Bailout

The future of the cable-TV business model

By Felix Salmon

For reasons that I don’t fully understand, Jim Surowiecki is not a fan of a-la-carte cable pricing, where you just pay for the channels you want, and not for the channels you don’t want. My views on the matter haven’t changed since 2007, but one big thing has: broadcast TV is now digital, which means that cable companies are extremely constrained as to how much they could charge for network TV in an a-la-carte world. As a result, it seems obvious to me that consumers would likely save a lot of money if they paid only for the channels they watched. (The one possible exception? Sports fans.)

Surowiecki says that consumers wouldn’t benefit much from unbundling cable channels, while cable providers and cable networks would both get hurt. He says that a recent paper “estimated the best-case gain to consumers at thirty-five cents a month”, but if you read the paper in question, it doesn’t model a-la-carte pricing at all, but rather scheme where you get a choice of seven different “themed tiers” of programming on top of a $29-a-month basic bill. What’s more, the “best-case gain to consumers” is calculated not as the amount of money consumers save, but rather “the change in expected bundle utility”, taking into account how much “bundle utility” they lose out on by not watching channels they currently watch but which become too expensive under the new system.

There will surely be a lot of unforeseeable consequences to moving to an a-la-carte system: there’s no particular reason, for instance, that cable providers should receive all of the monthly fees, while cable networks receive substantially all of the advertising revenue. My guess is that in an a-la-carte world, both would be shared much more equally.

But as Surowiecki hints, there’s an extra possible step here. If you move along the spectrum from full bundling, like we have right now, to “themed tiers”, to a-la-carte, and keep on going, you end up at a simple metered system not unlike that which the NYT is mulling. Give everybody every channel, let them watch whatever they want to watch, and then bill them for whatever they consumed. Mass-market channels with mass-market advertisers would be completely free — as will smaller channels seeking to build an audience. High-end HBO dramas and big-time sporting events would be quite expensive.

I think the problem with that kind of system is the same as the problem with any micropayments system: people don’t like the psychic cost of paying even a small amount for anything, and would much rather just make one big payment and have it over and done with. As Surowiecki says, bundling “eliminates the problem of fretting about small expenditures”. TV is something people have on in the background: they don’t want to worry about running up a bill for that kind of activity.

The ideal world, I think, would be one where consumers got to choose. You only want to watch the Daily Show, 30 Rock, and breaking news? Go for metered pricing. You want HGTV, Bravo, HBO, Comedy Central, and ESPN? Go ahead and buy them. You want full access to the whole menu of hundreds of channels you can watch at any time at zero marginal cost, just like you have right now? Fine, you can keep what you’ve got.

That world would be great for consumers, but there would be a lot of adverse selection: people currently paying large sums for TV they barely watch would immediately trade down to a cheaper option, and the cable providers would lose that extra subscription revenue in perpetuity. Which means that unless and until it gets mandated by the FCC, it ain’t gonna happen. I’m not holding my breath.

Full post as published by Macroprudential on January 19, 2010 (boomark / email).