When It Comes to Television Content, Affiliate Fees Make the World Go ‘Round

Posted on April 28, 2010. Filed under: Internet, online video, Uncategorized, video, Web/Tech | Tags: , , , , |

“The clock on the wall’s moving slower
My heart it sinks to the ground
And the storm that I thought would blow over
Clouds the light of the love that I found”

Fool in the Rain, Led Zeppelin

More often than not, we here in Silicon Valley are prone to idealism. We see a scenario the way we want to see it, and make predictions that fit our view of how we think the world should work, or perhaps even how we would like the world to be. This is especially true when it comes to technology. Outsider “luddites” who do not immediately grok the remarkable disruptive power of our latest and greatest technologies are doomed to the business trash heap – driven there by obsolescence and an obstinate refusal to accept their fate. Often times, our version of them “accepting their fate” would require them to abandon everything they know, walk away from the majority of their revenue, and terminate 80% of their employees. But hey, that’s their problem, not ours. We love disruption. It serves our purpose.

One often discussed target of such criticism is the media industry. There is a widespread belief that Hollywood now faces the same digital threat that has plagued the music industry over the past ten years. The argument goes something like this: There is nothing Hollywood can do to stop this train. The problem, you see, is that technology is merciless, impersonal, and unforgiving. Video can be turned into bits; Moore’s Law will make a pile of bits smaller and smaller over time; and efforts to erect pay walls will prove fruitless and even Quixotic. Studio heads should simply throw in the towel now and take what’s coming to them. Denial equals delay, and delay costs you time away from learning how to execute within your new constraints. All content will be free, and you simply have to live with that fact. The sooner you get in touch with it the sooner you will learn to execute in the new reality.

There are three key reasons why Hollywood is under less duress than Silicon Valley wants to believe. For starters, the leaders are wide-awake. Ever since Boxee offered Hulu (and were told to stop), the executive ranks at the major cable companies have been alert and engaged. Second, Hollywood has a solid track record of enforcement. They understand the stakes are high, and they are willing to invest in lobbying, regulation, litigation, and enforcement. They are also unafraid to throw around their weight (witness Viacom vs. Google). The final and most significant reason is that this is a massive, massive business, and it is critically important to understand where the money flows (most people don’t). You can spend plenty of time talking about other issues, but when it comes to understanding the key factor at play in nearly every major business decision in television, you will find affiliate fees – all $32 billion of them.

For those who do not know, affiliate fees are the primary revenue stream that funds today’s mainstream television content development. These are basically a “share” of the subscription fee you pay to your cable or satellite operator that is then shared back to the content owner/distributor (typically on a per subscriber basis). As an example, you will hear that some less notable cable-only channel was able to negotiate $0.25/sub/month, or that ESPN can negotiate $2.00/sub/month, because any aggregator would be afraid to market a television package without ESPN. Over the past 30 years, these fees have become the lifeblood of the TV content business – affecting how the major aggregators think and operate, and also affecting how content is produced, financed, and packaged.

Here are some specifics to help frame the issue. According to Matthew Harrigan at Wunderlich Securites, in 2009 DirecTV paid approximately $37/sub out of an ARPU of $85/sub to content owners for programming costs (i.e. affiliate fees). In this case, affiliate fees represent roughly 43% of total revenue for DirecTV. Similarly for Comcast, Matthew estimates programming costs at 37% of video revenue (Comcast has high-speed data and voice revenue that are separate). These are just two examples, but to give you a sense of scale these numbers represent around $7-8 billion/year each for Comcast and DirecTV. The recent, and very well written Business Week cover story on this same topic pegs the aggregate fees of all content providers at $32B per year. These are big, big numbers. To put things in perspective this is about 33% higher than Google’s annual global revenues including revenues for its advertising network.

These affiliate dollars flow through to the content producers. Estimates suggest that the annual affiliate fee revenue at companies like Viacom and Disney is around $1.5B and $2.0B respectively. On their own, numbers this large would obviously be motivational to corporate executives. But the reaction is even more intense because affiliate fees “feel like” 100% gross margin revenue. From a cost accounting perspective, a studio should allocate these fees across the content development costs, and therefore, they are not explicitly 100% GM. But as there are no significant variable costs related to the deployment of these programs to the carrier, most content owners cannot help but think about affiliate fees as 100% gross margin and therefore the key contributor to overall profitability.

Affiliate fee optimization is the key objective behind many of the industry’s most high profile strategic moves.  Here are a few examples.

