When AT&T announced it would offer 100+ cable television and broadcast network channels under the DirecTV Now brand for $35 a month, Wall Street had a fit.

Craig Moffett, an analyst with Moffett-Nathanson, speculated that AT&T would make at most a profit margin of $5 a month for its $35 a month plan, once programming costs were covered. But then AT&T announced it would sweeten the deal with a free Apple TV Player or Amazon Fire Stick for those confident enough to prepay for the new service. That makes DirecTV Now a purposefully unprofitable service, creating considerable stress for both the cable and satellite industry and their investors.

Variety notes the average DirecTV satellite subscriber delivers about $60 a month in profit to its owner, AT&T. That led the industry magazine to speculate DirecTV Now is a “loss leader” designed to sell its parent company’s AT&T-Time Warner, Inc. merger deal to regulators on the premise of increased competition delivering real savings to consumers.

Thankfully for Wall Street’s nerves, AT&T’s usual practice of marketing things with a lot of fine print emerged in the nick of time, and the $35 dollar price has now turned out to be an introductory offer for early adopters. In the not-too-distant future, AT&T will enroll new customers for its “Go Big” package at a much more profitable $60 a month. Customers who sign up at the $35 rate and stay customers will be able to keep that price as long as they make no changes to their account after the promotion ends.

Moffett

But Moffett warned investors that the traditional cable television model is still under serious threat, and AT&T’s less-promoted “Live a Little” package offering 60 popular cable networks for the everyday price of $35 is the equivalent of AT&T “running with scissors” because it alone could cause millions of cable and satellite customers to cut the cord and stay more than satisfied with a slimmed down cable package.

“Virtually all the channels that anyone would really want, save for regional sports networks” are included in the lighter “Live a Little” package, Moffett added. Customers who loathe watching sports but want a beefier package can also sign up for a $50, 80-channel “Just Right” package that primarily omits sports-oriented channels and a handful of spinoff cable networks few would miss.

Moffett and other Wall Street analysts were hoping AT&T would bloat its cheaper package with home shopping, religion, and other little-watched, low-cost cable networks and then entice customers to upgrade to unlock more popular cable channels. Instead, AT&T’s most premium package — “Gotta Have It” which costs $70 a month adds the “can live without” networks like Boomerang, Cloo, El Rey, Centric, and other little-known channels that typically live unnoticed in Channel Siberia on 500+ channel cable lineups. The highest premium priced package is attractive only for those looking for Starz/Encore channels and the basic cable network that gets no respect — Hallmark Movies & Mysteries (a/k/a the Dick van Dyke Permanent Employment Network.)

“By stacking their base package with all the best networks — likely a requirement for getting the programming contracts at all — they still have the same problem that was highlighted initially,” by Moffett. “Put simply, they aren’t going to make any money.”

That quest for profit is further challenged with subscriber acquisition programs that dole out free Apple TV units to customers willing to prepay for three months of service at the $35 rate or an Amazon Fire Stick (with Echo remote) in return for prepaying for one month of service. Anyone in the market for either device can sign up for DirecTV Now, get the equipment at an attractive price, and consider the 1-3 months of service a free extra bonus. Customers were reportedly lining up at AT&T’s owned and operated retail outlets (not authorized resellers) to pick up devices and sign up for service today.

At these prices and with these promotions, AT&T DirecTV Now could first decimate the subscriber base of its immediate competitors Sling TV and PlayStation Vue, either of which offer a much less compelling value. AT&T can afford to charge a lower price because it has deeper pockets and enormous volume discounts on the wholesale price of cable programming — combining millions of DirecTV and U-verse TV subscribers together to negotiate what industry insiders suspect are major discounts the smaller providers cannot get.

But there are issues likely to be deal-breakers for some would-be DirecTV Now subscribers:

• Local broadcast stations are available only in a handful of selected cities and only a very few include all ABC, NBC, and FOX affiliates. CBS is not participating in DirecTV Now at this time, and that is a major omission;
• NFL Network isn’t on the lineup;
• Regional sports networks are spotty and geographically restricted. Here is a detailed PDF outlining options by zip code;
• There is a limit of two concurrent streams and although video quality is very good, it is not the 1080/HD experience AT&T’s marketing material would suggest. The quality of your internet connection will make a difference;
• No DVR option at this time.

