It’s Not TV, It’s Coasian Bargaining

March 26, 2013 at 11:27 am 1 comment

| Gabriel |

In a guest post for Megan last year I argued that the biggest barrier to a la carte HBO Go is that it would provoke a backlash from the cable operators, upon whom HBO is still reliant for most of its sales. (FWIW, I wanted to title that post “There is no word for `cord-cutter’ in Dothraki,” but the editor made it less elliptical). Just a year later, we have HBO floating a proposal to let you buy HBO Go without getting basic cable. At first glance it looks like I was just wrong, but check out the fine print (actually the headline), which is that you wouldn’t buy the service directly from HBO, but through your ISP.

Now this seems crazy. I pay for all sorts of content on the internet (e.g., Netflix) but it’s not a check-off on my broadband bill, rather it’s something I pay directly to the provider. The idea of adding premium content as a check-off to your telecom bill seems really 80s or early 90s, harking back to when the information superhighway was going to be a sort of Minitel en anglais rather than the internet we’re used to where your connection is a pure infrastructure service, most content is ad-supported, and premium content is something you either pay for directly or through a handful of platforms charging the rightsholder a 30% sales commission (e.g., iTunes, Google Play, Amazon Instant/MP3/AndroidApps) who are not directly connected to your ISP. And yet HBO wants to go through the telecom check-off model rather than just sell you their content directly (or through a “store” platform like iTunes). The question is why, and, no, the answer is not because they are too stupid to think about it any other way or too lazy to set up their own billing system.

As I argued before, HBO has to navigate the Scylla of “piracy is a customer service issue” and the Charybdis of “don’t antagonize the still-powerful incumbents.” My reading is that this otherwise cockamamie proposal of ISP-centric billing is a pretty solid strategy for accomplishing just that. Let’s think about the advantages, from the point of view of maintaining HBO’s relationship with the telecoms:

  1. The ISPs get a cut. Traditionally, HBO retails for about a 100% markup. So if your cable company charges you $12 (on top of your basic cable) it’s paying HBO about $5 or $6. The proposed model would keep that going. Keep in mind that the ISP and the cable operators are usually the same companies. In this sense, making you buy HBO from Comcast or AT&T instead of directly from HBO is effectively a convoluted way for HBO to make a side payment to the telecoms to not retaliate in the core business model of selling HBO as part of a tv package. Note that if HBO were to settle the Coasian bargain by just to writing a check to the MSOs, this would be a lot simpler, but simple exchanges are often perceived as more morally objectionable than Rube Goldberg exchanges.
  2. Each ISP gets control over pricing. About half the price of HBO through your tv is the cable operator’s markup (see above) and given that Amazon and Apple only charge 30% for billing and hosting, it’s conceivable that HBO Go a la carte could undercut cable HBO on price. The new proposal ensures this won’t happen.
  3. Each ISP gets veto rights for its own customers. Suppose that your ISP isn’t happy with HBO’s offer to let it keep half the money from IP only HBO Go (which it would price at or above the price it charges tv customers) because it really wants to keep pushing you towards that “triple play” package its telemarketers keep harassing you with? Well, that ISP can just refuse to sell HBO GO to its broadband-only customers. And unlike Netflix, the ISP would actually be able to veto your purchase. It’s structurally very similar to car dealerships, where local brokers are terrified of (and can use their clout to prevent) translocal competition. This one is actually kind of scary. Imagine if you could only subscribe to the New York Times through your condo’s HOA, which would otherwise deny building access to the paperboy?

There are some ways in which this would still create problems for the cable operators, mostly in that it would undermine the two-part tariff aspect of their business model, but I think this is effectively obviated by the local veto aspect of the proposal. Moreover, cable operators are increasingly showing signs that they see the bundling aspect of their business model unraveling (mostly because carriage fees are out of control) and are willing to settle for a role of brokerage, without bundling. (Note that data caps, which don’t apply to content bought from your ISP, help enforce this brokerage role since they effectively let your ISP tax content bought on the open market).

So the good news is that you may be able to watch Girls without first having to also pay for a bunch of sports and reality shows about petulant alcoholics. The bad news is this represents yet another business model innovation against the open internet.

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Cutbacks or Hostile Media Effect? Choosing the null set

1 Comment

  • 1. John Alexander Thacker  |  March 26, 2013 at 6:43 pm

    It seems crazy, but cable behemoth ESPN already does this with their ESPN3 online network, and has done it for years. You get it if and only if your ISP gives a cut to ESPN per subscriber.

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