  1. Cablevision vs WABC. Recently, there was a high profile stand-off between WABC in New York City and Cablevision. As is often the case, the content owner here was threatening to cut-off access to their content precisely before a very high profile and high demand piece of content was set to air. This particular piece of content was the Oscars. A cable channel owner holds up a cable company to extract a higher per-sub affiliate fee for the next contract. They always put the customer in the middle, and both sides try to argue that they are virtuous and that the other is greedy. There have been numerous examples like this over the years, and it is common to see one of these showdowns each and every year.
  2. Modern Day Cable Channel Strategy. Today’s most typical cable strategy is built entirely around profit maximization utilizing affiliate fees. If you own a cable channel, your goal is to develop one or two key, hit programs, and fill the rest of the linear lineup with very inexpensive content. The “hits” make you a “must have” for any cable or satellite carrier – granting you the right to ask for fees. Too many hits drive up costs. This is why you will see more and more hit shows on the less well-known cable channels. Mad Men on AMC is a perfect example. How can a cable company not offer Mad Men? Once you nail the single channel game, you immediately try to proliferate that into multiple channels a la MTV and ESPN.
  3. Comcast Acquires NBC. Why would a cable distribution network want to own content?  First, it’s a hedge against rising content costs (affiliate fees).  Second, it offers leverage vis-à-vis their competition.  DirecTV needs NBC.  DirecTV will have to negotiate affiliate fees for NBC with Comcast (Comcast also owns other channels like E! Entertainment, The Golf Channel and Versus).  This helps keep Comcast’s business model in check.  It’s also why Comcast made a huge play for Disney in 2004. Affiliate fees have been rising for some time.
  4. Networks Ask for Fees. For the longest time, the major networks were not part of the affiliate fee gravy train. In fact, due to “must carry” laws, most networks never considered intentionally restricting their own distribution. They were simply pleased to get redistributed over cable and satellite. As these fees have grown in size and importance, the networks have changed their position and have come to the table asking for affiliate fees also. The WABC case above is one such example.
  5. Oprah Asks for Fees. Many people seem confused by Oprah’s decision to abandon her network television show after 25+ years of unquestionable success and relaunch it within her own cable network. Why would she do such a thing? Because she can. When Oprah launches her own network (with the help of Discovery), she will get per sub affiliate fees. Which cable company is not going to carry Oprah?  What programs will be on during the other 23 hours? As stated in #2, it really doesn’t matter. They still need to carry the Oprah channel. That said, Oprah has proven she can launch other personalities (Dr. Phil), and one would suspect that any new celebrity she “launches” will be tied to the Oprah network, increasing her leverage and her affiliate fees.
  6. Sports Networks Ask for Fees. Affiliate fees are driving an endless supply of channels for anyone that has “must see” content. The NFL has a channel, and had some high profile disagreements with the carriers over the “need” for its affiliate fee. You also see an NBA channel, an MLB channel, and pro wrestling is vying for one as well. If you own exclusive content, you might as well build a channel around it. This endless proliferation of channels will one day reach a limit, but for now it’s the game on the field.
  7. Hulu/Boxee. Many people blamed Hulu for its decision to block access on the Boxee platform. These users simply didn’t understand the power of affiliate fees. Comcast told NBC/Fox that if Hulu could distribute their content for free, then they would like to take their own affiliate fees (the newly negotiated ones in #4) to $0.00. This caused NBC/Fox to tell Hulu that maybe Boxee isn’t such a good idea.

In addition to not appreciating these money flows, most of the digerati in Silicon Valley have huge misperceptions about the content owner’s preferences. They assume that content owners would like to distribute directly to consumers precisely because the Internet allows them to do so. They would no longer  be in the “death grip” of the content packager (cable and satellite companies) who take an unreasonable fee for their services. This is simply not how these content owners view the world.

Content owners absolutely prefer to be aggregated in a bundle of channels and, as a result, to receive affiliate fees. They also have little interest in “a la carte” packaging, a concept dreamed up by regulators in Washington but not desired by the heads of the content studios. Simply put, there is adequate value provided in distribution and revenue collection. To launch a direct channel (and forgo these fees), and then attempt to regain your customers one by one is a harrowing experience. Why earn your customers one by one when you can get to mass volumes, and a fixed amount of recurring revenue, through a distribution partner? If you create a new piece of camping equipment would you sell it online or try to obtain distribution through REI?

ESPN360 is a solid example of content owner’s preference for the affiliate fee driven/ distribution partner model. As the Internet became fast and pervasive, ESPN (owned by ABC/Disney) saw a clear opportunity to deliver more programming to their users and launched an online-only product called ESPN360 (recently renamed ESPN3). This on-demand, “over the top” offering is a killer product for the true sports fan, offering access to significantly more live games that was ever possible on a traditional linear cable channel. Despite the fact that ESPN has the brand, the reach, the market power, and the technology to charge users directly for this new product, they chose a different path. ESPN sought out distribution partners to bundle ESPN360 in with their standard video television packages, even though this was confusing and even baffling to most Internet users.

So against this backdrop, the cable companies have developed a remarkably shrewd strategy to simultaneously leverage their broadband infrastructure and affiliate-fee money flows. This concept, known as TV Everywhere, has two main components (once again, this move by the cable companies is extremely well articulated in the recent Business Week cover story on the same subject). First, you tell your customers that you want to provide them with a killer new service. They are already paying for all the content they receive through the linear channel stack. What if that same content could be viewed at any time “on-demand” and also through multiple devices (TV, PC, and mobile)? Sounds great so far. Who wouldn’t want this? And “everything” on a service like Comcast is more than any digital aggregator has yet even dreamed of aggregating. Ignore for a moment that this is not completely working just yet and focus on what they will “eventually” deliver. It’s also helpful to show the FCC you are being innovative, and not resting on your laurels the way a true monopolist would. Check.

Next comes the clever part.  The cable companies go to the content owners and make the following argument. With Internet-connected TVs on the horizon, you can no longer separate the Internet from the TV or the office from the living room. We pay you an affiliate fee to distribute your content to the homes we serve. We understand you have multiple distribution partners. What we don’t understand is why you would give content to some of them for free, and still expect us to pay our feesCheck-mate. This is the move that forced Hulu to a subscription model. The content owners, struggling with depressed advertising rates as a result of the global recession, quickly acquiesced to Rupert Murdoch’s assertion that maybe all their content should have a price.  Disruption disrupted.

Some have even suggested that Comcast has approached the large networks and offered an “extra” affiliate fee of around $0.50/sub to pay for over-the-top rights. Proactively increasing your own costs is a fairly unique business strategy. But this move also increases the costs for the disrupters, who are far less likely to be able to afford it.

As a result of these maneuvers, the current trend in the market is for less rather than more prime-time content to be openly available for free on the Internet.  Do you remember when South Park boldy made all episodes available for free on the Internet? Check out where things are today.  Try to watch the recent Facebook parody “You Have 0 Friends,” and you will receive the official message “DUE TO PRE-EXISTING CONTRACTUAL OBLIGATIONS, WE CANNOT STREAM THIS EPISODE UNTIL 05.08.10.” They may have wanted it to be free, until someone threatened to take their affiliate fees away. Viacom also recently removed shows like “The Daily Show” and “The Colbert report” from Hulu noting that “we could not agree on a price.” Suggesting there is a “price” at all would indicated they were discussing affiliate fees, as opposed to ad splits.

