Microsoft's Ben Thompson has written two posts on his blog explaining why why the so-called "bundled model" of cable programming –– in which we are forced to pay for every channel, instead of picking just the ones we want –– is here to stay.
In the first post, Thompson illustrates why we can't simply choose our favorite channels and pay for them individually using the example of ESPN.
Under the current model, every household pays about $5 to have ESPN included with their cable subscription. Since fewer than 5% of households actually watch ESPN, each of these households would have to pay about $100 each month if they wanted to get it by itself for ESPN to generate the same amount of revenue.
In his second post, Thompson explains why we can't just pay the networks directly for creating content (except, of course, Netflix). Here, he makes an analogy to Silicon Valley: the networks are like venture capital firms who invest in perhaps ten companies while expecting nine of them to fail.
Channels like AMC are able to make big bets like investing $2.7 million per episode of Mad Men because the affiliate fees they get from the cable networks give them the capital they need to take risks. While the big profits come from the hit shows like Mad Men and Breaking Bad, they wouldn't dare risk such sums on these groundbreaking programs to begin with if they could only rely on ads and direct sales through venues like iTunes and Amazon.
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