Talking Cable Economics with Entertainment Studios’ Byron Allen
By | July 27, 2012
Byron Allen is one of the most influential content players in Hollywood, producing more than 30 syndicated shows through Entertainment Studios. He also owns 6 HD cable networks. CableFAX exec editor Michael Grebb sat down with Allen at his Culver City studios in Los Angeles to discuss cable economics, cord cutting and why Allen thinks content production costs must come down.
When you look at over-the-top, is cable asleep at the wheel or reacting appropriately
The traditional cable networks—they’re not asleep at the wheel. They’re going to continue to do what they’ve been doing, which is to push for more sub fees and higher sub fees. The cable operators—they are in a very bad position. The cable operators are paying way too much for content. The pricing is out of control, and they have to significantly reduce their programming costs—probably by as much as 80 or 90 percent.
That’s pretty extreme. How do they do that?
Well, I can tell you this. Over time, it will shift to the Web where the cost is much lower. There are people out there who don’t have cable at all, and they’re very happy with Netflix at 8 bucks a month. They just reduced their cable bill by 90 percent. They made a decision: I will just watch Netflix. As a matter of fact, I just had dinner with a young lady who just finished USC, and her aunt is a good friend of ours and we all took her out to dinner for her graduation. She said, “Well, my roommates and I took a vote on whether we would sign up for cable, and it was a unanimous decision that it was ‘hell no’.” They didn’t want to split 60 bucks 6 ways. They didn’t want to spend 10 bucks per month. So they said they get everything they need on the Internet.
Yet many ops say video sub losses mostly don’t stem from cord cutting. Are you saying they’re just in denial?
Listen. They sound very similar to the people who used to own record stores. They sound very similar to the people who used to own bookstores. I’d say that we’ve seen this before. I noticed the guys who owned bookstores didn’t say “we’re in trouble.” I notice the guys who used to own record stores didn’t say “we’re in trouble.” We just drove up one day, and they were gone. I think that sometimes people in publicly traded entities have the incentive to paint a rosy picture so they can keep their jobs and collect their bonus checks until it’s apparent that it’s ugly. I’m not here to debate that, but I’m here to say “I wouldn’t bet on it.” I’m sure broadband will be around in some form, in some fashion. But I just happen to know way too many people who have said I significantly reduced my cable or I cut it, and I’m very happy with 8 bucks. How does Netflix go from zero to 23 million subs in less than 5 years. How does that happen? I think it’s interesting that it took them 5 years to accomplish something that it took Comcast to accomplish in 50.
It seem unlikely cable operators will go out of business, considering the infrastructure they’ve built.
I don’t think they go out of business. I’ve never said that. I’ve just said that they are in trouble, and they need to significantly reduce their programming costs. Now the good news is that they only have to pay based on the per sub. So if the subs go away, they don’t owe any money. But I just feel like they need to significantly reduce their programming costs so they can pass that savings on to the consumer to bring down the cost.
Isn’t this a Hollywood problem—in terms of how shows are set up and how much they cost? How do you change that?
It won’t change. It’s an event that will occur in other places to force it. You have 102 million homes, and it’s challenging. If you have 102 million homes, and you’re collecting 50 cents per home, that’s $50 million a month, $600 million a year—not including advertising. What can’t you produce on cable TV for less than $600 million?
But with so many cable channels, if you try to squeeze, say, a big reality producer like Thom Beers, he’ll just go somewhere else. Someone is always willing to pay. Isn’t that the problem?
I’ve never said the current infrastructure will be efficient. It’s the other people who will come in and bring the efficiency. We never said the record store and the bookstore would be efficient. The Internet made it efficient.
Then I guess it’s a good thing cable built out an expensive and hard to replicate infrastructure, compared to record stores and bookstores that just had inventory.
It will be there. And they will wake up one day, and a great deal of their pipe will be used for broadband for the Netflixes and the Hulus of the world… What we believe is that you need to own your content 100 percent, it needs to be of the highest quality, and you need to be efficient in how you spend your dollars to make that content. And it needs to be able to be accessed on every screen available worldwide. And that’s the issue with a lot of the content right now. They don’t have that capability, and that is going to take a while because the consumer is really interested in having their favorite shows on every device: Their mobile phone, their iPad, their television. And for us, the game changer was to watch our networks on an iPad.
Of course, shows can only go so long because the costs go up.
Well, you can recast them.
Maybe if you’re Dick Wolf [creator of the “Law & Order” franchise], you can re-cast them.
Just swap ‘em out. And you could have 25 years. (Laughs). And by the way, Dick Wolf’s a buddy of mine, and that’s probably why we are buddies, because we see eye to eye. And that’s why I said you can ask for a 150 an ep, I’ll show you 150 an ep at the unemployment office. And I’ll bring a kid who’s been outside my door for about 3 years trying to get that part.
Then why is everyone except Dick Wolf afraid to do that?
I can’t speak for why others won’t do it, but it’s a business. At the end of the day, you’ve got a gardner who comes to your house, and if he knocks on your door one day and says “Hey, I need $8,000 a month to get this lawn in order.” That’s the day you’re going to say, “Hey, you’re not my gardner anymore.” Why would it be any different in Hollywood? That’s just what it is.
Isn’t it hard to be first though? Then you get the reputation, and it’s harder to attract talent.