CNET compiled an excellent channel comparison chart to help consumers figure out which, if any, of these upstarts make sense as a cable TV replacement:

$5 a month each for HBO and Cinemax.

Time Warner, Inc. did its part, offering a substantial deal to DirecTV Now to allow customers to add HBO and Cinemax for just $5 a month each, substantially less than what both networks charge customers signing up a-la-carte. This also unlocks access to streaming options on both networks’ websites.

In fact, as a DirecTV Now customer, you will also become an authenticated pay television subscriber, unlocking access on various cable network websites to extra streaming and on-demand options.

The implications of DirecTV Now depend on how long AT&T extends its $35 offer, which is going to be compelling for a lot of Americans. Moffett predicts DirecTV Now could sign up a staggering 11 million Americans — at least two million cannibalized from its own DirecTV satellite customer base, six million cutting the cord on their cable company (including AT&T U-verse) and another three million cord-cutters or “cable-nevers.” Most of the latter are Millennials, and research suggests $35 may be low enough of a price point to sign them up.

AT&T is also raising concerns among internet activists because online streaming of DirecTV Now will not count against an AT&T postpaid customer’s data allowance. This zero rating scheme is seen as an end run around Net Neutrality, particularly because AT&T is not as generous with its competitors. AT&T said it will offer other video streamers the possibility of being exempted from AT&T data allowances, if they pay AT&T for the privilege.

How It Works/Signing Up

AT&T DirecTV Now starts with the Google Chrome 50+, Safari 8+ or Internet Explorer 11+ (on Windows 8 and up) web browsers or the DirecTV Now app. AT&T recommends Chrome for desktop viewing. The service doesn’t work with Firefox, Microsoft Edge, or legacy browsers.

The first step is registering for a 7-day free trial. Before handing over your credit card number, if you scroll down you will find a small free preview option is also available that includes a largely useless streaming barker channel promoting the service and a respectable collection of video on demand options from basic cable networks. The free video streaming option will give you a clue about how the service is likely to perform on your internet connection and devices. For the record, DirecTV Now now supports:

• Amazon Fire TV
• Amazon Fire TV Stick
• Apple TV (4th generation)
• Android^TM phone 4.4 and higher
• Android tablet 4.4 and higher
• Chromecast (for Android only)
• iPad iOS 9 and higher
• iPhone iOS 9 and higher
• iPod Touch version 9 and higher

Support for other devices like Roku is coming next year.

Customers must be within the United States to use the service. If you travel abroad or to any U.S. territories like Guam, the Virgin Islands, or Puerto Rico, DirecTV Now will stop working until you return. When you sign up, keep in mind your billing zip code will mean a lot when it comes to accessing regional sports and local broadcast channels. DirecTV Now uses your billing zip code and your actual location to determine whether you are qualified to access regional sports networks and local stations.

Score a Free Apple TV Player or Amazon Fire TV Stick

Apple TV (4th Generation): Effectively free after prepaying for three months of service.

If you are looking to score an Apple TV (4th generation) or an Amazon Fire TV Stick, you will want to skip the 7-day free trial and enroll in a paid plan immediately, which will allow you to select which player you want. If you want the Apple TV, you will prepay for three months at $35 a month ($105). The Amazon Fire TV Stick only requires you to prepay for the first month of service ($35). One device per email address, but you can sign up for multiple accounts (using individual email addresses) and get a device for each — especially useful for larger families that could run into DirecTV Now’s two-stream limit.

Consider your choices before enrolling. If you want to add premium channels or upgrade your plan, and you select the three-month prepay option to grab an Apple TV Player, adding premium channels like HBO and Cinemax or moving to a higher plan will result in three months of prepaid charges for those upgrades as well, billed automatically to your credit card on file — which amounts to a $30 charge if you select HBO and Cinemax. After your promotional prepaid term ends, your account will continue to be billed at the $35 (plus any add-ons) rate until you cancel. AT&T covers you for the forfeited first free week by extending your bill date out by seven days. Allow 2-3 weeks for the device(s) to be shipped to you.

