Given the opportunity, many of us choose to organize our TV watching to minimize ads as much as possible. We record, fast forward or pay subscription fees to services like Netflix and HBO to watch shows ad-free. But here’s the dirty little secret of television — advertising makes it go and keeps it affordable for the viewing public.
Which is why the Federal Communication Commission’s attempt to “open” the cable set-top box to competitors has the potential to be a giant disaster for consumers. Let me explain. Although advertising is becoming increasingly easy to skip, it still funds an enormous number of programs. Last year advertisers spent $79 billion on TV. That’s down slightly from 2014 but still makes it the largest slice of advertising spending in media beating out digital and (obviously) print.
Advertising makes up as much as 50 percent of revenue for programmers and 8.5 percent of revenues for the so-called multi-channel video programming distributors. The money flowing from these ads keeps the TV ecosystem going. Networks have money to invest in and pay the creators who make TV shows. Prestige shows like “Mad Men” and “Empire” are financed by ads. But it also allows MVPDs to keep subscription prices relatively low by providing another source of revenue — one that doesn’t come out of consumers’ pockets. That helps subsidize pay channels, which is why standalone HBO costs $14.99 per month but you can get HBO through your cable provider for $10 per month.
The FCC’s proposal to open the set-top box market to third-party developers would destroy this entire system. The MVPDs would be required to provide their programming streams to anyone who wanted to use them. These third-party box makers wouldn’t be required to follow the advertising deals that MVPDs have carefully contracted. They could alter or delete the original ads or pile on more ads and keep all that new revenue for themselves, driving down the value of the “original” ads and sucking up revenue that would ordinarily go to fund new programs. Chairman Tom Wheeler has claimed the new rules won’t allow this but experts recognize that the “rules won’t prohibit extra ads around TV channels.”
This is a classic free-rider problem where the entities that are benefiting from the streams aren’t paying for them — to the detriment of the content creator and distributor communities and ultimately the consumer. With reduced advertising revenue, the MVPDs would have little choice but to raise prices for consumers, putting them at an unfair and artificial disadvantage compared to the new box maker entrants who have not had to pay the high costs of building infrastructure. And the impact on programmers would be even more severe. The loss of ad revenue would make it harder to fund quality shows — especially premium “movie quality” shows like “Mr. Robot” or the new “Roots.”
Small, niche and diverse stations have warned they will find it hardest to survive. New networks often have a chance to grow thanks to the income coming from bigger networks. Without ad revenue, there will be little incentive for MVPDs to give those networks a chance. A big part of the problem here is that the FCC is trying to fix a market that isn’t broken. The MVPDs already see the demise of the set-top box writing on the wall — that’s why we’re seeing the market flood with boxless solutions that embrace the apps-based approach consumers demand.
Why pay for a box when your smart TV or streaming device can deliver the same results without a box? The entertainment industry is working things out on its own. It doesn’t need the FCC’s heavy-handed intervention. And there’s serious risk that the FCC not only isn’t helping but could actually do harm by destroying the current advertising ecosystem that delivers great value to the American consumer.
Mike Montgomery is executive director of CALinnovates, a tech advocacy coalition. Thinking of submitting an op-ed to the Washington Examiner? Be sure to read our guidelines on submissions.