While this likely enrages the disruption enthusiasts, expect this trend to continue over the next year. More and more content owners will rip their shows “over the paid wall” as they get reacquainted with their own affection for affiliate fees. There is much speculation about Hulu’s forthcoming subscription launch with many journalists hopefully optimistic that Hulu as we know it will remain free and that all sorts of new features (TV support, iPhone support) and content (movies, back catalog) will be behind the paid wall. They may be surprised to find that “paying” may be necessary just to obtain what users see today. Affiliate fee parity may demand it.

So does this imply the end of all digital packagers? Not at all. Most clearly, NetFlix has successfully built a hybrid physical/digital strategy while maintaining its “all you can eat” model. It is also going toe-to-toe with other packagers by striking deals to lock up digital content (including TV programming). Furthermore, Hulu has executed well beyond anyone’s original expectation, and there is no reason to expect that to change as they move to a new model. One would expect them to continue to lead in terms of ease-of-use and simplicity even within a new model. Also keep in mind that Amazon has a strong VOD offering integrated into its overall purchasing experience, and many suspect both Apple and Google will enter the game as well. Despite this level of competition, all of theses vendors will need to find unique ways to compete against TV Everywhere. And with “free” off the table, the dimensions of competition will be inherently less disruptive.

There are two other potential challenges for non-facilities based content aggregators. First, as was the case with Satellite radio, we may see a “no holds barred” price war break out in an attempt to grab “exclusive” content to distinguish one’s package. As we all know, exclusive deals with the likes of Howard Stern nearly killed XM and Sirrus. DirecTV already pays $700 million per year to the NFL to have an exclusive offering of every NFL game on every weekend (NFL Sunday Ticket), and they recently coughed up over $4 billion to extend this deal. Wow. What if other digital “packagers” look for unique differentiation by leveraging the cash on their balance sheet? If this happens, any digital aggregator without deep pockets will be holding a knife at a gun fight.

The second externality that could cause trouble is “bandwidth limits” or “metered usage” on the Internet. While some people assume this will never happen (especially the idealist in Silicon Valley), the quiet momentum is building. There are continuing tests at AT&T and Time Warner, and AT&T’s president Randall Stephenson spoke openly about metered Internet pricing as recently as a month ago. Also, the Supreme Court recently put the kibosh on the FCC’s deliberate effort to make net neutrality one of its defining policies. This is perhaps an entirely separate post, but one should be confident that the rate charged the consumer by the owner of the transport for one hour of Internet video would be quite a bit higher than that for one hour of the same video over their own “optimized” TV infrastructure (backed up with an ample helping of technical analysis and white papers).  The fox isn’t just guarding the henhouse, he designed it.

There are still two legitimate arguments that trump all these discussions of affiliate fees and deft corporate strategy – piracy and content democratization.  Let’s start with piracy.

What if “BitTorrent 2.0” in whatever form it takes is just blatantly unstoppable?  No matter what you do, content has become too small relative to the big broad pipes and storage devices.  Technology trumps determination, and the minute something has been shown once, it will be free for all takers.  Isn’t this true in China today? It’s a big leap from expecting this to happen “someday” to expecting a content creator/owner to throw caution to the wind and immediately adopt a strategy that is congruent with unlimited free distribution (what is this strategy by the way?  can’t ads be removed also?). Technology is inevitably a tough competitor, but so is regulation and enforcement, and you should expect that a mighty effort on the part of a multi-billion dollar industry would mute any expectation of an overnight transformation. In her latest post at All Things Digital, Kara Swisher suggests that a recent increase in the number of intellectual property enforcement officers at the DOJ may be a direct response to the immediate needs of the entertainment industry.

Other cheerleaders of the disruption bandwagon point to the undeniable future where the availability of low-cost, high-feature camcorders at BestBuy will lead to a mass democratization of content creation. In this brave new world, the bloated and lavish infrastructure of Hollywood will give way to thousands of mini-Tarantinos who produce hit after hit on shockingly low new-world budgets that redefine the content creation business. This is the video equivalent of the infinite monkey theorem.  While this may be true when it comes to low-budget formats like game shows, talk shows, and reality television, today’s fussy television viewer has come to expect a product that is much more equivalent to feature films than home movies. Each episode of Lost costs well over $1mm to produce. Cheap cameras do not disrupt “production quality”. And let’s not forget that The Blair Witch Project was over ten years ago, and desperately stands alone as an exception and not a rule.

In the long run, the disruption zealots may be right. It may all come undone in the unstoppable Armageddon of unlimited “all you can eat” content enabled by the undeniable liberation of all bits big and small. But with $32 billion on the line, don’t expect it to happen overnight. You will be sorely disappointed.

