Your Cable Bill Is Going Up (and Your Choice is Going Down)

The FCC has reversed course and decided that cable companies bundling channels into packages rather than selling them a la carte is bad and requires coercive action from the government to fix.  This issue was originally pushed by religious groups, who I guess did not want signals from naughty content even accessible from their house (the "just don't watch that channel" solution presumably determined to be too difficult).  However, "progressives" on the left have latched onto this issue as well.  I remember a Kevin Drum post, which unfortunately I can find right now, advocating cable unbundling as an example of an agenda progressives should be jumping on.  Beyond the basic rationale that progressives hate cable companies almost as much as Exxon and Wal-mart so anything cable companies oppose they are for, the ostensible logic is that if I pay $50 now for 165 channels, I should only pay $10 if I choose to watch only 33 of those.  Here is their "logic":

The main obstacle for a la carte: programming contracts.
Programmers routinely bar cable operators from selling channels a la carte.

Why? Advertising rates. Cable programmers base ad rates on
the number of viewers they reach. The more they reach, the more they can charge.
If they allowed a la carte, viewership for many channels would likely
plummet.

Gene Kimmelman of Consumers Union says:"This is the essence
of how they squeeze extra revenues out of consumers."

The problem could worsen, he warns, as cable operators "” as
well as broadcasters and satellite TV "” pack on more channels.

"The bundles get bigger, and prices go up," Kimmelman says.
"A la carte would blow this scam out of the water."

This presumes that the number of channels has anything to do with cable cost or pricing.  Which it really doesn't, since the marginal 100 channels or so at the tail end of the viewership curve all just want to be carried for free, in hopes they can get some ad revenue from corporate America for being on the dial.   From a cost standpoint, beyond a few core channels, it costs cable companies about nothing extra, given the infrastructure of high-bandwidth delivery systems is already in place, to send you 20 channels or 150. 

Pricing, though, is not just set based on costs, but on value.  And the government is about to change the value equation, and maybe not in the consumer's failure.  Up to now, cable's value proposition has been "wide selection", a value proposition supported by the multi-channel bundle for one price.  After making this traditional value proposition illegal, there is no guarantee at all that the value proposition that replaces it will be a better, or even equivalent one.

Most consumer advocates tend to assume that bundles are hosing the customer, because they are being forced to pay for stuff they don't want.  But bundles can more often than not be the opposite - including items of value that the customer is not paying full price for.  The the evolution of cable service tends to confirm this.  Cable on a real basis does not cost that much more than it did 20 years ago when you only got 20 or so channels.  My suspicion, which I can't prove, is that you are paying for those 20-25 core channels, and everything else is a freebie.  In this model, bundling is delivering extra value over a la carte, because you really aren't paying much or anything at all for those incremental 130 channels.

In fact, in my years as a consultant looking at pricing, one of the first things we looked at in a company to increase total pricing and profits was unbundling services.  The issue of concern was that more often than not, bundling provided customers with hidden pools of value that they were not really paying for, and unbundling helped make consumers pay full price for things they were previously getting for free.  Airlines, banks, and numerous others make more money by unbundling today.  My suspicion is that this will be the case with cable.

By the way, look under the hood of any business regulation proposed as "consumer protection" and you will usually find the fingerprints of corporations trying to use the government to sit on their competition.  And yes, we have that here.  New entrants AT&T and Verizon want the government to ban the current cable companies' business model, thereby putting them on equal footing in entering the market.  By the way, speaking of these phone companies, does anyone out there really think they are getting a better deal when they pay for call waiting and answering service and long distance and local separately rather than in one of the advertised bundles?

So here are my predictions:

  • Assume an average cable bill today is $50 a month for 150 channels.  If the average person watches and really is willing to pay for 15 of those a la carte, then the new pricing is going to result in a $50 bill for those 15 channels.  Count on it.  People will be paying the same amount as before, but for fewer channels.  Or, if they want the same number of channels as before, they will be paying more
  • In one year, leftish backers of the bill will realize the above, and will publicly criticize the cable companies for their rational reaction to the coercive government program.  They will propose new pricing regulations to "fix" the problem they say stems from private enterprise, but in fact came from unintended consequences of the original regulation.  This use of negative consequences of regulation to justify further regulation is one of the most important tools in the statist's bag.
  • A number of smaller cable channels will go bust.  Even those wanting and willing to pay a la carte for the full 150 channels they got before will not be able to, because many will not exist any more.
  • Fewer niche or idiosyncratic channels will exist.  Today, cable companies want to sell the package of 150 channels.  At the margin, adding a channel that caters to a niche not reached by the other channels is better for them than adding yet another channel that caters to the median viewer, because it makes the package as a whole attractive to more viewers.  However, if every channel is sold a la carte, cable programmers will add channels and content aimed at the mass market to maximize sales of each channel.  Each channel must stand on its own. Oddball niches need not apply.  Interestingly, many of these will be things like the Gay Vegan Channel
    that tend to be particularly popular among "progressives".
  • Innovation in terms of new cable channel offerings will die, because a la carte pricing will substantially increase the cost for a new entrant to get going.  In the past, they just had to sell 2-3 cable company programming buyers that they should try the new channel in their lineup, and they were off and running.  Now, they not only have to convince cable companies to be on the menu, but have to sell consumers one by one to get into homes.  This is orders of magnitude more expensive.  The stock of current cable companies will go up, because competition will be harder.  In another ironic unintended consequence for "progressives", only large corporations will be able to start new cable channels in the future, increasing media consolidation that progressives decry.
  • In one year, religious backers of the bill will be upset that so many people still opt for naughty content, and will propose legislation to increase the difficulty in signing up for certain channels (e.g. physical presentation of proof of age) and to regulate advertisement and promotion of these channels.

