Michael WhiteThere’s an Achilles Heel for the upcoming so-called over-the-top online pay TV services — including a low priced, entry level one Dish Network plans with help from Disney — DirecTV chief Michael White told an investor audience this morning. “If you make it too good you’re going to cannibalize the [conventional pay TV] business,” he said at the first MoffettNathanson Media & Communications Summit. “It’s in the content companies’ interest to not make it too good.” It’s a problem because Big Media companies still control TV programming. direcTV__130523212608If an online provider could offer “AMC and FX, and not have to pay for Nickelodeon and all the other stuff [then] you might get there,” White says. “My bet is that everyone including Disney will try to bundle more stuff” in an online service, driving up the price. “It’s a slippery slope…Can you unbundle good enough stuff?” DirecTV research shows a “sharp fall off” of consumer interest in a video service once the price exceeds $12 a month.

Pay TV companies should fear cannibalization: a lot of people can’t afford a full cable or satellite service. The rate of new home formation is “awful,” White says, and it’s tough for young adults to find work. “Something is going to have to give….There’s no question it’s hard to grow the pay TV business when the underlying households aren’t growing” — especially when “programming costs are driving up prices well in excess of what incomes are growing at.”

How will the story end? White sees three possibilities. Cable and satellite companies can dig in their heels to oppose high programming prices. They’re doing that “in Los Angeles for the first time ever” by refusing to accept the $4 per subscriber per month fee that Time Warner Cable wants to charge for its SportsNet LA channel which carries the Dodgers. A second alternative is that the industry will have to respond to a sharp increase in pay TV cord cutting. Or lawmakers in Washington might decide to step in, perhaps by mandating a la carte pricing, “which I wouldn’t count on right now.”

But that could change. For example, DirecTV will watch to see what happens if Comcast wins its $40B+ plan to acquire Time Warner Cable. That might give the cable giant leverage to resist the high prices that programmers want — and they, in turn, might try to make up the difference by increasing their demands on other cable and satellite companies. If that happens, then “we’d say ‘we’re out’ and get consumers to go to Washington….It’s when the customer gets fed up that something might change.”