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89 Responses to “When It Comes to Television Content, Affiliate Fees Make the World Go ‘Round”

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[…] access to content. However, it is very deliberate choice that they do not, so as not to upset the current bundling model that makes the TV world go round. Both companies decided to create these killer must-have apps for free to drive more subscribers to […]

[…] When It Comes to Television Content, Affiliate Fees Make the World Go ‘Round by Bill Gurley (a general partner at Benchmark Capital, a Silicon Valley venture capital firm and is considered one of “technology’s top dealmakers”). I never truly understood the power of the TV broadcasting business until I read this article. Truly gave me an understanding of why and how the networks, studios, and cable companies form a cabal-like business environment that has only gotten stronger with technological advancements (give those executives credit for reacting quicker than the music business) rather than weaker. It explains why ESPN, with their enormous $5+ per sub affiliate fee and overwhelming leverage power with satellite and cable companies, would NEVER choose to bypass that system to feed their content directly to the customer. It would make zero fiscal sense, despite all evidence pointing towards the contrary by those who do not understand the television business. […]

[…] payments from affiliate fees on the US TV market were approximately $32 billion in 2011, which was about 50% more than the total advertising spending on cable TV the same year. Premium cable businesses, like HBO and Showtime, are even managing to build their […]

[…] be included in any cable plan to get a slice of that pie. Broadcasters charge the cable companies affiliate and retransmission fees. The broadcasters then pay out licensing fees to content creators, who sell their programming into […]

[…] be included in any cable plan to get a slice of that pie. Broadcasters charge the cable companies affiliate and retransmission fees. The broadcasters then pay out licensing fees to content creators, who sell their programming into […]

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This is one powerful article that makes the case for my 2nd pilot to prove an online video news revenue model. First pilot proved that we could gather and distribute CNN quality news at a 10th of the cost.

Thank you!

Stanley W. Fields

[…] they plan on keeping it that way.  This may change, but I doubt it.  Read this article, “Affiliate Fees Make the World Go Round,” to further understand why this is the […]

[…] You guessed it; the cable and satellite providers. Why? Because as noted venture capitalist Bill Gurley sagely pointed out, “When it Comes to Television Content, Affiliate Fees Make the World Go ‘Round.” […]

[…] As Bill Gurley notes, the big media businesses will fight hard to protect the stability of their value chains. For example, affiliate fee revenue at companies like Viacom and Disney is $1.5B and $2.0B respectively. Reductions in affiliate revenue at the corporate level will mean reductions in fees paid out to creative people.  That’s not good. […]

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How long will it be before a new system such as Netflix or Apple TV makes traditional cable, broadcast networks and Blu-ray distribution obsolete?…

The conceit of this question is that companies like Netflix or Apple TV are somehow natural competitors to cable or broadcast. Once you understand how media companies use distribution windows to monetize their content, you’d see the question makes abo…

Blair witch has been reproduced. It was called Paranormal Activity. Made for $15,000 and earned over $200 Million. Most reality TV can be produced on prosumer cameras available in Best Buy. In film, DLSR cameras have revolutionized filmmaking and camera department budgets. No longer is a huge camera department required, just a DSLR camera and a good eye. Production design can be achieved via. available locations rather than recreating it a la “Hollywood style”. The industry spends a lot of money trying to achieve the real world look, so obviously a millionth monkey with a stealthy DSLR camera in a real world location can produce comparable results. Documentaries are perfect examples of this phenomena. Talented good looking actors are a necessity, but due to economies of scale and the recession this component is free. Algorithms have proven that audiences respond name actors far less than the industry assumed. In fact, locations are more important. So you are wrong, technology has equalized the production process greatly and has begun decomposing distribution as well. The VHS replaced home film projectors, the DVD replaced VHS and now the internet has replaced the DVD. Bye bye Blockbuster, and Redbox will be gone too if they don’t ‘man up’ and go head-to-head VOD with Netflix. Netflix is weak in many genre’s so unless they start aggregating they will lose pace against “tv anywhere” or some rogue cyberlocker, in eastern Europe. TV anywhere is a great idea for the industry to slow the tide, but for ad supported cable networks, even with product placement, their advertisers are reducing budgets and opting for internet marketing strategies that provide robust metrics. BTW, TV is terrible for metrics and the Nielsen’s are a joke. So, that leave’s premium content like HBO and non-ad-supported channels in the best position to thrive off the TV Anywhere paradigm. But, how long will that last? My friend accesses HBO via. her brothers account and in 30 minutes I built a system to re-stream it back out over any streaming platform, justin.tv/influxis/whatever, as an experiment in digital rights management. Conclusion, TV Anywhere doesn’t enforce DRM. Netflix / Silverlight doesn’t either, you can listen to the port and rip data as it drips in. Maybe 30 year olds find it too technologically challenging to access content this way, but kids don’t. Ripping isn’t just a right of passage, it’s a way to get popular. If the ripped content is spread over a P2P system it cannot be policed. “Lawyering up” can’t stop peer 2 peer. So, I think you need to look a little further into the future to see what’s really happening. This TV Anywhere is an OK biz strategy, but it’s also “dying snake piss”, a last ditch effort to maintain control. This won’t help. What will is realizing content is metadata and as such it can be used for novel marketing strategies; not the typical lame eCPM’s, but something way more progressive. I’m not going to get into all that here, that zeitgeist will come later, but until then sit back and watch this ship burn in the night. They may put out the fire with all the sea water they are throwing on it, but in the end it will still sink.

The central pivot of your argument is that theft is just something we’ll have to learn to accept. It’s not only something that is happening but it’s a “rite of passage” == cool. Would you walk into a 7-11 and steal a candy bar? You probably would not. If you would, we, as a society, have people to arrest you for breaking a societal law. Society has not decided that copyright laws – whether easy or hard to break – are ok to violate. Societally we value the idea that people should be paid for the ideas they create. We have extensive laws to insure that those ideas – whether highly valued by the market or not – are not stolen. Laws are laws and breaking them with code or a crow bar are the same thing. Dressing up that law breaking with the term “disruption” or “innovation” or “inevitable” does not make it less of a crime. You argued about the disruptive nature of technology in its ability to lower the cost of productions. But cost has nothing to do with this. If someone can produce a great film using handheld cameras and it costs them 20K to make and they make $200M, that’s not an excuse to violate the law and steal from them. The market – derivative from the laws we create to protect it – will dictate what the revenue and profit is from creative work – regardless of the cost that went in to creating that work. How much “cost” goes into making an Andreas Gursky photo? Should that have any bearing on how much the art sells for? If we don’t protect creative work, then we will not have financial incentives for it to be created and the results are predictable.