Reason's Hit and Run has more along the same lines.

Postscript:  In the past, FCC and Congressional rules have actually mandated bundling.  For example, still on the books are must-carry laws that say that cable companies have to carry every local broadcast channel.  It will be interesting to see if I can opt out of ABC.  I bet I won't be able to - legislation pre-empts FCC rule-making.  Which will create an interesting discriminatory aspect to the regulation, which is that the cable companies must bundle in companies that also broadcast their content over airwaves but must unbundle non-broadcast content.  Which also leads to the irony that cable will have to include content that consumers have an alternative source for (e.g. ABC via an antenna) but have to be ready to exclude content that consumers have no alternative source for (e.g. the History Channel).

Final Thought: What's next from the FCC?  If I only listen to FM 93.3 on my radio, are radio makers going to be required to unbundle the capability to receive all those other stations to give me a radio that only gets 93.3?  And does anyone think that radio would be cheaper?

  • Don Lloyd

    Read and delete.

    "...And the government is about to change the value equation, and maybe not in the consumer's failure. ..."

    TYPO, 'failure' should be 'favor'.

    Regards, Don

  • Lenny

    Good commentary - to a limited extent the content generation/cable service industrial complex has already started looking at strategic "unbundling" as a way to increase revenues. My local cable company now offers something like 8 or 9 different packages. The least expensive package has only 25 channels or so and costs only $16. Of course it's not the same 25 channels I would choose if I could but it's clear they are targeting people who will switch to "rabbit ears" rather than pay $40-$50 for the larger "basic" packages.

  • Highway

    I think you're exactly right with your analysis. I got to the H&R discussion late, and the noise had overrun any actual points, so I didn't add my thoughts. I think the current '100 channels' noone wants are basically being carried for free. And if the FCC tries to force the cable companies to unbundle the stations, are they going to force the networks to unbundle when they sell to the cable companies? Or are the cable companies going to have to take a whole bunch of channels that they can't re-sell, in order to get access to the networks that people will actually subscribe to. Right now they're rebroadcasting them for essentially free, because it makes them look better with bigger packages.

    You're right. A la carte pricing won't make anyone's bill go down, but will shut down a lot of marginal networks. 4 dollars per channel? Do people realize how fast that will add up? I really fear this kind of change (or interference, if you like) from the feds.

  • Doug

    There isn't currently much of a long tail on cable, at least not where I live. Sure, there are public access and religious channels that nobody would pay for, but other than that, I think every single channel on cable is from one of a few media conglomerates that each operate many different channels. Discovery Communications operates at least 14 channels including Discovery, TLC, BBC America, and the Travel Channel. Viacom operates CBS (*and* UPN), MTV and VH1, Nickelodeon, Showtime, Comedy Central, BET, and more. Disney has ABC, Disney, and ESPN. Wouldn't it be likely that even with unbundling, I'd still end up choosing "The Viacom Bundle" or "the Disney Bundle"? I suppose that depends on how any legislation gets written.

    I do agree, though, that the FCC shouldn't be stepping in to mandate anything here. Wasn't their original mandate only to allocate frequencies so that broadcast stations would not step on each other? Now not only are they talking about forcing a-la-carte, they also want to sanitize cable networks and satellite radio from the evil threat of, well, Howard Stern. Remember that the cable companies were originally government-created monopolies. There is more competition today, in terms of satellite as well as phone companies getting into video programming. There's also competition from DVD rentals. I can get lots of quality TV shows, commercial-free, in DVD form, for under $20/month. In the not too distant future I think video podcasting will become a serious competitive threat, not only to the cable companies but also the media companies.

  • Max Lybbert

    People get snookered by illusions far too easily. While it may look like the cable company is "beaming" the HBO signal directly to your house because youpaid extra, in reality the company is sending that signal to every house, and the equipment at the end is blocking it at houses that have not paid for it. This is how people steal cable -- they get around the block. Aside from royalties, it costs more for the cable company to block out every signal than to beam every signal to you.

    The strange part of the issue is that this question was actually the heart of a Supreme Court case the cable companies won last year (NATIONAL CABLE & TELECOMMUNICATIONS ASSOCIATION et al. v. BRAND X INTERNET SERVICES et al. http://www.law.cornell.edu/supct/html/04-277.ZS.html). The Court decided that there is no legal reason the cable companies would have to sell a la carte, but the FCC has now decided there is. Odd as it gets.