23 January 2018

Starz Dropped from Altice - Premium Channels Not on Consignment

In one of the first cable programming outages of 2018, the channels of premium TV provider Starz are no longer carried on the cable systems of Altice. Many cable programming affiliation agreements expire at year end and the one between Starz and Altice (the owner of the former Cablevision/Optimum and Suddenlink cable systems) is one such deal. What caught my eye about this dispute was a quote from Altice, emphasis added.
Given that Starz is available to all consumers directly through Starz's own over-the-top streaming service, we don't believe it makes sense to charge all of our customers for Starz programming, particularly when their viewership is declining and the majority of our customers don't watch Starz,” Altice said in its statement. “We believe it is in the best interest of all our customers to replace Starz and StarzEncore programming with alternative entertainment channels that will provide a robust content experience at a great value.
Of course, all Altice customers do not pay for Starz. Starz is a premium channel and is usually sold a la carte or in higher level cable programming packages. It is not provided to all cable TV customers like a broadcast channel (e.g., ABC, PBS) or virtually all customers like a widely-distributed basic cable channel (e.g., CNN, USA, ESPN). So, Altice customers do not all pay for Starz.
What this means however, is that Starz licenses its channels to Altice on a per-basic-subscriber basis, not on a per-Starz-subscriber basis. Starz doesn't share in the revenue that Altice generates from its service; it has effectively a marketing guarantee from Altice, which then can package the service in the way that it feels most benefits Altice's business.
Such per-basic licensing of premium channels is hardly new to the pay TV business; I first saw such a deal in the early 1990s. Such deals can benefit the cable operator -- instead of having a $10 premium channel subscribed to by only 10% of customers for which it pays 50% of revenue ($5 wholesale), and generates $0.50/basic subscriber in margin, the MSO can provide this "$10 retail value service" in lots of packages for effectively a lot less than $10 -- it can provide more value to more consumers with that kind of packaging flexibility and upside.

However, the revenue upside of earlier cable is well in the rearview mirror now. Cable programming at the retail level is too expensive in today's competitive world.

That the third-tier premium provider (Starz is well behind HBO/Cinemax and Showtime/The Movie Channel/Flix in market share; this is not a commentary on the quality of its programming) is licensing its content on a per-basic guarantee really shows how inverted the pay TV business has become. With the competition among distributors, the winners have been the programmers who can require terms of the MSOs that they cannot get in the over-the-top world (when the programmers sell direct, they don't get a revenue guarantee). In the over-the-top world, the programmer has greater costs to market the service themselves, not via the cable operator, and greater control (uniform national pricing) but in that distribution channel, the programmer keeps the retail revenue, not just the wholesale, and also has control of the packaging -- no leaving the smaller channels out..

Update: Starz asks FCC to intervene in its dispute with Altice (Sara Fischer article at Axios)

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