You can also sign up at an AT&T owned and operated retail store, but be aware AT&T “authorized” reseller stores are not participating in this promotion. That may allow you to bring home a device today.

Don’t care about the device promotions? Take the 7-day free trial, but be aware that you are giving AT&T your credit card number and charges begin immediately after the free week ends unless you cancel. Here’s how:

1. Sign in to your account.
2. From your User Account overview page, select Manage My Plan.
3. Select the Cancel Plan link.
4. Choose one of the listed reasons.
5. Select Cancel Now to confirm cancellation.

Your subscription will continue until the end of the billing cycle. No refunds or credits are provided for partial months. Your account will revert to Freeview demo status after you cancel a subscription.  You can add a subscription package back at any time.

Oddly, AT&T is not charging sales tax for New York, California, Maryland or Virginia residents. Customers in states like Tennessee where AT&T provides local phone service were most likely to face sales taxes. Those signing up early are in the best position to exploit what appears to be an oversight, or it represents the first time the New York Department of Taxation and Finance left money on the table.

Streaming from Your AT&T Wireless Device Does Not Count Against Your Data Allowance

If you’re a DirecTV Now and AT&T Wireless customer, streaming most DirecTV Now movies and programs over the AT&T wireless network won’t count against your data usage allowance, according to AT&T. But believe it or not, AT&T’s fine print indicates advertisements and non-streaming app activity do count! There are some other important disclosures to be aware of:

• You must be on the AT&T Wireless network within the U.S. (U.S. territories are not qualified for zero rating);
• You must be a postpaid, not a prepaid AT&T wireless customer to qualify and must not have “data block” on your mobile line;
• If you are grandfathered on an unlimited data plan, using DirecTV Now will not count against the 22GB data threshold which subjects you to speed throttling;
• This offer may disappear at any time and/or is subject to change.

DirecTV Now Qualifies You as an Authenticated Pay Television Subscriber

Many cable networks require customers enter their cable, satellite, or telco TV login credentials to unlock video streaming and on-demand features. DirecTV Now is a qualified provider for these websites (more coming):

• ABC
• Disney
• Disney Jr.
• Disney XD
• ESPN (WatchESPN)
• Freeform
• HBO GO (requires subscription to HBO)
• MAX GO (requires subscription to Cinemax)

Other networks are not yet enabled for DirecTV Now. CNN, for example, has a prompt for DirecTV satellite customers to log in, but DirecTV Now has its own account registration system.

Local Channels Are Very Spotty

Local over the air channels are very limited on DirecTV Now and are geographically restricted. You can access these channels only if you are located in or very near to the cities listed below and your billing zip code is in the same area. If you travel outside of the immediate area, live streaming will stop working until you return.

Giving the Service a Test

Stop the Cap! enrolled as an ordinary customer this morning and gave the service a rigorous test, including multiple streams over our 50/5Mbps internet connection. The service debuted today, and there is little doubt there is intense interest from consumers, so we expected some performance problems from the initial demand. We didn’t see any evidence of traffic congestion, however, and that is a good sign.

AT&T’s John Stankey explaining DirecTV Now.

A similar test of Sling TV did not perform as well during peak viewing times, when streaming problems emerged. DirecTV Now seems to be built to withstand intense demand.

One customer with a 6Mbps U-verse internet connection “in the boonies” was impressed the video quality of DirecTV Now was high even on a relatively slow DSL-like connection.

“This blows SlingTV away,” the person shared. “I only have U-verse 6Mbps internet service and it is not pixelated or buffering at all. Looks exactly like my regular DirecTV picture.”

AT&T published these recommendations for DirecTV Now customers regarding internet connection speeds:

• 150kbps – 2.5Mbps – Minimum broadband connection speed for Mobile devices
• 2.5 – 5.0Mbps – Recommended for HD quality

We’ve been led to believe DirecTV Now should perform equivalently to 1080i HDTV service (depending on the video source of course). We cannot say we agree it does right now. We noticed significant artifacts on high-motion video and picture graininess that left us feeling this was closer to a 720p HD experience. It isn’t possible to say whether the video player reduced playback quality because of internet traffic issues we were unaware of or if this is how the picture is supposed to look. It did not significantly detract from the viewing experience and the lack of buffering and pixelation was far more important to us.

