Monday, December 10, 2007

Cable ala carte

Interesting article from the New York Times by Joe Nocera ( about why ala carte cable pricing would be a bad idea. The basic premise is that if you allow ala carte pricing, you'd drive up the prices for most customers, and would choke off some of the smaller channels. A true free-marketer would argue that would be the point, but it is an interesting analysis on what otherwise seems to be a no-brainer idea.

(P.S. - Apologies for my absence the last couple of weeks. I've had a couple of health emergencies in my family which has kept me from keeping up to date. I'll try to keep up in the future)


Talking Business
Bland Menu if Cable Goes à la Carte

Published: November 24, 2007
Twice in the last few months, I’ve written columns about the bitter “carriage dispute” between the NFL Network and the nation’s two largest cable companies, Comcast and Time Warner. This column, I swear, is not going to be the third in a series. As annoyed as I remain over the tactics of the National Football League, I’ve had my say.

It is, however, about cable television — and in particular, about a response I kept hearing in the aftermath of those articles. One of my central points was that if the National Football League gained carriage on digital cable for its overpriced network, all cable subscribers would be stuck paying an exorbitant amount for something only a tiny fraction actually want.

Many readers sympathetic to my stance wondered why I hadn’t pursued that argument to its logical end. Don’t just stop with the NFL Network, they wrote. Why should cable subscribers have to pay for any stations they don’t want? Why does the cable industry force us to absorb the cost of the 75 or 100 stations that make up “extended basic” or “extended digital”— which most cable customers subscribe to — in order to see the much smaller universe of stations we truly want to watch?

“What we really need is à la carte cable TV,” wrote a reader named Neal D. Breitenbach. “That way I can buy what I want rather than what someone forces into my TV. I don’t want to pay a dollar for the NFL Network and I don’t want home shopping or Fox News either. Why can’t I pay for what I want and nothing more?”

Another reader, Alan Kemp, wrote: “Comcast’s claim of wanting its basic programming to focus on widely watched programming is nonsense. Over one-half of its basic channels are never watched in my house. I suspect most Comcast subscribers, like me, pay for many channels that they do not want and do not watch.”

À la carte. It sounds so appealing, doesn’t it? Instead of having to accept — and pay for — all the channels bundled by your cable company, you could pick from a menu and pay for only the ones you watch. As Andrew Zimbalist, an economics professor at Smith College, nicely put it in a paper he wrote on the subject: “Imagine walking into a department store to buy a pair of slacks and being told by the salesman that in order to buy the pair you like, you would also have to buy a particular shirt, a particular tie and two pairs of socks. Department stores do not attempt such bundling, because the consumer would not stand for it.” Yet that’s what the cable industry does.

À la carte is an idea that has been floating around Washington for years. One of its biggest champions is Gene Kimmelman, an executive at Consumers Union; he sees it as both a way “to create marketplace pressure to reduce prices” and to goose competition.

Another big supporter is the Parents Television Council, an organization dedicated to “protecting children and families from sex, violence and profanity in entertainment,” according to its president, Tim Winter. Although Mr. Winter pays lip service to the “pro-consumer and pro-free market” aspects of à la carte, his real agenda is decency. À la carte, he told me this week, would “allow parents to make the choice of what they want to bring into their homes.” In other words, bring Disney in — and keep MTV out.

And then there’s the most important, and most dogged, supporter of à la carte in Washington. That would be Kevin J. Martin, the chairman of the Federal Communications Commission. As a regulator, Mr. Martin has zero authority to impose à la carte on the cable industry, but that has not stopped him from pushing for it at every opportunity, including promoting it before Congress.

Mr. Martin has long said that he favors à la carte because it’s pro-consumer, but most people in the cable industry — none of whom will speak on the record, for fear of angering the F.C.C. chairman — are convinced that he favors it for the same reason Mr. Winter does: it will allow parents to keep MTV and its ilk out of their homes. Mr. Martin, who is widely expected to run for office someday in his native North Carolina, has made no secret of the fact that he has “strong concerns” about the amount of sex, violence and profanity on television, as he put it in an interview this year with Broadcasting & Cable magazine.