There’s so much great talent out there.
So you just have to continually discover talent?
Sure, discover and move on. You have to do exactly what your body does. Replenish yourself with new cells. That’s what you have to do.
So in the 1990s, when the cast of “Friends” famously threatened to walk if they all didn’t get a big raise, you would have just fired them all and replaced the cast?
Yeah.
And you feel like the ratings wouldn’t have been affected?
We would have worked it out. We would have worked it out. I don’t know what their deal was. I don’t know if they had the ability to renegotiate or if the contract was up.
OK. Moving on, you’re also planning to launch a new cable network soon. Can you give us any details?
We can’t talk about what the genre is now. But it will be produced at the highest quality—a genre that people are very much interested in. It’s one of the most watched genres on television. And it’s going to be advertiser supported. And that’s just helping to bring efficiency to the marketplace.
You’ve said it will be free to operators.
It will be free to operators, and when the operators adapt this model, we will aggressively offer more networks on the same model. What we’re looking to do is to help operators bring their costs down by as much as a dollar a sub—to provide them enough networks that are advertiser supported that they can save as much as a dollar a sub.
How many networks would it take to do that.
Ten. Ten networks. And with that dollar a sub—if you’re someone operating with 3 million subs—that’s $36 million a year. And if you’re trading at a 10 multiple, that’s $360 million that you’ve added to your market cap. So we’re saving you a great deal of cost and adding to your enterprise value, and our number one mission is to bring that efficiency to the content cost and to bring that cost down so those cable and satellite operators can realize greater enterprise value. That is what we’re here to do. We’re here to provide them the content to increase their value. And they’re not going to get there by continuing to pay for programming from cable networks that do not have shows in the top 100 of all indexed television shows. When you look at the top 100 of all indexed television shows, very few if any are in cable with the exception of sports. This conversation has nothing to do with live sports—only programming. Cable outside of sports has nothing in the top 100.
Isn’t that just a function of the fact that cable networks generally hit much smaller niche audiences? Should you even use that as a bar?
Absolutely, you should use that as a bar because you can’t shift the bar if it’s about how many eyeballs are watching. So you either have eyeballs watching or not.
Can’t it be the same number of eyeballs split into smaller sub-groups?
No, because at the end of the day, the person turns on the TV and if you don’t have enough people watching your network… then it is what it is. I believe that the efficiency’s going to be forced into the marketplace anyway. But that’s okay. I’m not here to predict the future, and to try to figure out what’s going to happen. I’m really here just to talk about, “hey, we believe there’s a great need to bring efficiency into this space as quickly as possible.”
What about what Fox News did years ago—in which it actually paid operators for carriage. Is that something you’d consider?
Those days are over. It just doesn’t pan out. I think at the end of the day, it’s really about making sure it’s just good business sense for the operators. And a lot of people just have long forgotten that.
So do you think the program packages just get cheaper—or how does this work?
You know what: There are a lot of smart people in cable, a lot of very smart folks who will figure out what they need to do to make it work. What I look at is—you talk about adding new folks. What are the demographics? If you’re not adding people under the age of 30 and under the age of 40… how do we survive 5 to 10 years out. It’s like what my mother says: “Don’t listen to what they say, listen to what they don’t say.” What are the ages of folks who we are adding, and who are we losing? So if you tell me that we’re losing a bunch of 50-, 60- and 70-year-olds through attrition—and we’re not replacing them with a bunch of 20- and 30-year-olds, then the math isn’t working in your favor.
And you don’t think that the behavior of those in their 20s and 30s will change as they get older? People have made that argument.
I don’t want to predict the future. I can only tell you that you definitely want to be sensitive to pricing—much more sensitive to pricing than we have ever been. The industry didn’t used to have to be sensitive to pricing because its competitors had a similar business model: cable, satellite and telco. Well, now we have a scenario in which the Internet isn’t similar in its business model and pricing. It’s much cheaper.
So based on all we’ve discussed here, what’s one takeaway you’d like distributors to have?
The distributors have made a huge mistake allowing too few companies to provide them content. There’s been a massive consolidation, and they’re paying the price for allowing that consolidation—allowing very few companies that represent a lot of networks to provide them content. My recommendation would be that you really need to foster competition, and you really need to turn to the independents. You need to support the independents rather than shutting the door to the independents. It’s those independents that are going to give you that efficiency and that breakthrough programming because they’re not massive conglomerates.
But all these massive conglomerates started out as independents, so how do distributors know you won’t eventually hike your prices in the same way?
You just keep fostering independents. You just have to keep going. It’s a churn, but you’ve got to really foster the competition, and you’ve got to really open up the doors to independents. And I would say, take a long hard look at any content that’s not in the top 100. Why are you paying for content that’s not in the top 100? I think they’ll eventually get there. Listen, like I said, we’re going to launch a cable networks that will be totally ad supported and give operators the opportunity to replace a network that’s costing them 10 cents a sub with a network that’s going to deliver to them the same numbers, the same eyeballs, at zero a sub—not 10 cents. If you have 5 million subs, that’s half a million a month—$6 million a year. It’s not a bad deal. And you just keep doing that. That’s just smart business. Cable is in a great position to really re-invent itself as the go-to digital platform, but it’s not going to capture that opportunity with the old traditional business model of continuing to overpay a few media companies that have consolidated large cable networks.