AT&T store in NYC.

DirecTV Now would serve adequately as a cable TV replacement if it had local station coverage and some type of DVR. At present, DirecTV Now is limited to a “Restart” feature that allows you to restart shows already in progress on certain channels, but you cannot fast-forward or record a restarted show. Once AT&T introduces a cloud-based DVR and fills out the local station lineup, this service could be lethal to overpriced cable TV packages.

AT&T’s marketing attempts to undercut the powerful position of inertia by setting an unknown time limit for customers to enroll in the $35 a month video package. If you don’t sign up today, you may not get the “free” Apple TV or Amazon Fire Stick and a respectable cable TV package for just $35 a month — about half what cable operators are charging these days for their bloated video packages. AT&T doesn’t care if you stick with your current cable provider and signup for DirecTV Now, if only to grab free streaming video equipment while sampling the service. They get their money either way.

Had AT&T permanently kept the price at around $35, many consumers would likely sit back and wait for AT&T to sort out the streaming contract issues it has with the TV networks — CBS in particular, and come up with a DVR solution before those potential customers decided to sign up and make the change. Based on several “hot deals” websites, the mentality among many consumers is to “lock in” the $35 price now and wait for AT&T to build out the package while continuing to invest $35 a month on it. That doesn’t seem so bad when you get free electronics as part of the deal.

Our Final Take

AT&T’s DirecTV Now is a potential winner and worth signing up for because of the introductory price and free equipment offers. But if you decide not to disconnect your cable/satellite television service, it is probably safe to drop DirecTV Now after your prepayment expires and return to resume service a little later. There will probably be some warning when AT&T will end the introductory price for the service, and interested customers can hop back on board before that date arrives. DirecTV Now will be a formidable competitor, but it will fight against consumer resistance to confront the cable company and cut cable’s cord until it solves the local channels issue and has a credible DVR option. The service could also use an add-on to make adding additional concurrent streams possible and more affordable than just signing up for a second account.

Don’t count out Big Cable just yet. With data caps and other internet overcharging schemes, Comcast, Cox, Suddenlink, and others can play games with usage allowances to deter customers from streaming all of their video entertainment online at the risk of blowing past their allowance. DirecTV Now’s $35 price won’t mean much after overlimit fees begin appearing on your internet bill.

Apple TV

Apple’s ability to successfully force its way into the pay television business with a cord-cutter’s streaming TV solution has been left languishing since 2009, thanks to some of America’s largest cable and entertainment companies who think Apple is arrogant and out of touch.

The Wall Street Journal today published a story showing how Apple’s plans to challenge the cable TV industry much the same way it revolutionized digital music has rubbed the big and powerful the wrong way. Apple’s desire to launch a cheaper streaming video service with a slimmed down TV lineup and robust on-demand options has flopped, because executives have no interest in bending to Apple’s way of thinking.

In 2009, Apple decided it wanted in on the streaming pay-TV business. At the same time Time Warner Cable began experimenting with data caps, Apple was approaching local stations and broadcast networks and offering them premium payments — higher than what the cable industry itself paid — for Apple’s choice of stations and cable networks. The deal meant Apple would alone be free to pick only the channels it wanted to carry, a major departure from the industry practice of contract renewals that bundled popular networks with spinoff and lesser-known channels cable operators didn’t want to carry. Apple’s hard-charging negotiator, Eddy Cue, seemed to believe that if Apple was at the negotiating table, that alone would be enough to get a deal done. It wasn’t.

Two years later, Time Warner Cable approached Apple seeking to launch a joint TV venture that could compete nationwide with satellite and phone company competitors. The talks were at the highest levels at both companies, involving Time Warner Cable’s then-CEO Glenn Britt, Cue, and Apple CEO Tim Cook. Cook also approached Brian Roberts, CEO of Comcast, promising him the service would only be sold through cable operators — good news for Comcast but bad news for open competition.

