• by Diane Mermigas , November 2, 2007

Major economic forces are having their way with the media and entertainment industries in a power struggle that eventually will lead to dramatic change. But until then, it is going to hurt.

The free-market forces of competitive pricing, as well as supply and demand, are getting new support that will benefit consumers and challenge media companies--many of whom have been thriving as virtual monopolies. While cable operators especially aren't to blame for the virtually protected status handed to them for so long by federal regulators, they now must reexamine their growth prospects, based on losing some of the business they have taken for granted.

Specifically, the Federal Communications Commissions' decision to open apartments and other multiple-dwelling units to competing service options other than the designated cable provider is a small but meaningful step to allowing free-market winds to blow through the cable industry. Comcast, the nation's leading cable operator, is objecting to the unanimous FCC ruling that could impact nearly one-third of Americans, on the grounds that it could have the opposite effect intended.

Comcast is smarting from having recently lost its darling status on Wall Street to analysts that are lowering their estimates and ratings based on a surge of rigorous competition from Telcos and satellite providers with their own bundled voice, data and video offerings.

Analyst estimates for Comcast's 2008 free cash flow have been slashed 25% to $3 billion. Pali Capital analyst Richard Greenfield observes that cable management and investors have turned 180 degrees in the past year from resigned oligopoly to straining to project how deeply Telco and other competitors will cut into cable operator financial returns in what has mushroomed into a full-fledged war.

Still, there are no signs that cable's incumbent position will fail the industry anytime soon. A 10-year forecast from SNL Kagan estimates that cable's residential revenues will grow 77% to $121 billion by 2017, based on a 64% increase in average monthly cable bills to $143. The biggest unknown there that no one (especially the cable companies) want to talk about is their absence from and lack of strategic positioning for what eventually will be a predominantly wireless world--and a huge economic catalyst.

Assuring choice for consumers living in multiple dwelling structures (18 states, including New York, Illinois and New Jersey, already ban cable exclusivity) is a small victory for free-market capitalism that takes on greater meaning when plugged into the bigger picture.

There is plenty of room to argue how the FCC and other federal regulators have sought to foster pro-competitive practices over the years. In the end, the free market system and the advent of digital interactivity generally are taking care of things.

The recent decision by Congress to extend the moratorium on taxing the Internet assures that this penetrating new platform for commerce and choice will continue to develop unabated. While radical technology-driven changes are afoot in every aspect of our lives, we still are only in the early stages of what can be. Protecting multiple options that consumers have to choose from ways to spend their time and money is critical. The free-flowing mechanics of a digital world assure consumers and prospective competitors limitless access. With the Internet at its core, the digital universe can be the ultimate capitalist tool, although some call it cyberspace anarchy.

Media and entertainment companies that have enjoyed near-monopoly and an upper hand with consumers (stretching back to the Big Three Networks' analog television reign) are understandably upset and struggling with this transition. For decades, studios have been able to dictate pricing and distribution of films and television programs because they could.

Since it appears virtually impossible to regulate the global Net, companies are having to rethink the economic fundamentals of their business: how to protect and monetize their intellectual property; how to constructively deal with new competitors; how to reach and maintain ties with fickle, targeted consumers; and how to morph core revenue streams into something better (like taking one-way advertising to two-way transactions).

In truth, the quality of products, the strength and diversity of revenue streams, and the overall experience for and relationship with core constituents (such as consumers and advertisers) will likely be better in the long run. But getting there is half the battle, made more difficult by companies' stubborn resistance to free market forces and new technology.

That is what makes some recent developments notable. For instance, the new Hulu.com Web site for TV programs and films from News Corp.'s Fox and NBC Universal is a capitalist response to the supply-and-demand predicaments of digital's content free-for-all. It's a cut above walled gardens such as Apple's iTunes to give consumers and advertisers what they want. It represents a new business model born of the free market system.

Radiohead's controversial decision to allow users to pay what they think its online album is worth is a promotional ploy to sell more compact discs, just as Prince's free music downloads sell concert tickets. Never mind that CD sales have declined for seven consecutive years. Of course, overall, television and film companies are trying to avoid the massive devaluation of their products that the recorded music industry still struggles to overcome. The digital download business, which is barely into its first stage of maturity, is playing out across Apple iTunes, Amazon, newspaper and magazine Web sites and other places.

The WGA Writer's Strike reflects the serious compensation issues of anyone creating, producing or distributing content for a digital age. While the issues won't be solved this go-around, headway can be made to assure that the content gatekeepers (studios, broadcast and cable networks, and publishers) share the new digital wealth. This, too, has a lot to do with supply and demand in that consumer and advertiser support for products will shift if the caliber of content falls as creators take their skills elsewhere. While the changing formulas may not be exact or lasting, the efforts must be made.

In a prolonged strike, broadcast and cable networks stand to lose hundreds of millions of dollars in advertiser makegoods and lost revenues. But this is truly the first strike not about viewers having to forego their favorite prime-time series--since they now can go elsewhere on the Internet for recent past episodes and plenty of other content to satisfy their entertainment yen. The overstated importance of a strike's impact on television to anyone but the network owners and their advertisers is getting a reality check. Big 4 Network prime-time ratings are so far down 8% in the new season, and 12% with the key adult 18-49 age group. Digital supply-and-demand rules are different than they were in the old media and entertainment world in that there no longer are finite ways to access finite content priced and placed by controlling corporations. In this strike, the media companies have themselves to blame for being hurt the most by failing to proactively acknowledge that the bulk of their and all other video content will be streaming across all digital platforms within years, in the single digits.

Historically, such open competition allows for lower prices and increased value for consumers. In truth, the ramping of the digital marketplace and the evolution of new economic rules are formidable free-market forces that will continue to increase unconventional choice for empowered consumers. And there will be plenty of ways to generate new sources of revenues for companies that are smart enough--and tough enough--to heed the market and go, go, go with the flow.