Opinion

Felix Salmon

The future of the cable-TV business model

By Felix Salmon
January 19, 2010

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.

Comments
9 comments so far | RSS Comments RSS

That’s why I don’t have a TV. Why should I pay to finance propaganda from Fox?

You can watch most TV programs on the Net anyway.

Posted by EmilianoZ | Report as abusive
 

See this problem and solution for why unbundling might not be such a great idea.

Posted by JamesBShearer | Report as abusive
 

Maybe you can answer a question I have about the ala carte system.

Given:

1. The costs of operating a cable company are basically fixed with respect to the number of channels provided to an individual consumer.

2. Cable companies will attempt to adjust prices so their profit margins are kept constant.

and

3. The average consumer pays $100 for 100 channels, 10 of which they watch enough to purchase ala carte.

Wouldn’t the rational price offered for a single ala carte channel be close to $10? In other words, wouldn’t it just be a fancy way to pay just as much money for far fewer channels?

I feel like most of the popular support for ala carte cable is based on the (unlikely) assumption that a 90% decrease in channels would carry with it a 90% smaller bill.

Is there something I’m missing?

Posted by Bergamot | Report as abusive
 

In the long run, it won’t matter, as all video entertainment will be available on demand. The technology to do this has been economically viable for at least a few years, but it hasn’t been implemented due to luddite attitudes at the networks and cable companies.

In the meantime, if networks press their distributors (i.e., the cable companies) for payments that are not currently part of the business model, the distributors will have no choice but to pass on the charges to their customers, as they just cannot afford to absorb these new costs. The networks are in denial, refusing to recognize that you can’t extract 6 pounds of sugar from a 5 pound sack (or more explicitly, $100 of monthly revenue from a subscriber with only $80 to spend). Maybe some cable companies will try offering bundles of channels, but the smart ones (if there are any) will just say “screw it”, and let their customers (the viewers) decide what they want to watch. The cable companies are fools if they think they are smart enough to game the system; there is no way they can predict what people will be willing to pay to watch. The networks are fools, period, as they effectively want to charge viewers for what they now deliver for free, and they want companies who increase the size of their market for free to actually pay for the right to do that.. Their product just isn’t that good, and people will not pay. All they will accomplish is a faster transition to internet delivery of video entertainment.

For more on the incompetence of TV network management, see Zucker, Jeff.

Posted by OnTheTimes | Report as abusive
 

Can someone explain bundling to this Canadian? Where I live, I pay a certain amount for basic cable (about 30 channels for 20$ I think) and I chose to pay an extra 20$ for another 20 channels. I can choose any channel I want for those twenty channels, and I can change my selection at any time. Would that qualify as unbundling?

Posted by Marlo | Report as abusive
 

ESPN is already taking the first steps to eliminate a now unnecessary middle-man by partnering with Microsoft Xbox to offer ESPN programing directly. The cable companies add little value above providing a connection and it’s just a matter of time until the premium they extract over and above data conduit is wiped out by new technology.

Posted by AlexUD | Report as abusive
 

Once again in discussing this issue you fail to present the most important fact. Some channels are PAID by the cable carrier (HGTV, SyFy, ESPN) and some channels PAY (the cable carrier (QVC, HSN). So to use my examples, getting 5 channels is cheaper than getting 3, because the shopping networks are cross-subsidizing the stuff you actually watch. This ONLY works with bundling. Offering a la carte channels at a negative price has predictable consequences that render it non-viable. And this is why in an unbundled world your cable bill goes up, not down.

Posted by nyetter | Report as abusive
 

You are onto something here! Bundled programming was originally good for the consumer and the TV industry. Bulk purchasing helped create diversity of programming.

But with the rabbit ears being retired, it is time we realized that the business has changed. Technology now makes it much easier for us to efficiently customize cable packages to suit the individual. also, we now have over 100+ channels force fed to us, even though the average household watches less than 20 of these channels.

There is a consumer movement to bring back competition and transparency into the industry. Hundreds of folks have already signed up in San Francisco. No reason why other cities should be stuck with the same old status quo.

Join the movement tvalacarte.org

Posted by TVALaCarte | Report as abusive
 

May 24, 2010Cost-Effective GenosTV Replaces Traditional Cable and Satellite Service
By Calvin Azuri, TMCnet Contributor

Rob Shambro, CEO of GenosTV, recently decided to dissect the “AlternativeTV” market. Genos, reportedly ranked as the world’s first broadband cable TV network, made a decision to dissect the players and their offerings because of many false impressions in this space.

Internet Protocol Television comes in three kinds such as Live TV, time shifted programming and video on demand. IPTV (News – Alert) delivers television programs to the households through a broadband connection by using internet protocols. Most IP media comes under the category of video on demand and content generated via internet. Most of the players are trying to obtain this media in order to use it on the TV.

You can obtain the video from the Internet and play it on the TV in many ways. First method is you can set the computer near the TV and connect both video and audio outputs to that of the TV. Second method is by making use of the extender. You can obtain the extender for Windows Media Center on the Media Center Edition, Vista and Windows 7. Users can connect a computer to a network and an authorized device like the XBOX360, Linksys (News – Alert) DMA, Samsung Media Live and the HP MediaSmart. The end user has to choose at the computer level.

A lot of TV service providers and hardware manufacturers offer the GoogleTV platform. It is available in the form of a separate box or integrated into TVs and other provider boxes. The service offers two things such as indexing your stored media and provides the facility to search the subscribed channels available via cable provider, YouTube (News – Alert) and other web content.

Rob Shambro said, “You buy the Genos box for under $100 after the company’s launch at CES Jan., 2011. You connect the box to your TV and broadband Internet. You sign up. You pick your language. You pick your channels, which run between 2-3 dollars per month. Then you THANK THE BOX”, “Imagine the cost savings!”

The Genos Service is powered with TVME which is the next killer app which permits users to create their own television station at no cost irrespective of where they reside.Genos TV differs from the traditional cable or satellite service, since users need to pay only for the channels they chose.

Posted by GenosTV | Report as abusive
 

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