This time, Apple sought money from the cable companies, not the other way around. Cable operators were told they would need to pay $10 a month per subscriber to Apple, with no guarantee that fee would not increase in the future. Just as concerning was Apple’s insistence that subscriber authentication would require customers to use their Apple IDs, a departure from the cable industry’s push to adopt TV Everywhere, where customers could unlock streaming video from any cable network simply by logging in with the username and password they set up with their pay TV provider. Apple was also characteristically secretive about their user interface and left cable industry executives flummoxed when they asked Apple to sketch out what the service would look like on a napkin. An Apple official would only respond that their interface would be great and “better than anything you’ve ever had.” The fact Apple refused to answer the question did not go unnoticed.

Nor did Cue’s unconventional way of negotiating with some of the most powerful entertainment executives in the country. When Jeff Bewkes, CEO of Time Warner (Entertainment) agreed to meet with Cue about Apple licensing Time Warner’s critical networks — which include HBO, CNN, and TNT — Apple’s negotiator showed up 10 minutes late. While Time Warner’s negotiators were smartly dressed in business attire, Cue turned up wearing jeans, a Hawaiian shirt, and sneakers with no socks. It went downhill from there, because Apple insisted on valuable on-demand rights to full seasons of hit shows and permission to let viewers store their favorite recordings on a massive cloud-based DVR that included features like automatic recordings of hit shows and advanced ad-skipping technology.

Crickets.

More than a few programmers used to having their way with cable operators were shocked by Apple’s ‘arrogance’ and unconventional way of doing business. The newspaper reports one former Time Warner Cable executive watched with amusement as stone-faced programmers were unimpressed with Apple’s demands.

Jon Lovitz offers a visual hint what Mr. Cue must have looked like meeting with high-powered execs at Time Warner (Entertainment)

“[They] kept looking at the Apple guys like: ‘Do you have any idea how this industry works?'” said the former executive.

Apple responded ‘doing new things requires changes that often are unsettling.’

A year later the negotiations were on life support, as Apple struggled with the arrival of 2015 with no slimmed down streaming TV package to offer Apple TV owners.

Apple’s demands flew in the face of decades of cable industry business practices, which give channel owners virtual guarantees of rate hikes with each contract renewal, the right to force their spinoff networks on the cable lineup in return for a comfortable renewal process, and the cable industry’s right to an assurance everyone was getting the same kind of deal (except volume discounts). Any deviation from this would result in panic on Wall Street, as investors’ dependence on perpetually improving quarterly financial results based on revenue boosts from new or higher fees would come crashing down if a company like Apple got a better deal.

One industry insider suggested once a company like Apple got a deal on sweetheart terms, every other distributor would demand the same deal (and many have contract provisions that require it). Apple may have assumed that because it managed to get the recording industry to agree to its iTunes digital music distribution deal 15 years earlier, so the cable industry would go. Except the road to cut-throat deals for entertainment programming is littered with dead-end business plans that had to be quickly modified when the discounts ended.

Netflix and Starz both learned expensive lessons when early discounts on licensing deals ended after Hollywood saw how much money those companies made from streaming. When licensing contracts expired, entertainment companies sought massive increases in licensing fees to “fairly share” the proceeds. Netflix ended up walking away from several studios, seriously impacting their online streaming catalog. Eventually, Netflix decided if they cannot beat the studios, they should join them, creating original programming to attract and keep subscribers.

Cue in real life

After almost a decade spent trying to get into the online cable business, Apple now seems more likely to follow Netflix, Amazon, and Hulu, and devote time and money on developing its own original programming. Instead of trying to license and bundle network programming, Apple TV today supports independent apps created by various networks. Viewers still get to watch their favorite shows, Apple does not have to pay for streaming rights, and there is a joint effort to create and support a single login so viewers can get access to content without constantly re-entering usernames and passwords.

Apple’s original shows include “Planet of the Apps,” a reality series, a miniseries being developed by Dr. Dre, and a spinoff of CBS’ “Carpool Karaoke.” The shows serve a dual purpose — entertaining viewers and helping push sales in Apple’s App Store and streaming music service.

Also under consideration are big budget, critically acclaimed original shows and series that could generate positive buzz for Apple TV, like “House of Cards” has done for Netflix.

