I missed this in the midst of election anxiety on Tuesday, but the Supreme Court just refused to take a case charging that cable bundling is in violation of federal anti-trust laws. As Deadline reports:

The U.S. Supreme Court today refused to hear the appeal of a class action lawsuit filed by cable and satellite subscribers who argued that channel bundling violated antitrust laws. The subs had asked the court to require programmers and distributors to offer single channels for purchase, rather than sell them only in prepackaged tiers. In March, the Ninth Circuit Court of Appeals dismissed the suit filed against NBCUniversal, Comcast, Time Warner Cable and others, saying the plaintiffs had not stated a plausible claim.

In a sense, this is a reaffirmation of something we’ve discussed here quite a bit: bundling and the cable business model as currently constituted are inseparable, and many, many millions of people are willing to accept the model as is, even if they don’t love it. Getting around this without killing enormous amounts of programming (something, again, as I’ve said before, that I would be okay with!) is going to take an enormous amount of innovation, and a lot of time, and in the end, individual channels in the bundle will probably cost more than we sense they ought to. In a way, I wonder if the first goal for the cord-cutting or a la carte movements ought to be targeting the provision of internet, cable, and phone services by the same company. Those kinds of bundles are convenient from a customer service perspective. But in terms of preserving the free flow of content, unrestricted by companies who have an interest in slowing down web-based alternatives to cable, that’s a bad incentive structure for the companies themselves, and poses risks for consumers who want real content choices in the future.

Over at The Mary Sue, Susana Polo makes an absolutely critical point for the debate about whether the cable model is about to collapse and people about to start cutting the cord en masse:

That the world is ready for streaming, a la carte television to become the default way that folks get their cable subscriptions delivered to them. This week the FCC released their eigth Broadband Progress Report, on the state of broadband internet service in the U.S., and they’ve collected some pretty interesting info. While broadband internet is available in 96% of American households, only 60% of Americans actually subscribe to the service. And of those 60%, only a minority of them actually get download speeds as high as 4 megabits per second, the minimum required speed for actual broadband as defined by the FCC. Most households are getting along with 768 kilobits a second. It’s hard to say whether this is because of subscriber preference, or because, well, many cable companies don’t exactly work very hard to guarantee that the speed they advertise is the speed you get. As Livescience points out, the bare minimum download speed for Netflix videos is 500 kbps, and that’s for particularly poor quality video.

Getting folks to give up cable in favor of streaming video services isn’t a matter of changing a single consumer preference. If cord-cutting is going to be a genuine movement, people are going to have to grow less attached to sports packages and more attached to faster internet, and to start demanding the availability of the latter. That’s a more complex cocktail of cultural changes than simply declaring that the cable companies are out of control.

There are a lot of people who want a lot of things about the way we watch television to change: to be able to buy channels on a stand-alone basis rather than in bundles, to be able to buy streaming access to premium networks like HBO without having to purchase a cable subscription first, to be able to stream shows that are available through services like Hulu as quickly and smoothly as if they were airing on a network. As much as I would also like to see some of those things come to pass, and as much as some networks would like to be able to offer some, if not all, of those options it’s been hard to get through to folks that there is a complex system governing cable television and internet that makes those changes difficult to make without current successful business models take a major hit that could disrupt the delivery and quality of the programming we currently find so desirable.

But major changes to that system might be closer than we think.

The Wall Street Journal reports today that the Justice Department is probing many of the elements of the cable and internet delivery system that throw up barriers to alternate means of distributing content. The story’s pegged as an investigation of whether Comcast, in violation of its anti-trust agreement that let it merge with NBCUniversal, is giving preferential treatment to content that streams through its own outlets so it streams faster and cleaner than content that comes over the internet from companies like Netflix. That’s critically important, as is net neutrality generally, but apparently, that’s not the only thing Justice is looking into:

Another issue that investigators have asked about is whether cable companies are acting anticompetitively by making viewers have a cable subscription before being able to access certain online programming. Comcast and some other companies have verification systems requiring viewers to enter their cable subscription details before being able to watch, say, ESPN’s programming on an iPad tablet…

The Justice Department also is investigating the contracts that programmers sign in order to be distributed on cable systems. Some contracts include so-called most-favored nation clauses, which make programmers give the biggest cable companies the best price they are offering anywhere, among other conditions. The Justice Department is questioning whether there are legitimate business reasons for such terms or whether they are intended to stop programmers from experimenting with other forms of online distribution, a person familiar with the matter said.

Whatever the ultimate outcome of the investigation, I’m glad it’s taking place. So much of the conversation around what people find frustrating in the current cable regime is erroneously aimed at networks, rather than the regime they operate within. This investigation should recenter that conversation, and hopefully give us more insight into the fulcrums we need to push on to give us an environment where networks can have more opportunities to monetize their content and to pursue new subscribers without risking the ones they currently have.

