This past week Time Warner Cable came close to dropping the Fox Network from its system due to a dispute concerning retransmission fees. In case you aren’t aware, cable companies like Time Warner and Comcast pay networks for transmitting their channels on their systems. For broadcast networks that opt out of must-carry regulation these payments are called retransmission fees. For cable networks they’re called carriage fees. In both cases they have become more important given the recent drop in advertising.

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’s likely that the difference between network carriage fees, in proportion to their respective audiences, will lessen in the future.

It’s no secret that publishing is a tough place to be in right now. Amidst lower subscriptions, circulation and ad revenues, magazines have been looking for a way to stay afloat. Towards that end Condé Nast recently hired McKinsey & Company to take a look at their entire operation. The innovative Maghound subscription service launched last year but has found limited success.

I believe that a new path may lie with the magazine ordering option launched this week in the UK by The Economist called “Economist Direct.” The option will allow consumers to order the latest issue of the magazine via an SMS message; eventually orders will also be taken via Facebook and Twitter. The option is meant to attract non-subscribers who are in interested in the current week’s issue.

I found it interesting that this service offered a certain immediacy and convenience, while allowing for readers who are not interested in subscriptions. This approach is quite different to the Maghound service, which entails a subscription model, as well as a long waiting period between ordering and delivery. After choosing their magazines, Maghound subscribers then wait until the next publication cycle to receive an issue. Ordering the current issue is not an option, even though paradoxically the publications are advertised on the site with the current issue’s cover.

I believe that Maghound is missing an opportunity. A single issue’s value holds over weekly or monthly basis. A publisher has that entire period to conduct the marketing, sales and delivery process. If Amazon can deliver a book within a week, Maghound should be able to deliver an issue as well.

By fulfilling orders for current or specific issues, Maghound’s would effectively offer a magazine-on-demand service. Customers could peruse current issues online and order them for priority delivery. Maghound could also email their customers on a weekly basis, informing them of any upcoming issues they could potentially be interested in.

While this sort of on-demand service might not be viable with weeklies it could certainly work with monthly publications. I also concede it would be far quicker for a consumer to buy a current issue at their local newstand, but but Maghound offers 304 publications. Chances are that their local stand or 7-Eleven won’t stock all those titles. By offering this on-demand service only to existing customers, Maghound could also offer the issues at a discount, below the newstand price.

There are many ways this service could be implemented. Perhaps the priority delivery could be free for three issues per month. Perhaps even the three issues would be free, if the customer already had three existing subscriptions with Maghound. In any case, I believe that the Economist Direct service offers a certain value that Maghound lacks, an option well worth looking into for U.S. magazines.

Update: The Economist has now launched their Economist Direct service in New York City.

Yesterday an article in The New York times highlighted the results of a media industry report from the private equity firm Veronis Suhler Stevenson (VSS):

An interesting shift occurred in 2008, the report said. For the first time, consumers spent more time with media they paid for, like books or cable television, than with primarily ad-supported media, like newspapers and magazines.

The VSS report also forecast internet media and subscription television to be sectors of strong growth during the next four years. These trends echoes the results mentioned in another report released a few weeks ago by Strategic Analytics (SA), which forecast that the global paid online video segment will surpass the ad-based online video segment in 2009. The SA report also forecast stronger growth for the paid segment during the next four years.

Both studies partly attribute the shift in balance towards paid content to the recession, which has stifled advertising budgets in both traditional and online media. In any case it is still surprising is to hear that paid video content will be a bigger moneymaker than ad-based content. While some companies like Apple and Netflix have made headway in the paid video segment a lot of studies have indicated that consumers prefer ad-supported models; an IBM study in November 2008 indicated that 70% of consumers prefer ad-supported models over consumer-paid models. Another study by Deloitte yielded similar results, indicating that 67% of US consumers aged between 25 and 34 would “be willing to be exposed to online ads in exchange for free content.