Developing programming keeps negotiators like Apple’s Mr. Cue from having to challenge a very profitable pay television industry on their terms and spares Apple from creating a cable package of linear TV channels subscribers increasingly don’t care about. Viewers want on-demand access to the shows they want to see and don’t care that much about who supplies them and how.

So in the end, the intransigence of Big Cable and Hollywood studios that are now worried about cord-cutting may have done Apple an enormous favor, sparing them from being entangled in a business that buys and sells channels to fill a bloated and expensive cable television lineup more and more consumers are now deciding they can do without.

Updated: Link to WSJ story corrected.

Mediacom subscribers in 15 cities lost 16 Media General-owned over the air stations from the cable lineup in a retransmission consent dispute just as a Major League Baseball All-Star Game to be shown on some of them was about to get underway.

Most of the stations are in smaller cities served by Mediacom and include:

• Alabama: WIAT (CBS) Birmingham, WFNA (CW) Mobile
• California: KRON (CW) San Francisco-Oakland-San Jose
• Indiana: WANE (CBS) Fort Wayne, WTHI (CBS) Terre Haute
• Kansas: KSNT (NBC) Topeka, KTMJ Topeka, KSNW (NBC) Wichita-Hutchison
• Iowa: KWQC (NBC) Davenport,  KIMT (CBS/My Network TV) Mason City
• Michigan: WOTV (ABC) Grand Rapids-Kalamazoo-Battle Creek, WOOD (NBC) Grand Rapids-Kalamazoo-Battle Creek
• South Dakota: KELO (CBS/My Network TV) Sioux Falls
• Tennessee: WKRN (ABC) Nashville
• Virginia: WAVY (NBC) Norfolk-Portsmouth-Newport News, WVBT Norfolk
• Wisconsin: WBAY (ABC) Green Bay-Appleton

Mediacom claims Media General was seeking excessive compensation to renew its carriage agreement with the television stations. Customers were told in a letter signed by Tom Curtis that some stations were demanding more than double the old rate to renew the contract.

“Not only was Media General demanding more than double the money, the price they set for KWQC [in Davenport, Iowa] was significantly more than any other broadcast station we carry,” Curtis wrote. “If we agreed to Media General’s demands, KWQC would have become the most expensive broadcast channel in all of the 1,500 communities that Mediacom serves across 22 states. Further, other broadcasters would follow and begin demanding to be paid the same as Media General, driving up costs for other channels on your lineup.”

This is the second time in four years customers have lost the stations. When LIN Media owned several of the outlets in 2011, it refused cable carriage for more than a month over a similar dispute.

Just when you thought the cable television lineup could not possibly get any larger,  insiders at Comcast are anticipating one of the possible conditions that could be imposed by the Federal Communications Commission in return for approval of its merger with Time Warner Cable is an agreement to carry more independently owned cable television channels.

One of the most vocal groups of consumers opposed to the merger deal have been viewers of independent Omaha, Neb.-based RFD-TV, which has landed carriage deals with Time Warner Cable but has been largely ignored by Comcast. For most of the summer, RFD-TV encouraged viewers to pelt the FCC with complaints about the merger deal, insisting that more networks not owned or operated by the top five media conglomerates get equal treatment on the Comcast cable dial. Thousands of viewers responded.

Comcast vice president David Cohen told Congress Comcast already carries more than 170 small or independent networks, although Comcast counts international networks distributed to customers at premium rates.

“It sounds wonderful. But when you peel back the onion . . . it’s really nothing at all,” Pat Gottsch, founder of RFD-TV told the Philadelphia Inquirer. “Very few [independent] channels have full distribution, other than BBC World News and Al Jazeera.”

Independent networks have little leverage with major cable operators because they cannot tie carriage agreements to more popular mainstream cable networks. That is why little-known networks like Crime & Investigation Channel or the spinoffs of fX – fXX and fXM – have glided onto cable lineups while networks like RFD, The Tennis Channel, and BlueHighways TV have a much tougher time.

Time Warner Cable now widely carries RFD-TV, but often only on an added-cost mini-pay tier. In many Time Warner markets, RFD and Smithsonian TV replaced HDNet, also an added-cost network.

