitable that high-cost, star-driven Hollywood films and TV shows are at the end of their days anyway.

Not that this is a bad thing, as Britt suggests in the interview.

I think we will have to have a new formula for financing television programming, or else we just aren't going to get the same quality and quantity that we are used to today. That's just pure economics. People should think things through before they just go willy-nilly putting things on the Internet.

Britt equates quality and quantity with the amount of money spent on programming and to some extent this is true. But quality and quantity are not nearly as related to dollars spent as most people believe.

Is Reese Witherspoon really worth $15 million to $20 million per film, or around half of the cost to make her most recent film "Rendition"? My guess is that you could pay a top-notch unknown actress one-fortieth of that amount and get a performance of equal or superior value. Leaving you with 39/40ths of her salary to devote to other projects.

The high-cost, star-heavy formula of making TV shows and films drives the fees that Hollywood and the networks charge for their wares and is a system doomed to obsolesence as the Internet starts to squeeze costs out of entertainment content. Once cable operators start cutting back on license fees, big program networks and studios are, in turn, going to either cut spending, step up Internet distribution, thereby accelerating the decline in cable-paid license fees, or more than likely do both.

The salaries that allow stars to live like this are an obvious starting place, but few in Hollywood would deny that there's a lot of excess money floating around the upper echelons of the entertainment business.

The Internet, on the other hand, is far less star-driven, far more quirky than the old media world and a little money can go a long way in generating profits. This vast new outlet for video programming holds the potential for spawning a money-making hit out of low-cost (although not necessarily low-caliber) content and a new crew of content providers outside the studio system can compete with the big boys. In economists terms, the video entertainment business is an increasingly contestable market and web distribution can increase consumer surplus by giving viewers content at a far lower cost than they are willing to pay for it or than they used to pay for it.

This new calculus of entertainment content production has yet to fully take hold, but you can believe that Hollywood and the old-fashioned TV networks are going to face tougher and tougher negotiations with multichannel TV distributors as more and more video appears on the Internet. But I disagree with Britt that this new formula poses a risk to video quantity or quality. On the contrary, as costs drop, we might just see more and better video programming on both the web and traditional TV.

Posted by Cynthia Brumfield on June 2, 2008 3:31 PM to IP Democracy