This is a departure from the usual course of business. Typically it is difficult to get launched on a cable system, but once a service is on it is usually on for good. Why is this changing now?
For the distributor, there are two reasons for the change. First, these channels charge license fees. While the license fees for independent channels are typically modest compared to the big programming services, money is money. If few are watching the channel, even modest fees might represent a poor programming value. Second, is that these channels take up "bandwidth" -- space in the cable "pipe". To the extent a poorly viewed channel is carried, there may not be room for something with more popular appeal (e.g., a HD version of a channel that is only carried in SD, a new foreign language service).
FiOS TV has put Youtoo, Blackbelt TV. Blue Highways and Mav TV on the chopping block. Time Warner Cable has the arts service Ovation in its cross-hairs, as part of its new approach of offering services the choice of carriage with no license fees or no carriage at all (article in the New York Post).
A primer for those unfamiliar with the services:
- Youtoo is a "social TV" service launched in September 2011, built on the distribution of a service which targeted older viewers (which went through several names over time, most recently AmericanLife, GoodLife, and, originally, Nostalgia).
- Blackbelt TV is focused on martial arts.
- Blue Highway TV has programming of interest to rural viewers and those who like American roots music.
- Mav TV has programming focused on young men (imagine if Maxim magazine had a channel, no shortage of attractive women in bikinis).
- Ovation is a service with arts-oriented programming (similar to what Bravo once was and what A&E was a long time before that) along with somewhat arty movies and off-network series.
The implication for independent channels is pretty clear: sell out and soon. (Note that this advice does not apply to sports services -- NFL Network is doing fine as an independent.)
The second implication is for the major programmers: this is a good time to get a deal on an independent service with good programming that now looks to be facing a tougher road ahead.
For the distributors, one result of making the road for independent channels more difficult is that instead of creating a more competitive marketplace for programming, with more suppliers, the distributors will end up with a less competitive one. However, in fairness, it has been a long time since a new programming company actually made a difference to the competitive environment. To a large extent, it is the nature of the programming business, it is pretty difficult to substitute one supplier of programming for another, the appeal of each is specific, even within a genre.
Who would buy such a channel? Of course it needs to be an owner that can solve the problem the channel faces -- being dropped. In other words, a strategic buyer, rather than a financial one. That means one of the existing programming companies (all but Univision have a history of swallowing up formerly independent channels and/or smaller programmers -- that's much of how they became giants).
The other set of strategic buyers are major distributors themselves, since they can assure distribution on their own systems and often, through other dealings with other distributors, logroll their channels onto other key distributors.
While many channels have found a new, more prosperous life under a new owner (e.g., Food under Scripps, Family under ABC, Oxygen under NBCU), some independent channels just don't make it. The slighly new-agey Wisdom Channel became Lime TV, but then got out of the cable programming business. Mind Extension University became Knowledge TV before it was shut down. Comcast bought the failing Tech TV to merge it with G4 (which is reportedly about to be rebranded with the Esquire name). NBC shut down Trio, which began life as a US programming service from the Canadian Broadcasting Company.
Sometimes the programming concept is simply not popular enough to justify its position on the dial. With decent distribution agreements but unpopular programming, usually the channel will be rebranded (America's Talking morphed into MSNBC, Discovery Health into the Oprah Winfrey Network). However, sometimes the underlying business arrangements -- in essence, the channel's affiliation agreements with distributors -- are an impediment to success (e.g., the license fees are too low, the carriage is not sufficiently secure). In that case, a new service is better to start fresh than try to build off an unsatisfactory foundation.
Sometimes a drop is a temporary measure (USA, AMC and Lifetime have all been dropped and managed to prosper); sometimes it is the start of a death spiral. We'll see how it works out for these five.
For a terrestrial distributor (i.e., cable and telco, but not DBS) the need to save bandwidth is probably a short-term issue. The conversion of their plant to IPTV should make this bandwidth constraints for cable channels a thing of the past. (In contrast to a typical cable system where all channels are delivered to all households at all times, in an IPTV system, channels are delivered only to the households that are tuned to them -- the bottleneck is the number of channels that can go into the home simultaneously.) The conversion to IPTV has already taken place in many systems for VOD content and its time for linear channels is here already on some systems and on the horizon for most others).
The need to save money is likely the driving factor here. As noted before, the amounts are modest. So why do the distributors bother picking on the dwarves of the cable lineup? Well, you have to start somewhere. It is impossible to take off the low-rated channels from the big programmers if you haven't taken off the low-rated independents (to prove that it is your strategy, not just a negotiating threat).
Another factor is that the cable environment that led to the launch of these channels has changed. Before DVRs and VOD, to get more programming choices onto a system, the distributor needed to add more channels. Adding channels was easy to explain to customers and was valued by them. Cable operators added channels at the time of a rate increase, "a spoonful of sugar" in the words of Mary Poppins. When the lineup was going from 20 channels to 100 channels and the new additions were the Food Network, Syfy (then Sci-Fi) and TV Land that was a solid strategy.
The returns start diminishing going from 100 channels to 250. The new niches are pretty small (e.g., The Cooking Channel, FearNet, Boomerang) and many consumers probably don't notice or value the additional services -- there are already more channels on the dial than channels whose names they recognize.
Perhaps more importantly, consumer choice has expanded beyond more live channels. If the DVR had been invented a decade earlier, we probably never would have had quite as many channels launching in the first place, consumers would have been better able to utilize their existing array of programming or channels. Of course, this is exactly what consumers are doing -- getting more value out of their favorite channels, they have less need for their secondary choices. VOD has had a similar impact, particularly for the premium channels like HBO and Showtime.
One might assume that the response by the programmers to this approach by the distributors would be to shut down their smaller services, but that's not what I foresee happening. The secondary services provide value to the programmer via advertising and typically cost little to run (The Cooking Channel uses the Food Network's old library, as Boomerang does that of Cartoon Network). The strategy for the programmer might be to bundle the channels even more aggressively. The primary channels will get bigger rate increases (since they "can't" be dropped). The secondary channels can have no license fee at all, particularly if it is offered on a highly penetrated tier (which it now can be since it no longer costs the distributor extra to carry it broadly). This schema works fine, if there is a primary channel, but that's not the case for a lot of these independents.
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