Content Subsidies

2011 October 11

A recent installment in The New York Times’ “Room for Debate” series asks “Have We Become More Willing to Pay for Content?” Debaters cited the drivers commonly believed to influence content purchases: preference by demographics, quality of content, and ease of access.

This is how the discussion about charging consumers for professionally produced content is typically framed. Consumers, however, also pay for content indirectly. These indirect forms of payment greatly influence consumer perceptions about content value.

Access Subsidy. MVPDs pay $32 billion a year in affiliate fees for programming. This is the portion of your monthly television bill that help funds shows, news, and sports on cable. The affiliate subsidy amounts to around 40% of subscriber fees generated for video services by cable, satellite, and phone companies. Because the content is bundled into a package that includes access,  subscribers don’t know what they pay for each channel. It’s probably better this way, given how much money some channels receive in affiliate fees.  According to SNL Kagan, each year, the NFL Network receives $6,642 and ESPN Classic receives $3,781 per household viewer.

Device Subsidy. In 2008, Apple surpassed Wal-Mart to become the leading music seller in the nation. But unlike typical retailers, music sales are incidental to Apple’s goals. Amazon’s recently announced Kindle Fire brings into focus the difference. One analyst described the Kindle Fire and iPad as “mirror opposites.”Amazon will sell the Kindle for the low price of $199 (losing $50 on each) to make money on content. Whereas Apple sells hardware at a high-margin (the iPad starts at $499) and “just about breaks even” on content.

Price War Subsidy. In the fall of 2009, Walmart.com and Amazon.com lowered the price of ten leading hardcover books to $8.99 each. The books retailed for $24 and higher and Barnes & Noble and Borders offered the books for $14 and up. Publishers generally charge retailers 50% of the list price, so Wal-Mart and Amazon were losing money on each sale.  According to The New Yorker’s James Surowiecki, Wal-Mart and Amazon weren’t interested in selling books, their aim was to steal customers from big booksellers and other retailers and then sell them other products.  Because the price war was limited to ten books the impact on revenue was small but the PR benefits were great. “It’s textbook loss-leader economics, ” says Surowiecki.

Popcorn Subsidy. Moviegoers regularly complain about the high cost of popcorn, soda, and candy. According to researchers, movie prices would be far higher without them.  Movie theaters generate only about 20% of their revenues from concessions, but they account for 40% of profits. Ticket sales are shared with movie distributors, but theatre owners keep 100% of concessions. In Spring 2008, ethanol subsidies combined with Midwest floods spiked corn prices,  resulting in higher popcorn prices.

In the case of each subsidy consumers pay distributors for content and distributors pay content providers. But because there are other factors at work the value of content is disguised. The subsidies have distorted consumer perceptions about content value and should inform content providers’ future efforts to charge.