A La Carte Pricing Will Hurt Niche Cable Channels

I see that the drive to force cable companies to offer their basic cable package a la carte rather than as a bundle is gaining steam again.  This is the dumbest regulatory step imaginable, and will reduce the number of interesting niche choices on cable.

For some reason, it is terribly hard to convince people of this.  In fact, supporters of this regulation argue just the opposite.  They argue that this is a better plan for folks who only are passionate about, say, the kite-flying channel, because they only have to pay for the channel they want rather than all of basic cable to get this one station.   This is a fine theory, but it only works if the kite-flying channel still exists in the new regulatory regime.  Let me explain.

Clearly the kite-flying channel serves a niche market.  Not that many people are going to be interested enough in kite flying alone to pay $5 a month for it.  But despite this niche status, it may well make sense for the cable companies to add it to their basic package.  Remember that the basic package already attracts the heart of the market.  Between CNN and ESPN and the Discovery Channel and the History Channel, etc., the majority of the market already sees enough value in the package to sign on.

Let's say the cable company wants to add a channel to their basic package, and they have two choices.  They have a sports channel they could add (let's say there are already 5 other sports channels in the package) or they can add the Kite-flying channel.  Far more people are likely to watch the sports channel than the kite flying channel.  But in the current pricing regime, this is not necessarily what matters to the cable company.  Their concern is to get more people to sign up for the cable TV.  And it may be that everyone who could possibly be attracted to sports is already a subscriber, and a sixth sports channel would not attract any new subscribers.  It is entirely possible that a niche channel like the kite-flying channel will actually bring more incremental subscribers to the basic package than another sports channel, and thus be a more attractive addition to the basic package for the cable company. 

But now let's look at the situation if a la carte pricing was required.  In this situation, individual channels don't support the package, but must stand on their own and earn revenue.  The cable company's decision-making on adding an extra channel is going to be very different in this world.  In this scenario, they are going to compare the new sports channel with the Kite-flying channel based on how many people will sign up and pay for that standalone channel.  And in this case, a sixth (and probably seventh and eighth and ninth) sports channel is going to look better to them than the Kite-flying channel.   Niche channels that were added to bring greater reach to their basic cable package are going to be dropped in favor of more of what appeals to the majority. 

I think about this all the time when I scan the dial on Sirius radio, which sells its services as one package rather than a la carte.  There are several stations that I always wonder, "does anyone listen to that?"  But Sirius doesn't need another channel for the majority out at #300 -- they need channels that will bring new niche audiences to the package.  So an Egyptian reggae channel may be more valuable as the 301st offering than a 20th sports channel.  This is what we may very likely be giving up if we continue down this road of regulating away cable package pricing.  Yeah, in a la carte pricing people who want just the kite-flying channel will pay less for it, but will it still be available?

  • http://geistbear.blogware.com Thomas

    I'd be satisfied if the regulation simple allowed them to offer a la carte rather than force it. I only watch about 10-15 channels and dislike that I have to get the basic package that doesn't have all 15 channels I want, but for one or two channels I don't get I am not paying another 20-30 dollars a month. I also end up paying for a bunch of channels I never watch and contain no value for me.

    As a customer if I was offered more choice I would take it over having none which is what I have now.

  • http://geistbear.blogware.com Thomas

    Further point niche channels currently suffer a form of trying to build a bigger brand under the current regulatory environment and ultimately it dilutes their niche status. Examples are everywehere Food Network is trying to also be the Travel channel and doesn't care about teaching people to cook anymore, SciFi channel has wrestling, G4-Tech TV has become a Spike TV knock off, America Movie Classics shows Steven Seagal movies and Lake Placid. The current system doesn't encourage niche markets in the least, only that they get diluted.

  • CRC

    I'd be satisfied if the regulation simple allowed them to offer a la carte rather than force it.

    I agree. Personally, I'd choose my channels a la carte (and I know others that would too). But force in either direction isn't necessary. If the overall market decides or accepts the package deals such that cable companies don't see any value in offering the a la carte option, that's fine. Now cable is a bit tricky in the sense that there is some limit to competition so we don't necessarily get to see what a competitive "free for all" might lead us to. But that's life I guess. I know the phone companies would like to use their infrastucture to deliver entertainment content. Apple is trying with a different (definitely a la carte) approach. TiVO+Amazon are doing the same. And on it goes.

    Surely though legislators have more important things to, like hold hearings about steroid usage in Major League Baseball.

  • http://www.steamstreet.com Sandtiger

    There's a huge problem with these attempts to 'unbundle'. Who sets the price? Wouldn't the cable company just charge really high rates for the unbundled channels? They could charge $15/month for ESPN, or $25/month for TNT, thus forcing everyone into the bundle anyways. So, after the unbundling happens, we'll also start to here rumblings from Washington regulating the prices of these channels.

