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.

Fox had been asking Time Warner Cable for $1 per subscriber. The counter offer was only $0.30 and SNL Kagan believes that they settled at $0.50 with a likely “increase over the life of the new agreement.” Since most networks receive less than $0.50 per subscriber Fox’s deal seems pretty good but based on Fox’s large audience it’s arguable that they should have gotten more. Fox’s primetime audience is double that of ESPN but its carriage fee is less than a fifth. Using a ratio of carriage fees to primetime ratings points, Fox stands at 0.22, below most networks.

Negotiations between service providers and networks are closely guarded so it is very difficult to ascertain just how deals are struck. Audience ratings are certainly not the only factor. ESPN attracts a lot of “hard-to-get male viewers, and even harder-to-get young male viewers” and its relatively high carriage fee is often justified because of this. Network bundling and company associations can also help boost fees. In any case it does seem that the difference in network carriage fees, in proportion to respective audiences, will lessen in the future.

On average this season, Mad Men had about 20% more viewers. Last season the show grew 62% season over season, indicating that the program’s audience might be topping out.

Unfortunately I don’t have the average season numbers for the 18-49 demographic, so it’s not possible to draw a similar theories about audience growth in this segment, but looking the 25-54 demo there was only an 8% growth this season. Maybe the audience is indeed plateauing.

These numbers, particularly the season averages, might be misleading. Notice how across all demos, both the premieres and the season finales draw much higher audiences and growth rates. This is logical since audiences are much more interested in not only watching the first and last episode of a show, but are also more likely to see it live. Since these ratings are “Live plus Same Day” (Live+SD) for just the initial episode airings, it is theoretically possible that the viewership is higher for the numbers represented in the season average, once accounted for time-shifted viewing on DVRs or through VOD services, or for viewings of other airings. In other words, I bet that the relative difference in between Premiere/Finales and “in-between” episodes is much higher in Live+SD than in Live+7.

UPDATE: According to a recent MediaWeek article, Mad Men overindexes in C3 ratings, indicating that the show’s audience does lean toward timeshifted viewing. This lends more weight to my theory that the audience for “in-between” was probably more even with premieres and finales, once total viewing was accounted for.

In any case, while Mad Men is a very successful and highly admire show, compared to other basic cable shows it is below par in terms of ratings. This finale audience of 2.8 million wouldn’t place it in the Top 25 cable shows. AMC is rightfully promoting that Mad Men is “the most upscale drama in basic cable, with 50% of that demo having household income in excess of $100,000.” A similar pitch was mentioned at the conclusion of last season.

The success of True Blood seems to somewhat of a systemic cable summer boon, seen at both HBO and Showtime where primetime ratings are above 20% year to year, and at ad-supported cable whose shows are driving an all-time high for TV viewing. In comparison, TV viewing at the broadcast networks is faltering, perhaps indicating that stronger development should be allocated towards next summer.

Last week’s strong premiere is therefore a vindication for the producers, the show and their new network. Of course this audience improvement may have something to do with all the publicity resulting from the litigation, which has probably resulted in more attention towards this season. Other important factors to consider are that Lifetime has a 20% larger distribution than Bravo (96 million to Bravo’s 80 million households) and that Lifetime has been strongly promoting the show. I also believe that broadcast television has provided an overall weak summer lineup (ABC has set new ratings lows twice this summer), giving cable networks an opportunity for cable networks to attract big audiences. Not coincidentally AMC’s Mad Men had a strong third season premiere last week. USA Network has also had a strong summer, both with the third season of Burn Notice and with the debut of its new series Royal Pains.

This season’s audience potential for Project Runway looks good since the series has historically averaged higher than its premiere episode. Lifetime has been slowly been losing viewers during the last six years so the network has a lot riding with Project Runway. Still, it is still too early to tell whether the acquision of Project Runway was a wise decision for Lifetime, simply because of the price tag of $150 million, which may or may not include the production price paid to Weinstein Co. According to TNS Media Intelligence, Bravo sold $12.6 million of advertising spots during Project Runway‘s fifth season, not including “sponsorship or integration fees.” Assuming a 40% growth in audience levels this year, and 5% thereafter, and a proportionate rise in sales, Lifetime would be clearing just around $97.5 million. Of course, this calculation doesn’t include other pertinent revenue streams like carriage fees, sponsorship and online video. It is also difficult to predict how Project Runway‘s presence on Bravo will lift the network’s ratings as a whole. Still, the price tag paid does offer a glimpse into how important the program is to Lifetime.

