Cable Channel Strategy

1. Today’s most typical cable strategy is built entirely around profit maximization utilizing affiliate fees. If you own a cable channel, your goal is to develop one or two key, hit programs, and fill the rest of the linear lineup with very inexpensive content. The “hits” make you a “must have” for any cable or satellite carrier – granting you the right to ask for fees. Too many hits drive up costs. This is why you will see more and more hit shows on the less well-known cable channels. Mad Men on AMC is a perfect example. How can a cable company not offer Mad Men? Once you nail the single channel game, you immediately try to proliferate that into multiple channels a la MTV and ESPN. 
2. For those who do not know, affiliate fees are the primary revenue stream that funds today’s mainstream television content development. These are basically a “share” of the subscription fee you pay to your cable or satellite operator that is then shared back to the content owner/distributor (typically on a per subscriber basis). As an example, you will hear that some less notable cable-only channel was able to negotiate $0.25/sub/month, or that ESPN can negotiate $2.00/sub/month, because any aggregator would be afraid to market a television package without ESPN. Over the past 30 years, these fees have become the lifeblood of the TV content business – affecting how the major aggregators think and operate, and also affecting how content is produced, financed, and packaged.
3. Here are some specifics to help frame the issue.  In 2009 DirecTV paid approximately $37/sub out of an ARPU (Average revenue per user) of $85/sub, to content owners for programming costs (i.e. affiliate fees). In this case, affiliate fees represent roughly 43% of total revenue for DirecTV. Similarly for Comcast, estimates are programming costs at 37% of video revenue (Comcast has high-speed data and voice revenue that are separate). These are just two examples, but to give you a sense of scale these numbers represent around $7-8 billion/year each for Comcast and DirecTV. The  aggregate fees of all content providers are approximately $32B per year. These are big numbers. To put things in perspective this is about 33% higher than Google’s annual global revenues including revenues for its advertising network.