Using the ceteris paribus assumption that ignores other potential changes, what is the likely effect on the market for cable TV if increasing numbers of networks demand higher fees from the cable companies in order to broadcast their programs?
Is this (a) an increase in the supply of cable TV, (b) a decrease in the supply of cable TV, (c) an increase in the demand for cable TV, or (d) a decrease in the demand for cable TV? Will the equilibrium price of cable TV increase or decrease as a result of cable TV companies paying higher fees for the programs they broadcast ?
Read the article below and then illustrate this price change with a graph that shows the initial positions of the supply and demand for cable TV and the new positions of the supply and demand curves. (Hint: Does an increase in the costs of production shift the supply curve or the demand curve? Is it a shift to the right or left?) There is a link at the bottom that provides the answer.
The performances on “American Idol” may be erratic and the plot twists on “Lost” may be unpredictable, but one facet of television is certain: the costs just keep going up.
On New Year’s Day, the News Corporation, the media empire controlled by Rupert Murdoch, wrangled new payments from Time Warner Cable, including subscriber fees for the Fox Broadcasting network, which is free for viewers with over-the-air antennas.
The high-stakes deal reflected the scramble by media companies to reduce their dependence on advertising.
Something else also happened that day: Time Warner Cable put another rate increase into effect.
It will not be the last time. Along with Fox, other broadcasters say they deserve a share of the cable and satellite bills that roughly 100 million American households pay each month. At the same time, the cable-only channels that have lured viewers away from broadcast, with shows like “SpongeBob SquarePants” and “The Closer,” are lining up for further fee increases.
Viewers usually do not notice until the price goes up, but their pay TV bills are a battleground for media companies. “Content providers are testing the limits — hoping to raise the bar as high as possible,” said Steve Ridge, the president of the media strategy group for the consulting firm Frank N. Magid Associates.
These battles are playing out just as the television industry is coping with the wrenching changes brought on by new competition from the Internet.
Broadcasters have long envied the fact that their cable channel competitors are paid two ways, through advertising and subscriber fees. So now, the television networks are fighting for every penny they can.
Several years ago, CBS started asking for fees, and the News Corporation followed in negotiations last month, demanding a dollar for each subscriber every month from Time Warner Cable. The average digital cable customer already pays nearly $75 a month, the research firm Centris found last year.
The companies will not reveal what compromise they reached, but that figure will most likely become a benchmark for future deals. Disney is expected to ask for sizable fees for its ABC stations in negotiations this year.
In a twist, Comcast, the country’s largest cable provider, will soon own NBC Universal, if its acquisition is approved by the government, putting it in a position to pay out as well as collect fees for NBC.
Cable and satellite distributors are resisting the demands, but a “power shift,” as Mr. Ridge put it, is under way as broadband Internet becomes pervasive, putting a seemingly infinite variety of choices in front of consumers. Of course, broadband is not free, either, and it is often provided by the same companies that distribute television programming.
The News Corporation fight was unusual because it played out in public, with Time Warner Cable arguing that it wanted to hold the line on further fee increases. That looks impossible, however, as newly powerful cable channels seek to cash in.
They argue that they deserve more money for having invested millions in their original programming. Cable executives say privately that the demands, and resulting fights, are increasing in frequency. And every time they clash, there is a chance that viewers will miss out.
The sports network Versus, owned by Comcast, has been off of DirecTV’s satellite service for three months in a fee battle. More prominently, the Food Network and HGTV disappeared from Cablevision’s lineups in New York and New Jersey on Friday after talks broke down with the owner of the channels, Scripps Networks.
The Food Network costs distributors 8 cents a viewer on average now; Scripps wants a roughly 300 percent raise, according to people briefed on the negotiations. That might seem drastic, but 30 other channels, some with lower ratings, already earn that much. “We were really, really undervalued,” said Brooke Johnson, the president of the Food Network.
For ardent fans of “Iron Chef America,” the Food Network is undoubtedly worth 25 cents a month. But that logic, applied to dozens of channels, can become pretty expensive for viewers. For example, the owners of Oprah Winfrey’s cable channel, set to begin one year from now, are hoping that her star power will be worth 50 cents for each subscriber a month. The channel it is replacing, Discovery Health, gets only 12 cents now.
Consumers already pay dimes or quarters for most cable channels each month, whether they watch them or not. ESPN earns the most by far, $4.10 on average, and is forecast to receive more than $5 a month by 2012, according to the research firm SNL Kagan. Fox Sports Network gets $2.37 on average.
The next-highest paid channel, TNT, gets 96 cents. The Disney Channel, NFL Network, Fox News, USA and ESPN2 each get more than 50 cents. For every channel, the price per month is expected to rise each year.
“We hear from consumers that they are paying too much and getting too little for it. And there seems to be no end to the rate hikes in sight,” Mindy Spatt, a spokeswoman for The Utility Reform Network, said.
Even as consumers recover from the recession, there is little evidence that people are canceling cable en masse, although some know that calling up their local provider and threatening to cancel can quickly earn them a big discount.
Time Warner Cable is not alone in raising rates; higher prices go into effect for DirecTV and AT&T’s customers next month.
In Washington, where proposals for “à la carte” cable pricing were popular in recent years, some lawmakers and regulators now look to the Web as a more attractive, market-driven solution. Viewers will increasingly be able to bypass pay TV service and watch whatever they like online.
Distributors are trying to put a system into effect that will offer some TV shows online to existing subscribers only.
Time Warner Cable asserts that the power ultimately rests with the consumer. “They’re the ones who are going to resist these price increases that the programmers are trying to push,” said Alex Dudley, a spokesman for the company. “One need look no further than the music industry for an example of what happens when consumers feel taken advantage of by an entire industry.”
Lest anyone doubt that Americans, who watch an average of five hours of television a day, cannot part with their sets, look no further than Orange County, Fla., where two football fans sought an emergency injunction to avert a Fox blackout of their alma mater’s bowl game on Friday as the dispute with Time Warner Cable persisted. No one, not even Mr. Murdoch, was going to interrupt their viewing of the Sugar Bowl.
The fans lost the case but won their Fox, as the two companies committed to a new contract about 45 minutes before kickoff. Soon enough, though, those fans will be paying for it.
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