I was on the train and cut off from internet access yesterday, social media blew up over a site that let people enter in how much they’d pay per month for stand-alone HBO GO. It was a recapitulation of a debate we’ve had here before, about however much people would like to have standalone HBO GO, it’s a move that would fundamentally blow up HBO’s business model, and that HBO can’t approach quickly or lightly given its current commitments to cable companies and the scope of the programing it’s invested in. But the experiment also demonstrated one of the core difficulties in this debate: the fact that the people who talk most about wanting options that would allow them to watch television differently are a vocal minority whose behavior differs from much of the rest of the country in ways they don’t always seem to recognize or acknowledge.

One of the things this experiment exposed is that subscribers aren’t willing to pay enough for stand-alone HBO GO to support HBO’s current programming investments. As Sarah Pavis pointed out at BuzzFeed, people who submitted their quotes to the site ended up producing an average price of $12, lower than many current HBO subscriptions. We’ve discussed this before, but the current HBO price is feasible both because it’s essentially a volume discount, and because the cable companies cover their administrative and customer service costs. What this experiment tells HBO is not that there’s a lot of money for grabs out there, but that if it blows up its business models and its relationships with the cable companies who could cut them off if they offered a stand-alone option, their replacement customers would want to pay less for service than the current ones do. It’s true that HBO wouldn’t be splitting those fees with distributors, but it would have to take on a whole new range of expenses, including administration and some promotion, in the absence of cable support.

And it’s not just that folks are mistaking their preferences for a profitable business model. Josef Adalian at Vulture highlighted this piece from the Economist from last summer, in which HBO estimated that while there are 77 million households that have committed to buying cable but aren’t subscribed to HBO, there are only 3 million households that have broadband but not cable, and that fall into HBO’s target income bracket. Far more subscribers are invested in cable’s basic model, but are yet to be convinced by HBO’s specific product than there are consumers who only want HBO on the condition that HBO move away from the model that’s allowed it to make gorgeous, intellectually rich programming.

In Business Insider today, an industry analyst points out another emerging trend that may have been analyzed out of proportion to its actual adoption: time-shifted viewing of television. 83 percent of television viewing, according to the piece, still happens in the time slot in which an episode airs.

Taken together, these two sets of information are a salient reminder that as frustrated as some people are with the current model of television distribution, and as much as some vocal subset of people are changing their habits, television as it stands is a model that an awful lot of people are happy with. That doesn’t mean that they’ll remain happy with it, or that their viewing and consumption habits won’t change. But it does suggest we may still be a ways out from the point where it makes sense for a network like HBO to blow up the existing model, suffer through several rough years with a clear light visible at the end of the tunnel.

This weekend brought two pieces of bad news for traditional television networks. First, Business Insider reports that, from a survey of 28,000 international viewers, the number of people who self-report to Nielsen that they’re watching television one or more times per month fell from 90 percent to 83 percent in 2011. And now TV industry analyst Tony Wible is suggesting that while streaming services might have initially helped boost television ratings by helping viewers catch up or discover new shows, that boost is fading. 84 percent are watching television programming on their computers at the same rate.

That’s a big drop, to be certain, and it’s always worth keeping an eye out for whether this is a multi-year, recession-independent trend, or simply a result of a weak crop of fall television. And the question is whether the rise of watching television on devices means, despite its flaws, the industry’s backstop plan is working?

A lot of you believe, I think not incorrectly, that the network and bundled cable system is on some sort of collision course with consumer preferences. I don’t think television is going to go away entirely, of course. The rise of Sunday night event television has made watching shows at the same time as everyone else exciting again, and to a certain extent mandatory if you want to avoid spoilers. Cable in particular has invested in cinematography such that it’s fun to watch shows on bigger screens rather than smaller ones. Just because must-see shows are must-see for niches rather than enormous mass audiences doesn’t mean that the people who are tuning in are less passionate—in fact, maybe the reverse—but that in an era when there are more quality options, the giant mass audience is probably over.

The question, as always, is what is the new equilibrium? It’s one thing to know that a show is profitable at a certain ad rate and a certain Nielsen rating. It’s a much more complicated equation to figure out which combination of Hulu streaming, iTunes purchases, time-shifted viewing, and viewing in the time slot makes a show profitable, and beyond that, to figure out which combinations of shows based on those metrics, plus monetization of networks’ back catalogues, makes a network work. And if available revenues are simply going to shrink even as networks have the same number of programming hours to fill, what shrinks? Do shows start looking worse, whether it’s lower-quality cameras or cheaper sets? Does the trend of bringing big movie actors to TV stall as networks become unwilling to assume their contracts? Will networks cut down production orders to save money and shrink the length of the TV season? If it’s going to be impossible to scare up the $2 million per episode it costs to produce a comedy or the $3 million it costs to produce a network drama and still turn a profit, shows are going to look different.