Lastly, I don’t understand the argument about different monetization models. The model by which copyrighted product is monetized is a completely orthogonal topic to whether or not copyright laws are good laws and should be enforced. If content is easily stolen and we don’t enforce laws against doing so, supply will be glutted and prices will fall – in most any monetization model.

If thought leaders make it acceptable to steal ideas (call them bits if you want), then we are undermining an age old copyright system that we have societally deemed necessary. If and when we, as a society, change those laws then it won’t be theft. Until then, it’s theft no matter what you call it.

The big insight that I get here is that an increasingly vocal audience is responding reflexively to what they view as an unfair profit, whether it’s a carrier, studio, or even the actors themselves. (And when they say unfair, I get the feeling that if you have more than the commenter does, then that’s unfair.) I suspect many won’t really understand things unless they actually make the leap from passivity to having some skin in the game. After all:

“Tragedy is when I cut my finger. Comedy is when you walk into an open sewer and die.”

[…] any cable or satellite carrier – granting you the right to ask for fees,” Bill Gurley explains. “Too many hits drive up costs. This is why you will see more and more hit shows on the less […]

[…] fees then they do from ads.It's about driving cable subscriptions as it is, not ratings.http://abovethecrowd.com/2010/04…Chris Keath • 8:23amView All 3 CommentsCannot add comment at this time.  Jens […]

I could care less about affiliate fees, I do however care about bandwidth caps (totally un-necessary), throttling, censorship and BS excuses to limit my access to the Internet. I care that I am paying for 16Mb/2Mb, paying a premium, yet only receive 100K/30K…I should be paying pennies on the dollar given the reality of the less than the FCC definition for broadband (768Kbps) that I am receiving. Should they be allowed to call it broadband? Should RICO laws apply?

Thankfully none of us have to wait even one more year if we do not want too. We can move, today, to a synchronous Fiber-To-The-Home (FTTH) community. When Google gets all 5 built out there will be just over 30 synchronous FTTH communities in the USA.

If you do not want to move, than run for office and get your friends and neighbors to only elect representatives that will put citizens (consumers) before any and all corporations. Such a community will follow through with Synchronous FTTH when the incumbents fail them.

The mistake in this article is assuming customers will continue to be willing to be extorted to pay higher monthly fees and receive less bang for their buck (service).

If I can not get the content on the Internet, I will simply not watch it…game over. Plenty to do outside, with friends, in person. We should thank the providers for permanently changing our viewing habits, thus we do not need their cable!

Most important, is the loss of my TRUST. For over 20 years I have heard the telco/cable companies promise FTTH and not deliver. I have watched as my monthly bill rose and I received less and less service for more money. I finally gave up on it. The last time I talked to my provider, I told them to provide me with the amount of bandwidth I am actually paying for…ONLY after receiving what I am paying for, for the next 7 years, would I consider adding any other service. Time for them to put up or shut up! I have learned to live without them. How many of me (customers) can they afford to live without?

No more BS, no more shell games…put up or shut up. In the meantime I will move to a synchronous FTTH community and at that point they could not pay me to take their customer no service.

I have learned that I do have choices…they do not include them and I am happier for it!

Some people are benefiting from broadband arbitrage in the short run. My guess is that you’re not a pro sports aficionado and prefer to watch classic movies over episodic television and long ago stopped going to first-run movies at the cineplex and prefer to wait until it’s available on DVD. For you, FTTH is perfect.

The ugly truth is that rights fees demanded up and down the production chain have led to our current pricing structure. The NFL players and team owners are fighting over who gets first dibs on future rate hikes in both ticket prices and affiliate fees.

Today, you’re able to get what you want at a price you think is fair. Over the medium term, though, I expect an increase in Netflix fees and fin-syn related litigation, and an overall flight of quality away from free channels and towards premium pay services like HBO and ESPN. And enjoy your municipal broadband while it lasts — today it flies under the radar but don’t be surprised by rate hikes the moment the city council thinks of it as a revenue generator. The trends in city revenue are simply too bleak to be ignored.

At the end of the day as long as subscribers do not have to foot any additional costs, it is ok.

[…] was the battle between TV affiliates wanting more money from cable distributors, leading to embarrassing channel outages while disputes unfolded in the […]

[…] and recons the number is somewhere around $32B / year. Here’s how Bill Gruley put it in his abovethecrowd.com blog last April. “Over the past 30 years, these fees have become the lifeblood of the TV […]

Consumers are quickly realizing that the ‘value proposition’ for 10000 channels, a tenth of which have one show you might be interested in while the bill regularly increases is not a winning one, and I think you’re wrong in saying that nobody will ever disrupt this lucrative model because “that’s the way it is”.

[…] (as Bill Gurley of Benchmark argues)?Bill's argument can be found in this entry in his blog:  http://abovethecrowd.com/2010/04…1 CommentHey Doug: I think the link is broken -> can you repaste it into the Question […]

It mightn’t be written any better. Reading this post reminds me of some importantthings.

“As we all know, exclusive deals with the likes of Howard Stern nearly killed XM and Sirrus.”

1. It’s Sirius not Sirrus.
2. Howard Stern brought in far more in new subscription revenue than his his 500 million contract. Not to mention, the advertising revenue from on his own channel more than pays for his salary.

I don’t know why this misconception is so widespread.

