I wish I could remember where I read this to give proper credit, but it is funny that the folks who are absolutely bending over backwards to bundle health care want to unbundle cable TV. Think about it -- the person who just wants MSNBC but has to buy the whole cable package to get it is getting hosed far less badly than the young person next year who needs no medical care but will have to buy a pre-paid medical plan designed for a 65-year-old.
But I believe that cable unbundling will achieve the opposite effect from what most people expect. And the key to my analysis rests, as do all important economic issues, on the difference between average and at the margin. This is a repost from 2007
[A la Carte cable pricing] 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?
Note the key to this analysis is the limited channel capacity of cable or satellite. This is not a pure free market, where there is always room for another niche offering to try their hand with consumers. Cable channels are more like products competing for limited floor space at Costco - to make the cut in an a la carte world, a channel has to do a lot of business.