Networks and viewers are locked in an impossible situation here. It’s hard to settle into a new equilibrium with incremental changes to the business model. The experiments networks are doing, whether with streaming services like Hulu or subscriber verification are an important way of gathering data, but they leave users with enormous uncertainty about where to find content—I essentially stopped watching 2 Broke Girls once CBS pulled it from Hulu, information that I’m sure is useful to CBS but remains frustrating to me—and that makes it hard for consumers to establish consistent new viewing behaviors. We’re stuck, at least for a while.

There’s been a lot of discussion over the past couple of days about why HBO hasn’t made its content more widely available to non-cable subscribers. While I understand individual consumers are frustrated, I think we need to reckon with the fact that this is not a problem of a single premium network. It’s a limitation of an ecosystem that also happens to have produced the kind of environment where HBO can make the content that makes it so desirable.

Erik Kain started the current wave of this, first blaming HBO for piracy, then, arguing that HBO should offer HBO GO as a standalone service and that the company would make more from those subscriptions than from its current arrangement from cable companies, and eventually backing off for some of the reasons I’ll articulate. But it’s important to reiterate that a stand-alone service is not a minor change . There are major forces at work here, and both HBO and we would do well to be attentive to them.

First, I agree with Yglesias that commentators, particularly those of us who cover entertainment technology, tend to dramatically overrate the extent to which cord-cutting is actually happening and to which consumers want to and are dropping their cable in favor of streaming services. Even if broadband gets cheaper and broadband adoption gets more serious, that doesn’t mean that people are going to prefer streaming services to cable. As I wrote earlier this week, people are dropping cable subscriptions, but not yet in a way that indicates a cultural shift rather than a tough economy. The cable companies aren’t wilfully ignoring overwhelmingly compelling evidence. They’re waiting out a trend to see if it’s real. And until sports in particular, a much bigger driver of cable subscriptions than the premium networks, get unbundled from cable, I’m just not sure we’re going to see huge, permanent accelerations in this trend, particularly if use of streaming services like Hulu gets tied to authentication of a cable subscription or a tacked-on fee.

Second, waiting that out isn’t evidence of idiocy or a desire to do harm to consumers (though it’s a mystery to me why folks who consume content assume entertainment companies’ main purpose is to be nice to them rather than to make money). HBO and other premium cable channels have a very solid and established business model here. Cable subscriptions overall may be dropping, but HBO added 190,000 subscribers in the fourth quarter of last year, the biggest growth the network’s experienced since 2006. Folks may not like paying for bundled cable, but there isn’t actually compelling evidence that HBO in particular rather than cable companies in general should be worried about cord cutting.

And though Erik suggested that it would be easy for HBO to make up lost revenue by charging more for HBO subscriptions, I think he dramatically understated the difficulty and unpredictability of that move. It’s not just that “HBO has deals with cable companies that may make this move difficult, and quite possibly very expensive.” It’s that there is no way the cable companies would let this go quietly. At all. As Todd VanDerWerff put it:
Read more

Nielsen’s latest figures are out, and 1.5 million households gave up their cable subscriptions in 2011. That’s not a tiny figure—it’s a 1.5 percent decline—but it’s also probably not enough to convince the cable companies that they should be running scared of alternatives, or that they should reexamine their pricing or anything else about their business model.

In fact, this is a case where the recession seems to me to be the enemy of innovation. As cutbacks go, cable is an easy and obvious thing to eliminate from your budget if times get hard. It’s a non-minor chunk of change, and you can make up a fair bit of the value around the margins or with a Netflix streaming subscription. Even if you buy a single season of a show on iTunes and parcel it out, it’s less money than a month’s subscription, and may feel like you’re spending your money in a more targeted way than you were if you splashing out for a whole cable package. Cable may be less expensive than, say, a family trip to the movies, but it is a fixed cost you can eliminate, rather than a periodic and discretionary one you can save up for as a treat.

Given all of these things, I’d imagine the cable companies view the threat to their business model as circumstantial rather than existential. If cord cutting doesn’t just continue but accelerates once the economy starts to improve dramatically rather than incrementally, and if that trend continues over several years, then they might reassess. But companies tend to feel pain that’s a spur to innovation in a lag after individual consumers feel a pinch that causes them to change their behavior.