[…] Bill points out 32 billion reasons why content providers aren’t going to give away their content for free: $32B worth of annual affiliate fees paid by cable companies to content providers.  If you want a great look at the innerworkings of the cable TV industry, read Bill’s whole article (here). […]

[…] The little known fact about the what makes the cable business go round are extreme affiliate fees.  It’s a $32B dollar a year business.  It’s why Oprah Winfrey is opting to hang up her hosting shoes and go into retirement off of Oprah… […]

Far more depth than I was prepared for and very informative. When I was in journalism school at the University of Maryland, one of my profs said something I’ll never forget. Perris Glendenning was a county executive soon-to-be two-term governor, and he taught poly sci. During one lecture, he looked straight at me (we had recently discussed the concept of honor and I am a former Marine) and he said,”don’t listen to what politicians say. Watch where they spend the money.”
Sounds like good advice and it still is.
Having been through two startups, successfully selling one, it took some hard knocks for this idealist to stop listening to words and start listening to cash flow.
Good article, well done.

[…] Gurley reports for abovethecrowd.com that affiliate fees which flow from cable companies to networks to fund the production of TV shows […]

[…] systems. It’s just a fact, not a criticism. As my board member Bill Gurley wrote in a fantastic post earlier this year, the cable ecosystem has 32 billion reasons why it isn’t exactly racing towards the horizon […]

A couple of assumptions in this post are worth questioning:

1) There are billions of dollars at stake, therefore the status quo survives.
a. There were billions of dollars at stake in the record labels, magazine/book publishing, yellow pages, POTS, etc. industries that have all been flushed by changes in consumer behaviors enabled by new technology. Current size of an industry means little when the basis of competition changes.
b. Entrepreneurs with no stake in the old ways of doing things have the freedom to rethink the whole equation, not just tweak the variable values. YouTube has succeeded in becoming the world’s most widely watched network by refusing to accept the old dogmas about what constitutes video content, including dogmas about content length and quality.

2) Silicon Valley is filled with utopian dreamers and TV-land is filled with hard-nosed businesspeople, therefore TV wins.
a. There is nothing soft or starry-eyed about Jobs, Ellison, Schmidt, Chambers, etc. today, though in their twenties they were surely filled with youthful enthusiasm and inexperience. Some of the twenty-something’s now pitching Benchmark will grow to be the next Silicon Valley tycoons.
b. On this July 4th weekend, it may be good to reflect that sometimes the utopians actually win; the Tiananmen Square movement may have (temporarily) failed, but the Berlin Wall was pulled down.
c. Past performance is no guarantee of future results. Just because previous attempts at creating a TV alternative may have failed, this does not mean that every attempt will always fail. It often takes several experiments to get the formula right – look at the history of smartphones, PDAs, social networks, tablet computers, search engines, etc.

There are two fallacies in the assumptions underpinning TV today that will eventually be exposed by the army of start-ups nibbling away over time:

1) In addition to the $32B in affiliate fees mentioned in this post, there is $43B in TV advertising all of which makes US TV an industry too big to fail.
a. $ spent on TV advertising is not a number that must always go up. At some point TV advertisers will question why they pay more each year for such a blunt marketing instrument of questionable efficacy. Silicon Valley idealists are developing technology to enable TV commercials to be precisely targeted in a pay-for-performance model. This changes everything and disrupts the economics of TV-as-usual.
b. Affiliate fees – really consumer subscription fees – partly pay for content but the bulk go to cover access/delivery costs. High fees have been sustained by cable providers enjoying de facto/de jure geographic exclusivity. The Internet, when considered as a delivery vehicle with national/global coverage, should be TV’s best friend and allow costs to be wrung out of the TV infrastructure. Broadcasters will emerge who use broadband as their ‘cable’ to deliver TV signals directly to Internet-enabled HDTV’s to challenge today’s affiliate model. (As VOIP and mobile have capped the once sacred POTS cash cow).
2) Consumers are a bottomless pit – just give them more and they will lap it up.
a. Hollywood (and Silicon Valley) businesspeople assume at their peril that there is no end to the amount of media Americans can consume (nor no limit on the number of devices they will buy to consume it on). Time is not a commodity they are making more of, and Americans’ leisure time is actually an increasingly scarce resource (as measured by The Harris Poll). At some point, ever-growing choice and shrinking leisure time to enjoy it in will tip us over into The Attention Economy. Relevance will trump abundance in value. This is a pure software play. Silicon Valley expertise in customized personalization will win.

I think these are all good points, but it won’t happen overnight — because of the dollars at stake.

Many people thought the same thing you are arguing about the telcos. But it dint happen.


Thanks for the reply (and the original post!) but I guess I don’t understand you. I have only seen evidence that the telco’s landline business has been capped (at best) and shrinking as a general rule (measured either by new customers or revenue). If AT&T had not branched out into wireless when they did, they would be in deep trouble by now. VOIP (Skype, Vonage, etc.) + wireless have changed the landscape and defined where the new growth is. So I must not understand your example — if you could elaborate, that would be educational and appreciated. Thanks.


A different Bill G. once remarked that people tend to overestimate the impact of things in the short term and underestimate their value in the long term. I think Mr Gurley is essentially saying the same thing.

I think constantly challenging one’s own assumptions is a helpful exercise.

[…] maybe they should. Despite Bill Gurley’s well-reasoned argument that content fees and kickbacks will keep premium programming behind the telco pay-wall (i.e. […]

Your story here is a tautology. “Affiliate fees are the only thing that matters because affiliate fees are the only thing that matter.”

It is still quite possible for someone (I was hoping this would be Google with the Google TV) to aggregate their subscribers and directly deal with content producers. Google (in this example) would have to pay more per ‘sub’ than an MSO (perhaps even double or triple) but would be easily able to pay it, because they could easily charge more to their ‘subscribers’ if they advertised only paying for what you want.

Consumers are quickly realizing that the ‘value proposition’ for 10000 channels, a tenth of which have one show you might be interested in while the bill regularly increases is not a winning one, and I think you’re wrong in saying that nobody will ever disrupt this lucrative model because “that’s the way it is”.

You may be right. it may be NetFlix, but it will require ample $$$$$$!

Minor comment:

“But hey, that’s their problem, not ours. We love disruption. It serves our purpose.”