The independent networks fear they will never become viable if they cannot reach the nearly one-third of the country’s cable television subscribers a combined Comcast and Time Warner Cable would serve. Others question whether they will be given fair consideration if their networks compete with an existing Comcast or Time Warner Cable-owned channel.

The Tennis Channel and Bloomberg have both tussled repeatedly with Comcast over carriage agreements and channel placement. The Tennis Channel took Comcast all the way to a federal appeals court, but lost their case. Cable companies have won recognition of their First Amendment rights to choose the channels on their systems.

In years past, cable operators cited limited channel capacity as the most frequent reason a network could not be added to the lineup. Comcast continues to claim they have limited channel space for television channels, but that has not stopped the cable company from launching dozens of little-watched networks they receive compensation to carry (home shopping, TBN and certain other religious networks) or are contractually obligated to carry (add-on sports and entertainment networks owned by Disney, Viacom, Time Warner (Entertainment), Fox, and even Comcast itself, through its Universal division).

Comcast’s claim it already carries nearly 180 independent networks drew scrutiny when the company released the list of networks. At least half were added-cost international or pornography networks — all sold at a higher cost. More than a dozen others were independent sports channels packed into a higher-cost sports tier. Most of the rest were regional networks given very limited exposure. BlueHighways TV, which features bluegrass music, is seen in only 210,000 Comcast homes, mostly in Tennessee. That is less than 1% of Comcast’s total subscriber base.

The only prominent and truly independent networks given wide carriage on Comcast include Home Shopping Network and QVC, which pay a commission to Comcast for every sale made to a Comcast customer, BBC World News, and the Catholic EWTN network.

Mitigating the problem of independent network carriage may push the FCC to the path of least resistance – making carriage of some of these networks a requirement in return for merger approval.

It wouldn’t be the first time. Comcast agreed to launch 10 independent networks as a condition for FCC approval of its buyout of NBCUniversal. That deal is what brought BBC World News to the Comcast lineup, along with a range of little-known networks on high channel numbers: ASPiRE, BabyFirst Americas, Revolt, and El Rey. BabyFirst is targeted to babies and toddlers from 0-3 years old, but is also enjoyed by recreational drug users who find the network’s use of bright colors in their short-form videos entertaining. ASPiRE’s programming has been described by its critics as “crap.”

Subscribers of more than 900 independent cable companies may face an unwelcome surprise this summer in the form of a mid-year rate increase.

For years, members of the National Cable Television Cooperative (NCTC) have joined forces to negotiate for the kinds of volume discounts only the largest cable and satellite companies like Comcast, Time Warner Cable, DirecTV, Dish Networks, Charter, and Cablevision have traditionally received. NCTC members range from family owned cable operators, rural co-ops, community-owned providers, independent telephone companies, and small multi-system operators servicing multiple communities. With group-buying power, NCTC-member cable companies used to be able to negotiate volume discounts that could keep their rates competitive with larger providers.

But as consolidation among major network media, cable, satellite, and phone companies marches on, only the largest operators — some directly affiliated with the cable programming networks — are getting the best deals at contract renewal time. All NCTC members combined serve just five million cable TV subscribers. Comcast has 21 million, DirecTV: 20 million, Dish Networks: 14 million, and Time Warner Cable: 11 million.

When NCTC’s contract with Viacom was up for renewal, the owner of networks like MTV and Comedy Central raised the renewal price more than 40 times the rate of inflation. In fact, Viacom’s asking price was so high, operators like Cable ONE pulled the plug on 15 Viacom networks for good and replaced them with other programming. NCTC members eventually compromised on a deal to renew Viacom-owned networks, but customers of companies like Massillon, Ohio-based MCTV are paying the price in the form of a mid-year rate hike Bob Gessner, MCTV’s president, did not want to have to pass on to customers.

“I don’t like to do this because it puts me in a difficult position of raising prices, which no one likes, or reducing the product, which no one likes, or cutting back on the quality of our customer service, which no one likes,” said Gessner. “Large media companies control all the TV programming and they are raising the price.  The cost of TV programming is rising very rapidly and it is causing this rise in retail prices.”