Were you planning on cutting the cord on your cable as soon as Hulu signed a few more content deals and let you watch your favorite shows the day after they aired? Think again. The New York Post reports that Fox is renegotiating its deal with Comcast in a way that would require Hulu to require users to prove that they already subscribe to cable in order to get access to its content. The authentication system would likely work the same way: users would log in to Hulu with their cable company logins, rather than with a Hulu ID. Fox is already somewhat more restrictive about its content than the other major networks (with the exception of CBS, which puts almost none of its content on Hulu and declines to stream many episodes at all). Currently, you have to have Hulu Plus to stream Fox shows the day after they air. Otherwise, you have to wait a full week to watch the shows supported only by ads.

It makes sense that now is the time Fox would strike. Hulu (and Netflix as well) are early in their efforts to create original content. And while those companies say publicly that their original shows are meeting their expectations, they haven’t been precisely clear about what those expectations were, or whether that means they’re even close to garnering network-level (or even cable-style) audiences for that programming. They’re nowhere near close to telling the television networks to shove it, so Fox is striking in what it sees as one of a few remaining moments of opportunity, especially because it wants to make sure it can retain the cash to pay its retransmission fees. The cable companies need to hang on to their subscribers both to ensure their own profits, and to meet their own outside demands. Until retransmission fees are out of the equation, it’s hard to imagine that this model is going to change dramatically.

This is…shockingly sensible:

Time Warner Cable CEO Glenn Britt may be the most prominent media exec making this important point: ”Our whole (entertainment) ecosystem should try to create affordability,” he told investors today at the Morgan Stanley Technology, Media & Telecom Conference. “A lot of the people who are living paycheck to paycheck want our product, but simply can’t afford it. Many entertainment executives are in denial about this, but it’s happening.” Big Media ignores that fact at its peril: The vast majority of the industry’s profits come from cable networks — but the chief of the No. 2 cable company says that the pay TV business “is fundamentally not growing.” Programmers and networks have ignored that: “What they’re trying to do is grow by raising prices” on companies like Time Warner Cable, Britt says. That may work for a while, but “it clearly is not sustainable.” One of his strategies to deal with that is offering TV Essentials — a low-cost package of channels that doesn’t include costly sports services led by ESPN as well as popular networks such as TNT, Comedy Central, Fox News and MSNBC. “We’re clearly moving away from one size fits all,” Britt says.

It’s not the end of bundling, but it’s an important experiment, and it’ll be fascinating to see how it works out. I always think of the opportunity to buy premium cable channels without the rest of the package as the thing that would bring in new subscribers and prevent full-on cord cutting, but maybe Bravo, USA and company would be enough to keep people hanging on. I doubt that Time Warner would release a comprehensive dataset publicly, but I would love to know how many people who are planning to leave end up deciding to stay once they’re offered TV Essentials, and how many subscribers the new service brings in.

Britt also explained that the company is experimenting with a metered-useage internet subscription plan in Texas. As irritating as we super-users might find something like this—my Netflix streaming alone would send me into penury, much less the whole blogging from home thing—this is clearly the future. We already see it on phone data plans. And most cable and internet companies are offering differential pricing on speed. Tiering in both of those areas may mean that not everyone gets the same quality of service, but if it means that some people can afford access they might not otherwise have, and we’re paying overall to maintain the network we use, that’s probably a good thing. I agree with those of you have complained about the fact that the same companies provide our cable and internet, and who think it stifles pricing and plan innovation. But these are good experiments.

The word is grim: Credit Suisse revised its forecasts, and instead of expecting cable television subscriptions to increase by 250,000 next year, they’re now predicting that the number of subscribers will fall by 200,000. And it’s not just that families are cutting the cord because it’s expensive. The number will go down because of a larger cultural shift, younger consumers who have decided that cable isn’t worth the money at all and are declining to subscribe in the first place, so they won’t replace older ones who are exiting the subscriber universe. That should be a much scarier proposition for the cable industry, but it’s an intriguing one for networks.

I remain pretty convinced that even if it takes a very long time to unbundle cable, and even if a bunch of networks die in the process, a move towards a more flexible (if not entirely a la carte) multi-platform system is inevitable. The idea that choice is paying for precisely what you want, rather than getting an enormous number of things — some of which you want and some of which you’d gladly see die in a fire — for your money seems pretty well-entrenched in the music industry now, and has always been the case for books. If I were HBO, I’d be pondering a subscription option for HBO GO only: I’m pretty sure I’d pay the $9-odd dollars I pay for my HBO package now for HBO GO only if I didn’t have cable.

For networks that don’t have the same premium branding as HBO or Showtime baked into their business model, and thus would have more difficulty attracting a core of subscribers used to paying for them separately, it’ll be interesting to see what happens. I can see something like Bravo making the jump to premium-lite status not because the content is astonishingly good but because the brand is so clearly defined. And I wonder if other networks will retrench their content offerings to try to keep the subscribers they have, or innovate to try to bring resistent cord-nevers into the fold. It’d be easier to do the former, but for the survival of the industry, much more important to innovate with everything to do the latter.