Cable operators are privately working on a plan to force programmers to unbundle their networks and allow customers to subscribe to channels on an individual basis.
The plan represents a complete reversal from cable operators' long-held opposition to what is known as a la carte programing. Over the last decade, the cable industry battled ferociously with regulators to protect the right to bundle programing, arguing it offered customers the best value.
But executives now say the change is a necessary response to shifting dynamics such as higher carriage costs and using the Web to watch programs, as well as a weak economic recovery that has forced many consumers to cancel cable television subscriptions.
Comcast Corp and Time Warner Cable, the two largest operators have lost 1.2 million video customers in the 12 months to June 30.
Pay-TV distributors such as Time Warner Cable and Cablevision are searching for a business or regulatory strategy to lower escalating programing costs, which have risen between 6 and 10 percent each year during the last decade, according to industry sources.
An a la carte menu of programing would give consumers who are not sports fans the freedom to drop high cost sports channels such as Walt Disney Co's ESPN and ESPN 2 from basic packages. At around $4 a subscriber, ESPN is the most expensive channel in the cable business, according to SNL Kagan.
We feel that some of those expensive channels should be offered a la carte so only those people who want to watch them actually pay for them, said Jerry Kent, chief executive of Suddenlink, which has 1.3 million cable customers.
Rocco Commisso, chief executive of Mediacom, which has 1.2 million subscribers, sent a letter to Federal Communications Chairman Julius Genachowski earlier this month that suggested instituting a carefully designed a la carte system, so that decisions about what video services are bought are made by consumers themselves, rather than by content owners.
The specter of unbundled programing is likely to encounter fierce resistance from network owners such as Viacom Inc or Discovery Communications Inc, which are keen to maintain the economics of selling their most popular channels as a package with their smaller, nascent networks.
The cable operators' plan is motivated in part by the high cost of sports programing rights, which have skyrocketed in recent years. ESPN recently singed a $15 billion, 8-year TV rights deal with the National Football League, a 73 percent premium over their previous agreement. Cable operators, fearful of having to pay for the increase or pass it on to customers, harshly criticized the deal.
Cable and satellite companies have also had to start paying for the right to carry Disney's ABC, CBS Corp's CBS, Comcast Corp's NBC Universal and News Corp's Fox. Those free-to-air broadcast networks traditionally had been carried by cable operators at little, if any, expense.
Federal rules require cable distributors to carry local broadcast stations, which they argue gives broadcasters an unfair advantage in contract talks.
The so-called retransmission fee debate has already led to high profile blackouts of local TV stations in the last few years after contract negotiations between pay-TV companies and broadcasters broke down over payment terms.
There is a growing recognition that the current model is broken, said Craig Moffett, a long-time cable analyst at Bernstein Research.
Moffett warned, however, that allowing customers to choose any station they wanted in any package would be economically unfeasible for both the consumer and the cable company.
It could be a la carte, but not as people imagine it now, he said referring to smaller packs of programing more akin to what Time Warner Cable Inc has tried. Last November, Time Warner Cable launched a three-city trial of a low cost TV Essentials pack with fewer channels. It now plans to expand that offer to other cities.
Following Mediacom's lead, rivals Time Warner Cable and satellite company DirecTV Group joined forces this month to reach out to Genachowski about retransmission fees, with the aim of unbundling broadcast channels from cable channels in carriage negotiations. They are keen to find long-term solutions ahead of what they referred to as the retrans season starting next month, when many agreements come up for renewal.
We're in an environment where programing costs are rising at well above inflation and well above what I think consumers are willing to pay, said DirecTV CEO Mike White at a recent investor conference. I think content costs are a challenge for the entire industry.