    Every other business has bundling... go to McDonalds and order a pickel, try to get the newspaper without the Lifestyle section...

  • Tim

    Like all of you, I prefer the government stay out of my business plan and pricing model. However, there is going to be a certain dollar amount that it becomes unprofitable to hook up your house to the network. Where that is, I don't know but for all those people that think they will be able to order Discovery for 3$ and that is it, they are probably mistaken. So I guess if it has to be ala carte, they are going to make you pay 45$ and say, pick however many basic channels you want up to 50. Premium channels cost more.

    Honestly, for me, it would create value to get rid of the crap I don't watch and not have to wade through it. And, it might be a better business model for the cable companies to charge an extra 5 dollars to get certain channels removed from the roster. Honestly, I would pay for that. No more infomercials!

  • http://www.rogelsview.com Rogel

    Why are the cable/telco/satellite TV offerings should be subject to regulation? Isn't the competition enough to regulate the best offering by itself? And since when TV broadcasting is essential right that it should be regulated by the FCC.
    I don't think that there is anything behind this regulations beside of serving the interests of some players in the markets, power accumulation by the FCC chairman and personal vendetta.

  • Mark

    Thomas and others,

    What you are forgetting is that of the 10-15 channels that you watch a few of those channels may exist as "niche" channels to everyone else.

    THe only way that your "niche" channels can survive on the cable broadcast is that htey are essentially subsidized by other people. And, vice versa.

  • Josh

    Tim, can't you just program your TV/receiver/Tivo to skip the channels you don't like?

  • tim

    Josh, yes you can program Tivo to skip channels but it takes forever to change from one station to the next. It's a pain. You can't surf anymore. I have DirectTV too and they don't allow you to program to skip channels. Also, when you go to menue you have to look at all the channels, even the ones you don't have and it doesn't tell you what you do and don't have. It is all a royal pain. I used to actually surf to find new channels to watch. Now I almost exclusively watch only what Tivo records for me based on my preferences.

  • Tim

    My biggest problem with cable and DirectTV are what the other Tim referred to. The receiver has no way to limit the list to only the channels you watch. I'd esp. like to get rid of the crap in the menus that we never watch. And even though you can block adult titles from the menu listings, I'd rather have my kids not know that the adult channels (and a lot of other crap) even exist.

    If there's any regulation I'd like to see, it would be in order to separate the distribution from the company that provides the content, and separate from the company that sells you the receiver (you still might get it all from one company). Then you'd have some competition.

  • http://www.buffalog.blogspot.com Craig

    "But now let's look at the situation if a la carte pricing was required. In this situation, individual channels don't support the package, but must stand on their own and earn revenue."

    Um, I don't think you've made your point (for me at least). I really don't care about subsidising other people's niche channels and I certainly wouldn't expect them to support mine. Bundling is somewhat akin to obliging me to buy a Prius with my Expedition so niche technology can get a fair try.

  • m.jed

    Given your libertarian bent, I'm shocked at your position on this one. Should restaurants only offer prix fixe menus (am I the only one bothered when potato chips that I'm not going to eat are included in the purchase of a sandwich at a deli)? Should we only have all-inclusive hotels/vacation resorts? Should shopping through a travel agent obligate one to car rental, airfare and hotel?

    iTunes is just one of many that have built a phenomenal business based on unbundling (at least only having to purchase one song from what used to be a CD - the proprietary DRM I could do without, but it's not hard to work around), in breaking from the status quo.

    I believe your suffering from a lack of imagination on this issue.

  • http://geistbear.blogware.com Thomas

    Mark I'd be willing to pay for more per channel to get my 10-15 just the niches I prefer than a set package I don't watch 90% of their programming. Furthermore I'd be reenforcing their niche rather than diluting it which the current system does. There is no enticement to keep current channels in their niche, hence so many examples of channels moving outside of it(see my previous examples). I'd rather have a system where I knew I was supporting programming I actually cared about.

  • JSmoke

    Cable operators don't pay the same rate to each individual network. Here in Minneapolis, when Victory Sports charged too much for programming, the cable operators wouldn't pick it up. But if it was an a la carte option, the cable company could just pass along the inflated price the network is charging and see if any customers are willing to pay it.

    There would be no reason why all the channels would have to be priced similarly. If you're a new niche network price yourself so the customer will include you next month. If you're ESPN see how much customers will actually pay to keep you on their roster of channels.

    The way I see the current system is like throwing a party and charging everyone $50 cover no matter if they don't drink alcohol or choose the vegetarian entree. Why penalize people who want to join the party but not with the full features.

    It's why I don't have cable TV actually.