Update: The day after this post, an article appeared in MediaPost commenting on cable’s hot summer and broadcast’s slow summer:

All ad-supported cable networks are up to a culminated 53.1 million viewers versus 50.0 million a year ago, from May 21 through August 14. Broadcast is down, in part, because of unfavorable comparisons to the Olympics of 2008.

Given last night’s performance and overall viewership during the first two seasons, Mad Men should average just over 2.5 million viewers per episode this season, which would be a substantial improvement for the series but still considerably lower than the 5+ million audiences that top cable series normally pull in.

Regardless of relative audience levels, Mad Men is certainly a success just based on the critical acclaim and awards it has garnered- Mad Men won a Best Drama Emmy in 2008, a first for any basic cable series, and it recently got nominated for again. The show’s success also seems to be spreading within AMC; sister show Breaking Bad recently also got nominated for an Emmy in Best Drama. AMC’s twin nominations place it at the top of the prestigious category.

So just how much does Showtime stand to lose? Looking at the shares of box office revenues by movie studio can provide one perspective. Since I had to use two sources for this information I decided to divide the data into two respective categories: “classics” (movies released between 1970 and 1999) and “recent hits” (movies released between 2000 and 2009).

Combined, Paramount, MGM/UA and Lionsgate took about 17% of the box office revenue between 2000 and 2009, and about 22% between 1970 and 1999, even though Lionsgate didn’t exist then. The group’s strength in the “classic” category is due to the strong libraries of Paramount and MGM, and it will be interesting to see how this is leveraged at Epix.

Notably, Warner Bros. emerged as the leader in both categories, which is a major reason why HBO can be considered to have the strongest movie library of any premium cable channel. Consolidating the current contracts by cable channels indicates just how strong HBO is in this respect (40% share of “classics” and 50% share of recent hits). This chart also demonstrates just how much Showtime has lost to Epix.

It’s unclear whether HBO will retain rights for movies from DreamWorks, since that studio is now owned by Paramount, but for now I am leaving this library under HBO’s roof. A major caveat in this analysis is that I am assuming that each of these channels have contracted the rights of the entire movie library of these respective studios, and contracts are normally issued only with certain titles and with very specific timing windows or transmission rights.

Also, as any fan of Dexter, Weeds, or True Blood can tell you, this comparison of premium movie channels doesn’t account for in-house productions movies which are becoming more important, if not the reason to subscribe to any of these services. I’m sure that this depends greatly on the individual subscriber’s preferences.

In any case I believe this is a beneficial approximate indication of why CBS’ shares dropped so much today, and a good gauge of Epix’ potential in the marketplace. It is obvious that Showtime will have to somehow make up for the loss of these movie libraries, perhaps through contracts with smaller studios, as well as original productions. It will also be interesting to see how Epix develops its value proposition based on its movie library.

Outstanding Drama: Big Love, Breaking Bad, Damages, Dexter, House, Lost, Mad Men

Outstanding Comedy: Entourage, Family Guy, Flight of the Conchords, How I Met Your Mother, The Office, 30 Rock, Weeds

Cable has steadily been growing its share of the nominations during the past ten years. At first only HBO used to have a regular stake but during the past two years new players have emerged and this year AMC has two drama nominations, the same as HBO. Cable networks, especially premium cable networks like HBO and Showtime, don’t have to limit or censor their productions like broadcast networks, allowing their dramas to push the envelope further and have a more sophisticated appeal. It also helps that the production budgets for cable productions have grown greatly over the past few years. Not coincidentally, many pundits in the broadcast industry argue that stations and networks need to reclaim their position by consolidating bigger budgets (perhaps through retransmission fees) and investing in better programming.

The broadcast networks have managed to maintain their control over the nominations for Outstanding Comedy, although I do believe that this category is merely lagging and cable will soon also take the majority of the nominations.

This might also be an incomplete picture since comedies fall into other categories. For example The Daily Show and The Colbert Report were nominated in the Outstanding Variety, Music Or Comedy Series category, and South Park was nominated for Outstanding Animated Program,

It’s difficult to get much audience information on HBO, but I did manage to compile the following list. Nielsen adjusted its ratings measurements of HBO after 2004, so its hard to compare audience levels before that point.

The second season premiere of True Blood is 157% above the first season’s premiere of 1.44 million in 2008. It may be that the HBO series was partly helped by popularity of the Twilight series. It might also be a sign that HBO has the first series hit since the days of Tony Soprano.