Television and the Scarcity of Resources

Wendell Wenjen

VP, Business Development

Originally posted on Multichannel

Television, like all things, has been shaped by the scarcity of resources.

Originally back when television was broadcast over VHF and UHF frequencies, the broadcast spectrum was the scarcest resource. The rights to broadcast spectrum were required for each market (DMA) to which a network distributed a signal.

At first, the U.S. government, which owns all broadcast spectrum in the country, allocated spectrum on a first-come basis with the requirement that certain public services were provided such as news and childrens programming. Once these original spectrum rights holders were grandfathered in, they could resell the spectrum rights to others.

With only three broadcast networks, each hour of prime-time was a valuable and scarce resource only allocated to programming that could draw substantial audiences. Currently, there is a television frequency repack going on which is mandated by the FCC in which current broadcast spectrum rights holders are required to give up some of the current spectrum allocation in return for different spectrum and cash.

Later, when cable television first started in the 1970s, the cable plant infrastructure no longer required free-space spectrum for distribution. Rather, the cable signal was distributed over a coaxial cable (coax) which had relatively unlimited spectrum. However, instead of over free-space, the spectrum was contained within the coax cable. This allowed hundreds of video channels to be simultaneously transmitted along with guard bands. Later, this same spectrum was used to transmit two-way data for Internet service.

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In the world of cable, the scare resource was subscribers and the network. It was still very expensive to build out a cable plant, which required physical infrastructure costs to be incurred and franchise fees paid to the city for exclusivity rights. So cable operators were valued on a homes passed basis, because each home passed a potential subscriber since the cable was already in the ground. Historically, cable systems valued each subscriber at about $5,000 which was the life-time revenue of that household before churning. So, subscriber acquisition of these homes passed became the most valuable resource.

In 1992, Congress (through the Cable Television Protection and Competition Act) mandated the must-carry rules regarding carriage of programming which gave the broadcast networks the option of either charging the cable operators for the right to re-transmit their signal over the cable plant (retransmission consent or must pay), or require that the signal be carried (must carry). The latter was applied for low rated broadcast networks or local non-network affiliated channels, while the main broadcast networks could demand payment in the form of retransmission fees. Many of the broadcast networks created their own cable networks, such as the Viacom networks created by CBS, and required that cable operators carry their new cable channels in return for the right to retransmit the affiliated broadcast network. Other new cable networks without a broadcast bargaining chip opted to give the cable operator a piece of the cable network ownership.

Today we are entering a world where the cable bundle is slowly but surely de-bundling and moving to Internet-based delivery.

While the economics of the debundled environment versus the existing aggregation and distribution model continue to be hotly debated by both industry pundits and equity analysts, the future economic interests and alignment of programmers with cable and multi-channel operators may slowly diverge as the programmers seek a direct customer relationship and the operators focus on their more profitable broadband data services.

Cable programmers are starting to become apps in the Apple TV app store, the Google Play app store and other device-based distribution platforms. Instead of relying on the cable operator to acquire and service the millions of customers, cable networks will start to become direct-to-consumer businesses with narrow over-the-top offerings bundled into branded apps like HBO Now, Sling TV, Sony Vue and the like.

In this new world of debundled programming and distribution, the scarce resource is again subscribers but now it is within these app store distribution platforms where they are competing with literally millions of other apps rather than just hundreds of other channels.

The customer acquisition challenge for these cable networks is a new one since they have never before had to market directly to customers to obtain subscriptions. Previously, their marketing focused on promoting new shows and programmers used lead-in audiences to drive viewers to new programming.

Ironically, the best medium for promoting these new over-the-top video channels and SVOD bundles turns out to be the old medium – cable and broadcast television – which still accounts for the vast majority of video-based viewing hours.

Broadband delivered programming services such as Hulu, Netflix, Amazon Prime and HBO Now have used television as a key channel for both their new customer acquisition efforts as well as their tune-in campaigns for new programming offerings.

Broadcasters with TV Everywhere authenticated over-the-top viewing apps are also driving viewers to these platforms through both call-to-action tags at the end of tune-in promos, and by developing creative specifically for these apps.

With the addition of audience targeted media planning and real-time analytics that combine television spot airing timing with in-app data, these networks can now measure the conversions that their television spots are driving to the viewing apps.

So, while television is again in the process of reinventing itself, it remains a proven way to reach consumers and drive branding and conversion.

Wendell Wenjen is vice president of business development at Simulmedia, a company that works with advertisers and cable networks to provide audience-targeted linear television advertising.

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