There’s also the arrogance of assuming that any disruption will of course leave the consultants on the top shelf. 🙂 A lot of this makes me think of college sophomores who adore social darwinism up until they realize that it applies to them, too. I wouldn’t call that idealism, though — just plain arrogance. And the ignorance of the sheltered.

[…] When It Comes To Television Content, Affiliate Fees Make The World Go ‘Round – kes meist ei sooviks tasuta vaadata saadet, seriaali või filmi, mis parajasti huvi pakub. Internet on loonud selleks kõik eeldused, kuid sisu tootjad ei ole kiirustanud nende kasutusele võtmisega. Peamiseks põhjuseks on mõistagi raha. Bill Gurely annab pikemas analüütilises postituse hea ülevaate sellest, kuidas USA sisutootjad raha teenivad ning kuidas see kujundab veebist saadava valiku hinda ja võimalusi. Valgustav. […]

[…] The economics of modern television. […]

[…] off and TV economics get radically reshuffled. But we’re not getting there anytime soon, and I’m not convinced we ever will. var a2a_config = a2a_config || {}; a2a_config.linkname="Comcast shows off an iPad remote"; […]

[…] off and TV economics get radically reshuffled. But we’re not getting there anytime soon, and I’m not convinced we ever will. var a2a_config = a2a_config || {}; a2a_config.linkname="Comcast shows off an iPad remote"; […]

[…] Gurley recently wrote an incredibly detailed piece on how the TV industry works, how the money flows through the stack, and why a niche channel I never heard of — AMC […]

[…] Keep reading When It Comes To Television Content, Affiliate Fees Make The World Go ‘Round by Bill … CrunchBase Information Bill Gurley Information provided by CrunchBase […]

[…] If we ever get to the world where you can start buying individual channels–doesn’t matter if they’re on TV or the Web–then all bets are off and TV economics get radically reshuffled. But we’re not getting there anytime soon, and I’m not convinced we ever will. […]

[…] off, and TV economics get radically reshuffled. But we’re not getting there anytime soon, and I’m not convinced we will. Print SHARETHIS.addEntry({ title: "Comcast Shows Off an iPad Remote, Promises to Show off […]

[…] * If you really want to learn about how the TV business makes money, check out this clear and concise article explaining the golden ticket of revenue…affiliate fees. – Above The Crowd […]

If you’re interested in the absolute best possible image quality on television, then you’re going to want to go with the provider who can bring you more high definition channels. Since HD has gone mainstream and more and more Americans have television sets that can process its myriad of superior pictures, it makes sense to go with the television service provider who can ensure that you have more options to choose from when channel surfing.

If Affiliate fees were to disappear how wound programmers fund content development?

Content owners need to fund programming that may take 1-2 years to hit the screen.

Say a series like Mad Men costs $2Million per episode and “traditional” ad-sales are declining. How does the content owner fund programming investment without affilate fees?

Maybe ISPs will give some of their broadband subscriptions to the content owners? But they’d want exclusivity and the cable/satellite operators should have them sown up…

Metered consumption might make things worse as you’d don’t hand over large fixed amounts of cash to ISPs, so how could they guarantee fees to content owners?

So does the internet become the VOD/Long Tail repository another window in the life of a product perhaps parallel to DVD?

Good work, thanks.

Here is the one really huge problem with your theory. Once internet costs exceed $80-$90 USD a month it become very cost effective to compete with current ISP’s due to the per household returns based on the cost of running the line and returns. With metered broadband competition will spike in a major way.

[…] with him, so I’m a bit surprised to find that I think he’s very, very wrong about why the TV studios and cable guys will win in the big fight between cable and the internet that we’ve been talking about here for a […]

[…] Gurley recently wrote an incredibly well-thought out, well-researched, and LONG, post arguing against the disruption…. As a Partner at Benchmark, Bill’s on the board of Clicker, so he definitely has an insider […]

Fascinating piece. Two thoughts. One is that I interpret Boxee as a likely case of being the knife at the gun fight (based upon its positioning). Their target seems to be the audience that wants to get away from a monthly bill.

Two is that some of this may be time thresholded. Akin to dollar movie theaters, there is a market that doesn’t need first run so long as they get a discount. This seems to be the sweet spot for Apple and Netflix in broadband.

Good stuff.


[…] Television to the Internet: Don’t Do It I read, via @Chris Dixon, Bill Gurley’s piece on cable television affiliate fees the other day. Chris called it “brilliant” so I felt compelled to read […]

[…] When It Comes to Television Content, Affiliate Fees Make the World … […]

[…] When It Comes to Television Content, Affiliate Fees Make the World … […]

Nice piece Bill. I actually wrote somewhat of a counterpoint – but did it a few days before I saw this. Worth looking at as a counterpoint, perhaps.


Jim Louderback, CEO Revision3

[…] When It Comes to Television Content, Affiliate Fees Make the World Go ‘Round « abovethecrowd.com Posted in Uncategorized by ecpm blog on April 30, 2010 When It Comes to Television Content, Affiliate Fees Make the World Go ‘Round « abovethecrowd.com. […]

Perhaps a more conceivable first step with no impact on affiliate fees is a partnership between, say just for the sake of example, Google and DirecTV. Google does some internet integration of content and provides the secure login interface to access a DirecTV’s subscriber’s content. In short, using the internet as a replacement for satellites and dishes. http://tinyurl.com/yewp9tt

Bill, great post that really puts a realistic lens on the whole matter.

@Mike: why should DirecTV or others open the door for Google that might turn out to be Pandora’s box?

