Cable Unbundling

Megan McArdle responds to yet another call for government-enforced unbundling (or a la carte pricing) for cable TV.  I think she does a pretty good job in response, but I wanted to go in depth on a couple of issues.

First, it is interesting to me that the exact same people, typically on the Left, who want to unbundle cable TV are the same ones who angle for net neutrality, which in effect is government rules to enforce bundling of Internet services.  Which leads me to think this has less to do with consumer protection and more to do with the raw exercise of power to overturn free market solutions to problems.

Second, I think that unbundling would be a terrible solution for customers, particularly for those whose interests are focused and esoteric (e.g, they like the GLBT channel or whatever).  These folks think unblundling will get them cheaper rates for the one channel they want.  What it more likely will get them is fewer of those niche, esoteric channels.  I will simply repeat an earlier article I wrote four years ago on this topic:

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?

  • Maddog

    Cable and sat services are in for a rough row to hoe. We recently picked up a Roku internet/television interface thinking it would be kind of cool. We no longer watch T.V. Really. Not. At. All.
    I am not quite ready to cut the cord, I really like the Tour de France and so will keep my sat service at least until the end of July. I am assuming the TDF will not be available to the Roku but it very well could be.
    Today I will cut it down to a much lower level of service and likely after July I will trim it to the $5 per month "vacation service" level. The Roku has some sports but not yet at the level to cut the cord on the sat completely.
    The Roku gives us about 100,000 program options and a wide variety of programs never available on cable or sat, so much for 57 channels and nothing on. We now have 100,000 options and more every month.
    We liked the Roku so much we bought another for the kids so for an investment of $170 for the two Rokus and $8 per month for Netflix we replaced more than $100 per month in sat service.
    Good bye cable! We hardly knew you.

  • Mark

    Something left unsaid is that if you unbundle the cost of the individual channels will be higher. So you can either get 100 channels for 60 bucks a month, or you can get your individual channels at 12 bucks each. So in the end if you are interested in more than 2 or 3 channels it might be cheaper to go with the bundled package.

    Right now I only get the very basic cable, because it comes with my internet service (the $10 cable modem service tax) and I watch most of my programming from HistoryChannel.com, Netflix.com, and Hulu.com anyway.

  • anon

    "First, it is interesting to me that the exact same people, typically on the Left, who want to unbundle cable TV are the same ones who angle for net neutrality, which in effect is government rules to enforce bundling of Internet services."

    Great observation. Never noticed that before!

  • Nate Ogden

    "Let’s say the cable company wants to add a channel to their basic package, and they have two choices."

    This is not at all how I understand the industry to work. If they want to add ESPN 42, all spelling be all the time, ESPN will demand the cable company pay them $0.50 per subscriber per month. On the other hand the Kite Channel would actually offer to pay the Cable Company to be carried.

    "Beginning stations must be prepared to pay for their airtime; however, when demand for your station rises, you may be able to charge the cable provider to carry your channel."

    Read more: How to Start a Cable Television Station | eHow.com http://www.ehow.com/how_6659994_start-cable-television-station.html#ixzz1OEubmEx3

    Further is pressure put on Cable Companies by the popular content providers. ESPN will say if you want to carry ESPN you also have to carry ESPN 42, taking up limited space, if it went ala carte and no one bought ESPN 42 that space would open up for the Kite Flying Channel.

  • Dan Smith

    Strikes me that the same people who want a la carte cable services are the same ones who don't want to pay for health insurance until they get sick, and then it should be retroactive. In other words, they live in Unicorn land. Not anchored in reality.

  • Nate Ogden

    "Strikes me that the same people who want a la carte cable services are the same ones who don’t want to pay for health insurance until they get sick"

    I can not buy cable at all and buy direct from MLB NBA NFL or go to many channels like Hulu or Comedy Central and watch for free after viewing a commercial. I don't need the Cable company to watch 90% of my shows, they are just an easy delivery mechanism that bundels everything together.

    Cable is like the individual mandate, we are being forced to overpay for a not so great product just so the government can get their pound of flesh out of us.

  • Don Lloyd

    I think the main problem is that most people see dozens of channels that they receive, but rarely watch. They then reason that they should be able to dump those channels and recover the cost savings of the cable company if it doesn't have to deliver those channels. They likely have no clue that there will be little if any cost savings involved to be recovered as the cost of capacity is little different if content is carried or not for marginal content.

    Regards, Don

  • eCurmudgeon

    Actually, the problem is in the very notion of "channels" itself. Instead of asking why a viewer should pay for a channel they have no interest in, why not take that to its logical conclusion and ask why a viewer should pay for all of the content on a channel if they're only interested in one or two programs on it?

