I wanted to follow up yesterday’s note on cable carriage fees by imagining a model that would determine such fees, at least partly, on the relative amount of audience that a channel attracts.

It occurred to me that such a model would be well suited for a digital subscription service, since it could faithfully measure the viewing audience for each channel on its lineup.  I decided to try and create such a model based on the parameters of the new TV subscription service that Apple is rumored to be developing. Supposedly Apple is offering broadcast networks a carriage fee of somewhere between $2 to $4 per subscriber while cable networks are being offered between $1 and $2 per subscriber. These top end of these fees run more than double what cable pays; a necessary compensation since the service will not carry advertising, eliminating a key revenue source for the networks, especially the broadcast nets.

Paying $4 per broadcast network would total $16 in programming costs to Apple. Also paying $2 per cable network with a 10 channel lineup would add on $20 in costs, totalling $36 per subscriber, well past the $30 price tage the service is rumored to have. Therefore, a viable business model for Apple’s service requires lower average carriage fees, but still needs an high upside to convince the networks to join.

An audience-based model that distributes fees according to viewership would allow for:

1. High ceilings for the carriage fees to the networks.
2. Fair compensation to networks for ad-based television viewing audiences cannabilized by Apple’s service
3. A lower total programming cost to Apple.

My proposal is to give each broadcast network a $2 base fee, with an additional $10 distributed among the four networks based on the share of viewing a subscriber gave to each one. Each network could have the possibility of reaching $4 per subscriber if they received 100% of the viewing for a given subscriber. A 25% viewing share would add $0.50. The following two examples demonstrate how it could work.

A similar model could also be implemented for the cable networks by simply substituting lower fees: a $1 flat fee per channel and a smaller distributed fee of $1 among 10 channels.

I realize that this model does not allow for much room in growing the channel lineup since it would incur significant new costs, but this could be planned for depending on Apple’s programming strategy.

In any case I do believe that this type of value-based fee pricing follows the spirit of business models espoused by Google (I am currently reading Googled by Ken Auletta), which efficiently allocate cost to value, and is the approach that will win out in the digital distribution of media.