[…] 4.  Fair use enables HUGE industries that rely on some intellectual property leeway to develop.  As in, trillions of dollars huge.  Think about how well Google, eBay, Amazon, or really any computer company, could perform if copyright holders had a right of action for every copy (including the kind constantly made in your RAM or on your hard drive when viewing the web) of any protected work that was ever created (even though the literal text of the Copyright statute would give rise to such a cause of action).  Google couldn’t index anything, eBay couldn’t let you see any visual works before you bought them, and so on.  Creating some safe space in the middle is good for both sides of the Copyright equation. […]

[…] Read the rest of this post on the original site Tagged: Voices, digital, media, television, Benchmark Capital, Bill Gurley, TV | permalink Sphere.Inline.search("", "http://voices.allthingsd.com/20100430/when-it-comes-to-television-content-affiliate-fees-make-the-world-go-round/"); « Previous Post ord=Math.random()*10000000000000000; document.write(''); […]

Stands to reason that your investment in Clicker.com wins no matter who the winner ultimately is in the distribution and content wars above. Smart. The site is great, fwiw.

[…] When It Comes to Television Content, Affiliate Fees Make the World Go ‘Round “The clock on the wall’s moving slower My heart it sinks to the ground And the storm that I thought would blow […] […]

Affiliate fees make the the cable companies go round but has little to do with the rest of the media business. As local and national advertising continues to dry up, this will continue to put a crimp on local newspaper, TV and radio operators. As this downward spiral continues, we will see more cheap, non-creative programming (Idol, Reality, etc) come our way….

Great post. I think it’s worth stressing that, as the labels never controlled the pipes, the music case study just can’t be successfully applied to video. That difference, and the attendant ability to monitor and moderate traffic on those pipes, puts MSOs in a wholly different position. It’s one thing to empty out a store when the night watchman is asleep and quite another when the owner is standing at the entrance with a loaded gun…

[…] More often than not, we here in Silicon Valley are prone to idealism. We see a scenario the way we want to see it, and make predictions that fit our view of how we think the world should work, or perhaps even how we would like the world to be.Close […]

Great post. I think your basic point can be simplified into — “sure, disruption is occurring and will continue to occur, but it won’t happen overnight.” And of course that’s true.

For me the biggest question and issue for content distributors is what happens when live sports media becomes available “a la carte.” There has to be a tipping point when there’s an available pricing model that makes more money for the NFL, NBA, etc. than selling all rights (or most) to a big network who then makes $$ from ads and per sub pricing from distributors.

To some degree it is already ala carte – only the bidders are not the end customers – but the terrestrial networks, the cable networks, and their partners. Recently when CBS renewed the NCAA basketball tourney – they did so with a cable partner – and with significant assistance from their local affiliates – so the costs are really getting spread around. As far as getting consumers to bid efficiently on the package – it is far harder to sell the package to 100M homes than to one of 20 distributors.

Great post. What many people don’t fully understand as well is the power that the cable MSO’s have in all of these discussions. The fees you pay to the cable company for video may be the biggest number on your cable bill – but it is the least profitable on a margin basis due to the $32B of fees you mention above. Broadband and phone products are far more profitable – so if the market lurches suddenly to an all IP HD video wild west – guess who is going to win? It’s not Hollywood – which will see massive fractionalization – it will be the ISP’s who have a fat pipe to the home – and will be able to charge for it. MSO revenues could decline – but cash flow will just keep going up.

Fascinating post. Reading this, the “bundling” pattern sounds similar to the old “CD album” pattern. iTunes+iPad helped transformed that. Do you think that something like an AppleTV++ with simplified pay per view model could help tip the model into something more a la carte? (You can consume a lot of content with the $80-$120 per month fee that some cable companies are paying).

Sorry for the typo: iTunes+iPad -> iTunes+iPod

Unless the iPad gets unbelievable penetration (and I actually believe it will, if it follows the same price curve as the iPod or iPhone), I suspect anything Apple does will be treated in the same way as ancillary DVD products. The problem with a la carte revenue is that it fails to provide recurring revenue which cable networks need to find their legs. Think of how long it took A&E to come up with “Mad Men”, or Food Network with “Iron Chef”. ESPN got its start airing tractor pulls, and CNN was derided for years as a stupid money loser until the first Gulf War came along and legitimized the notion of a 24-hour news cycle. The $64,000 question is how any publisher manages the risk of developing any content franchise more sophisticated than say, Demand Media’s keyword model.

Interesting point about Apple that may interest only me: the DRM that undergirds iTunes was developed, almost out of whole cloth, from a license from a small company named MPEG-LA. MPEG-LA was launched with a tremendous contribution from the cable TV industry when it was cobbling together the intellectual property necessary to roll out digital TV. So, in a way, affiliate fees helped enable Apple’s current business model.

When YouTube was launched, these same pundits said it was only a matter of time before it would regularly churn out hits that could compete with the best of broadcast TV.

As you point out, five years and millions of monkeys have failed to produce a single ongoing hit program that is the equal of the least of broadcast TV, much less Shakespeare. It makes me wonder which is more likely: a hit series on YouTube, or web content producers adopting the TV industry’s Byzantine notion of distribution windows.

Expecting a megahit program on YouTube is a category error. It’s not one hit show with 10 million viewers; it’s 10,000 little niche shows with 1,000 viewers apiece. You can spend hours on YouTube watching grainy webcam videos of people discussing your favorite hobby; sure, each video has a vanishingly small audience, but in aggregate it’s a bite out of the time they’d spend watching cable.

Actually, in aggregate these are bites out of broadcast TV, not cable. Cable TV channels are experiencing a kind of renaissance right now, seeing viewership ratings that equal or even beat broadcast TV.

But that’s a minor point.

I can hardly wait until TV Everywhere kicks in. Can you imagine the New York Times as a cable channel? Powered by Brightcove, viewed on an iPad, and metered by your friendly neighborhood MSO…now *that’s* what I call a niche.

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    …focusing on the evolution and economics of high technology business and strategy. By day, I am a venture capitalist at Benchmark Capital.


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