    Consequently, I'd love to see the current television programming model be deconstructed further into an iTunes-like pool of individual programs. Pay for what you watch (or allow it to be subsidized by advertising) and ignore the rest.

    The aforementioned Roku box is a start in that direction, but it still needs to go much further...

  • http://evilredscandi.blogspot.com Evil Red Scandi

    Not to be a jerk, but this argument sounds more socialistic than free market. We all need to support niche-market channels because otherwise they may not exist? Maybe they shouldn't exist.

    First of all, the free market didn't create the CableCo monopolies - the various governments did. If we had the ability to choose from as many different cable companies as we did, say, gas stations, it's likely that we would have options that better catered to individual wants. Satellite TV is kinda sorta a competitor, but they don't have nearly as much ability to offer on-demand programming. Now some areas have another option from the telcos (AT&T U-Verse and Verizon FiOS), but duopolies generally don't provide significant competition - they tend to just find the level of consumer pain and both camp out there.

    I don't want more government regulation fixing the mistakes of government regulation - the solution is to get rid of the Cableco and Telco franchise monopolies.

  • smurfy

    My cable company offers a two-year rate lock (with massive early termination fee, natch.) They're stalling, they know the cable business model is dead. Why go for government intervention when the whole thing is untangling right before our eyes?

  • NormD

    One unbundling I might support (I would like to see details) would be a sports-free package. I *thought* that sports drives a lot of price increases in cable TV.

  • epobirs

    It's a problem that will solve itself as the business shifts more heavily to a on-demand model.

  • eCurmudgeon

    @NormD: It's highly likely that in the near future, most sports events will move to a pay-per-view model.

  • tehag

    I don't understand the comment on net neutrality: how is FTP (an Internet service) like the food network (a content channel)?

  • Ignoramus

    "most sports events will move to a pay-per-view model."

    I agree. I suspect that this is what's behind the NFL lock-out. Owners-players are fighting over their percentage slice of the pie, when the pie is poised to go from Large to Extra Large with All the Toppings.

    With an internet-based delivery, tied to fantasy league stuff, and shadow-support of gambling, the sky's the limit.

  • Eric H

    It's hard to sympathize with either the cable companies or ISPs (who are often the same companies). Both are huge beneficiaries of previous government grants of monopoly and/or subsidy. Those satellites that are used to bounce ESPN and CNN feeds? Probably put up by Loral, Lockheed, Boeing, or some other heavily subsidized giant on NASA launchpads with AF-developed technology. You know the internet story. At what point do they get to say, "Thanks for the boost, now leave us alone!"? I think you're basically making a Hamiltonian ex post argument for state support of industry.

  • ArtD0dger

    I am surprised to see both Warren and Megan McArdle blow this issue so badly. The whole issue of "cable unbundling" is badly mis-framed. The unit of commerce for program delivery should not be the "channel" -- it should be something more like the "programming hour." Every conclusion in their posts proceeds from this spurious premise, including 1) some people need to subsidize a bunch of programming that they never watch with bundling and 2) other people would free load on a few channels that they watch all the time without bundling.

    I would say this is true even for cable and satellite TV where the marginal cost of broadcasting is high and receiving is low. But these are dead technologies walking. It is especially true for internet programming where one transmission goes to one customer, as would seem to be the dominant future trend.

  • ArtD0dger

    ...which is more or less what eCurmudgeon said.

  • ErisGuy

    McArdle is absolutely right. It is the purpose of the cable industry to overcharge for popular channels like ESPN so that the money the rich pay to receive those channels can be used to cablecast channels that the rich don't want, don't think is good use of their money, and which carry programming the rich may find offensive.

    Cable companies don't exist to provide a service in a free market in exchange for their services: they exist to serve diversity and to give back to the community. If the rich don't like it: tough. We who value diversity can always get some judge or some bureacrat to offer up some law or ruling or finding or ukase that says "if you want ESPN you must pay for the kite-flying channel."

    It's the charitable thing to do: to fund diversity. And we know how to use your charitable moneys better than you do. You might want to fund some channel of which the cable company disapproves, or of which the government disapproves, or which is unpopular with a violent and admired segment of the community. It's your money, but we get decide how to use it. It's more diverse that way.

    I think this principle of overcharging the rich so that the excess can be used as charity to expand diversity should include more institutions than the cable company. I believe that people who attend colleges to acquire real knowledge that is useful and profitable to them should have their tutition raised and the people who supply diversity to the university should have their tuition lowered. That is, engineers, scientists--all those tech guys--should pay more for their education to offset the costs of the studies programs.

    In fact, this principle: soak the rich to fund other people's favorite causes is a universal princple of government. What's the name for that kind of government?