Although the majority of consumers would opt for ad-based video models, perhaps the smaller pay-to-watch segment is willing to outspend advertisers as a whole, in return for the following benefits:

• Zero or less advertising
• Access to a wider range of content (recent movies, old TV episodes, etc.)
• Ownership of the material or a longer viewing window
• Option to watch across more types of hardware (computers, DVR, mobile, etc.)
• Higher viewing quality

Given these trends in these reports during next two years the online community will see an expansion in paid video content. The ‘TV Everywhere’ partnership was recently launched by Time Warner and Comcast, allowing Comcast subscribers to view video online from TBS, TNT, CBS and HBO. I am also wondering if ad-based sites like Hulu will add paid content options; perhaps a subscription service similar to Netflix for accessing all the episodes for a series. Will hybrid sites emerge, offering both ad-based and pay-to-watch options? It is probably to early to guess which models will win (Hulu was launched only 17 months ago; see graphic above) but it is probable that a greater variety of options will emerge, resulting in a more choices and a very dynamic market.

On Monday the U.S. Supreme Court handed down a very important decision in favor of Cablevision regarding a lawsuit that had been filed against it by several entertainment companies. The court ruling is allowing the cable company to offer a hosted DVR service to its subscribers. Rather than having to provide cable boxes with a built-in DVR, Cablevision will store the saved programming on a central file server.  So why is this case so important?

First of all, DVRs are one of biggest threats facing the television industry.  A recent Nielsen study “How DVRs Are Changing the Television Landscape” estimates that almost 31% of TV households (35.4 million) own at least one DVR. According to the Nielsen quarterly “Three Screen Report” this segment also seems to be watching more and more timeshifted TV.

However, the average DVR household is timeshifting only a measly 5.5% of their total weekly TV viewing hours (8.2 out of 150+).  What has programmers and advertisers nervous is that this rate is exploding, having increased by 40% over the past year.  One reason is that DVR users are likely to skip most of the commercial breaks; according to Nielsen’s latest “DVR Factbook” when questioning DVR users how often they skipped commercials on a scale between 1 and 5 (1 being never and 5 being always) the median response was a scary 4.1.

The second reason why this case is of great significance is that Cable MSOs (Multiple System Operator) now represent the largest distributor of DVRs; as of last year 55% of all DVR devices came from a cable company.  Should other cable companies decide to offer a similar service, it could greatly increase the adoption of TV timeshifting habits, which could have more serious repercussions on the TV and advertising industry.

Finally, there are several advantages to this proposed virtual DVR service over a standard DVR cable box, some of which The New York Times and Ad Age have also analyzed:

1) A hosted service will lead to lower storage costs since everything is on a central server.  Rather than need to maintain millions of DVR boxes, the Cable MSO will simply need to deal with one large box, which is easier to maintain and repair given how inexpensive storage space has become.

2) It will be easier for Cable MSOs to offer tiered DVR services with greater flexibility in terms of recording options and storage space, which could help ultimately drive up ARPU margin.

3) Having a shared space provides the opportunity to develop peer to peer sharing among subscribers, allowing friends to watch what others have recorded and potentially allowing subscribers to have on demand access to programming.

4) Having a centralized storage server also create the opportunity to offer innovations, like allowing people to view recording programming from any cable box or record more than two streams of video, which is the current limit of a DVR cable box.

The third point means that a virtual DVR service will function effectively as a Video on Demand (VOD) service, threatening yet another important market for Hollywood production companies.

Of course it remains to be seen how the virtual service will be implemented. Cablevision could ally themselves with programmers and advertisers by developing a services offering, like Time Warner Cable did with its Start Over option, that prevent subscribers from skipping commercials. Cablevision could also use this as a chance to insert cross-channel promotions prior to the program being played.

Cablevision is currently the fifth largest Multiple System Operator (MSO), with 3.1 million subscribers. It remains to be seen how many of its customers adopt the new service and whether other cable companies launch a similar virtual DVR option. Hollywood and Madison Avenue will be surely watching.