Some facts about cable TV programming:

• Nine media companies control 95% of the paid video content consumed in the U.S.;
• The average household watches only 16 channels, yet networks package their channels to force you to buy those you don’t want to get those that you do want;
• Programming network fees account for the bulk of your monthly cable bill;
• The cost of basic cable has risen 3½ times the rate of inflation over the last 15 years because of demands from networks for higher programming fees;
• One media company honcho recently stated that, “…content is such a fundamental part of daily life that people will give up food and a roof over their heads before they give up TV.” This shows that they have lost their perspective and the demands for huge increases will continue.

Gessner

Gessner has broken ranks with many cable operators that say little more at rate hike time than “increased programming costs.”

Gessner has produced a 20-minute video that carefully explains to his customers what is going on in the cable programming industry and why providers like MCTV are forced to shovel networks onto cable lineups few customers want or watch and how the biggest cable and satellite companies are now negotiating volume-discounted renewal pricing at the expense of smaller providers.

While the largest cable companies in the country secure lower rates through those volume discounts, programmers have found a way to make up the difference: demanding even higher rates for smaller cable companies to cover what they lose from Comcast and other big players.

Gessner, as well as other NCTC member companies, confront huge programmers like Comcast-NBCUniversal, Viacom, Time Warner (Entertainment), Discovery and Disney that first demand 3-7 year renewal contracts with built-in, automatic annual rate increases averaging 5-10 percent, regardless of the ratings of their networks. Most also demand that all of their cable networks be carried on their systems, whether customers are interested in them or not. If these companies dream up new cable networks, like ESPN’s SEC Network and the Longhorn Network, MCTV is committed to carry those channels as well, even though they are of little interest to residents of northeastern Ohio where MCTV operates.

These dream contracts (for cable programmers) are the single biggest reason cable-TV rates are skyrocketing. But Gessner says it gets even worse when those contracts expire. When renewal negotiations begin, programmers these days inevitably demand a “rate reset” which starts rate negotiations at a price 10, 30, even 60 percent higher than under the expiring contract.

Those dollar amounts cover local station retransmission consent agreements nationwide.

Gessner says he doesn’t know how much longer MCTV can afford to carry expensive networks like sports channels. If he drops them, angry subscribers could cancel cable service and switch to a provider willing to pay the asking price. Unless all of his competitors stand together, programmers will maintain the upper hand.

Some cable companies, like Cable ONE, are starting to risk the wrath of their customers by refusing to negotiate for terms they consider unreasonable. When subscribers learned the reasons why Cable ONE dropped more than dozen Viacom channels, many were supportive because the company replaced the networks with other channels and promised to keep rate increases down because they won’t have to pass on Viacom’s higher prices. Viacom retaliated by locking out Cable ONE’s Internet customers from accessing any of Viacom’s free-to-view online programming.

“Viacom lets web surfers from Albania watch Spongebob but Viacom blocks people who live in Alabama, and if you are an advocate of this thing called Net Neutrality, you should be very concerned,” Gessner said. “Viacom is blatantly violating the spirit of Net Neutrality by discriminating against certain Internet users in order to extract higher fees from TV viewers. That’s the sort of vicious bullying behavior many of the content companies use to maintain their stranglehold on the U.S. television industry.”

Gessner and other independent cable operators hope cable operators’ willingness to drop cable networks over their price is the start of something big — a pushback that could eventually force programmers to charge rational rates.

“Hopefully this will serve as a wakeup call to the rest of the industry to stop paying these ridiculous prices for TV rights,” said Gessner. “I have no illusion that sanity will come to the industry overnight — it will take time — but this is a step in the right direction.”

[flv]http://www.phillipdampier.com/video/MCTV Rate Increase 2014.flv[/flv]

MCTV president Bob Gessner hosted this thoughtful presentation to carefully explain why his customers are facing a $1-3 mid-year rate increase for cable television. Gessner breaks with tradition by explaining the cable television business model is effectively broken and needs serious reform, including more choices for customers seeking fewer channels and a lower bill. It’s well worth 20 minutes of your time. (20:11)