  • http://www.rogelsview.com Rogel

    I'm afraid that we are missing the point here. The question isn't if a la carte service is better than packaging or not, the question is: Should the government mandate it? Do you really think that the FCC should mandate the different offering of TV shows?
    The question of a la carte channels is, in all likelihood, irrelevant. We are moving toward a la carte programs - via the internet, on demand services and DVR. So why suddenly it is important that the FCC will interfere in what should be handle by healthy free competition?

  • http://www.google.com ErikTheRed

    Question not answered: Why should the rest of us subsidize a kite-flying channel if we don't give a flying [censored]? What gives the kite-flying channel the right to exist?

    Regulation of cable companies is, IMHO, a tricky one. They've been given a monopoly on their services by the local government, and so it's not like we as consumers have much choice (not everyone has line-of-sight for DirecTV). Therefore, in exchange for being granted a monopoly we expect the cable companies to be restrained from screwing us too badly.

    My solution is to have community-owned last-mile wiring (twisted-pair, coax, fiber, whatever) - the economics are against having every last company tear up the streets, yards, etc. to install their crappy wiring. A place where hippy-dippy collectivism makes sense, especially in upscale neighborhoods where we could afford to install some cool high-tech stuff. The we let the various cable and telephone companies connect to that infrastructure at designated access points (like a telephone company central office or a neighborhood distribution box). We as consumers can choose who our wires plug into. At this point, it becomes economically feasible for multiple cable, telephone, and Internet Service Providers to serve a community rather than giving us the one (inevitably horrible) choice. If some company wants to bundle 3000 channels including 5 dedicated to kite-flying and 10 devoted to Puppies Around the World, I can feel free to ignore them and choose the one that offers 500 channels of hard-core pr0n (and Fox News, which is to liberals what holy water is to vampires - lots of smoke and boiling, followed by a messy explosion).

  • bobby_b

    Totally agree.

    On a similar note, I love to eat herring while I watch professional wrestling. When you write the letter to those government cable people, tell them to mandate that cable companies must deliver jars of herring to all subscribers every day professional wrestling is being shown.

    It's getting harder to find good herring, but if we all just chip in this way, I can be sure of getting the herring that I like, and it will cost me very little money.

  • Max Lybbert

    The way cable companies operate, offering channels a la carte would not reduce costs at all. The signal they send to your house is not directly targeted. Instead, they send out a signal that includes all channels -- those on the basic package and the extras as well -- and rely on your cable box to filter out the channels that you haven't paid for.

    The filters are now software, so there shouldn't be much of an increase in costs (minor labor increase adjusting the settings), but there won't be any decrease. It's not like they're shipping physical widgets to your house.

    There is an argument that channels that charge some form of royalty payment for each subscriber do add costs (and letting me remove them from the basic package reduces costs). But how many of these are there in the basic package? Isn't the basic package mainly the companies that make their money from the advertising they carry?

  • http://onestackmind.com Robin S

    tim wrote:

    "I have DirectTV too and they don't allow you to program to skip channels. Also, when you go to menue you have to look at all the channels, even the ones you don't have and it doesn't tell you what you do and don't have."

    I think that's a problem with the individual receiver you have, tim; I had DirectTV until I moved last year, and I had several distinct guides available to me: "All Channels" (So I could see what I was missing), "My Channels" (or something like that; only displayed what I actually got), and then multiple custom guides, showing only the channels I wanted. I had a custom guide set up to only show me what was on the networks, TNT, TBS, USA, and Sci-Fi; Another custom guide, for use during College Football season, showed every network that I got that might be airing said College Football. A third picked up the channels that my baby sister would want to watch when she was there.

    On the other hand, my grandfather's DirectTV installer came with a completely different model of receiver, and he had the situation you're describing. He was stuck looking at every channel they offered, not just the channels he received.

  • Carlton

    I would argue your statement it only true in the context of the cable companies economic model, which I might note, is seriously out of date. If I was offering IPTV, it wouldn't matter what the size of my target audience was as long as I met my basic costs. If Jimbo wants to sell a video of washboard music to the world for $1 a pop out on the internet, he could very well make some money. Cable companies couldn't handle something like that as their costs and rate of return are based on a quasi-monopolistic pricing (see Rogel above). As Isenberg (http://www.hyperorg.com/misc/stupidnet.html) says, Its all about the network.

  • George Bryant

    The article is speciously shilling for the cable monopoly. Two response questions:

    1) Should I pay 6 dollars for my newspaper at the news stand in order to support Cycling magazine? Of course not and yet there is plenty of variety in periodical choices.

    2) If the cable companies are so altruistic why is their such difficulty in getting channels such as NFL onto certain cable systems?

    Just as previous monopolies(e.g. the old AT&T, and utilities), the cable industry pleads public service and righteous value until true competition (not likely) or regulation (unfortunately necessary) can address the current inequities in their service pricing.