Verizon FiOS Likely Not Changing the Cable Deal Structure

There has been a buzz throughout the cable dealmaking industry based on the article in the Wall Street Journal about Verizon FiOS's chief programming negotiator, Terry Denson and his attempt to put in place a new cable deal structure for cable programming services.

Verizon, whose FiOS TV is the nation's sixth-biggest pay-TV provider, with 4.7 million subscribers, has begun talks with several "midtier and smaller" media companies about paying for their channels based on audience size, according to Terry Denson, the phone company's chief programming negotiator. He declined to identify any of the media companies. 

Under existing arrangements, distributors like cable and satellite operators pay a monthly, per-subscriber fee to carry channels based on the number of homes in which they agree to make the channels available, regardless of how many people watch those channels. 

"We are paying for a customer who never goes to the channel," Mr. Denson said.

There are more than a few challenges for Terry if he's serious about this pursuit.

• It is hard to change the industry standard deal structure when you represent only 5% of the market.
• It is difficult, perhaps impossible, for any established programmer to go along with this unless the programmer plans to use this structure across the board. Most favored nation's provisions are typical for the "midtier and smaller" channels.
• The programmer's already have a revenue stream that varies with viewership -- their advertising. Having both revenue streams dependent on viewership would make their business model more volatile which is not more attractive to a network's investors.
• The affiliate fee structure was designed for and by cable operators. MSOs would only pay when they signed up customers and in proportion to the ones that they signed up. They got content without having to pay minimum guarantees. Such a deal structure was flexible to account for systems being bought and sold.
• It is not clear that this deal structure really fits Verizon very well. Verizon doesn't charge customers any less when they watch fewer channels. If a channel is getting higher than expected viewership, it would create a cost problem for the distributor without any offsetting revenue doesn't seem like a move in the right direction.  

I have always found Terry Denson a bright guy and I applaud anyone taking a fresh look at the standard practices of their industry. However, to my eye this is a deal structure that a distributor could only get in a situation where the distributor could dictate terms to the network. I think any network's investors would be very concerned about going in a direction that has no comparables. The only programmers who would accept that are programmers who are in a very weak, perhaps desperate bargaining position. In my experience, those aren't the deals that are difficult for a distributor to get done. A distributor can easily mitigate the risk of a channel that never gets viewed by doing a short-term deal or by writing in some sort of performance standard (e.g., if viewership is below a threshold, the distributor gets a lower fee or a right to terminate).

One wonders if the FiOS business plan itself needs some work. Frontier acquired several FiOS systems from Verizon and has effectively scaled down the FiOS TV systems they acquired by raising installation and subscription costs and not marketing the service. That suggests that the FiOS TV businesses was not generating a whole lot of margin for Frontier.

Other takes: Fierce Cable (Steve Donohue), CNET (Don Reisinger)