Yet as appealing as the idea might seem at first glance, there is a reason that Congress has not taken the bait and passed an à la carte law. À la carte would be a consumer disaster. For those of you who yearn for it, this is a classic case of “be careful what you wish for.”

For backers of à la carte, their big moment came in 2004, when Michael K. Powell, a champion of deregulation, was still F.C.C. chairman. Asked by Congress to look into the feasibility of à la carte pricing Mr. Powell had the F.C.C.’s economists work up a study. To the surprise of many — including, I’m told, Mr. Powell himself — the study concluded that à la carte would have the exact opposite effect from what its backers claimed. Instead of reducing prices, à la carte would cause cable bills to rise for most people. And it would cause many channels to go out of business. Mr. Powell turned the study over the Congress, and that was that.

Except it wasn’t. Soon afterward, Mr. Martin was named chairman of the commission — and one of his first acts was to “redo” the F.C.C. study. Sure enough, the new study attacked the old one, and claimed that à la carte would, indeed, be good for consumers. That, in turn, led to a flurry of condemnations and yet more studies that picked apart Mr. Martin’s study. The F.C.C. chairman was accused of doctoring the numbers to get the result he wanted. The study fiasco so hurt Mr. Martin’s credibility that when an à la carte bill came up in the Senate Commerce Committee last year — a bill Mr. Martin backed — it lost 20-to-2.

But wait: how can it be that à la carte will cause cable prices to rise? If you are subscribing to far fewer channels, doesn’t it therefore follow that your bill will be lower? Strange as this may seem, the answer for most people is no.

True, if you decide to take only one or two channels, à la carte pricing will save you money. But how many people are going to limit themselves to one or two channels? In fact, even if you pick as few as a dozen channels, à la carte will almost surely cost more than your current “exorbitant” cable bill.

The reason is that unmoored from the cable bundle, individual networks would have to charge vastly more money per subscriber. Under the current system, in which cable companies like Comcast pay the networks for carriage — and then pass on the cost to their customers — networks get to charge on the basis of everyone who subscribes to cable television, whether they watch the network or not. The system has the effect of generating more money than a network “deserves” based purely on viewership. Networks also get to charge more for advertising than they would if they were not part of the bundle.

Take, for instance, ESPN, which charges the highest amount of any cable network: $3 per subscriber per month. (I’m borrowing this example from a recent research note by Craig Moffett, the Sanford C. Bernstein cable analyst.) Suppose in an à la carte world, 25 percent of the nation’s cable subscribers take ESPN. If that were the case, the network would have to charge each subscriber not $3, but $12 a month to keep its revenue the same. (And don’t forget: with its $1.1 billion annual bill to the National Football League alone, ESPN is hardly in a position to tolerate declining revenues.)

And that’s one of the most popular channels on cable. What percentage of cable subscribers would take Discovery, or the Food Network, or Oxygen, or Hallmark — or the many, many more obscure networks that you can now find up and down your cable box? Five percent? Ten percent? According to Mr. Moffett’s analysis, if every African- American family in the country subscribed to the Black Entertainment Network, it would still have to raise its fees by 588 percent. He adds, “If just half opted in — still a wildly optimistic scenario — the price would rise by 1,200 percent.”

And that’s just the effect on fees. Networks would have to charge less for advertising because they would lose the casual viewer — a k a the channel flipper. Marketing budgets, on the other hand, would skyrocket, because the channels would have to pay huge sums to persuade people to subscribe. “Identifying everybody who likes the Food Network and getting them to pay for it is hard to do,” says Christopher Yoo, a law professor at the University of Pennsylvania who has studied cable bundling. One of the nice things about the current system is that once a station gets on extended basic, it can be discovered by viewers — and that wouldn’t happen in an à la carte world.

Indeed, it is quite likely that many of the smaller channels would simply vanish because they wouldn’t have enough subscribers — or couldn’t charge enough to stay in business with the subscribers they did have. It is undoubtedly true, as Mr. Kemp wrote to me, that he never watches most of the cable channels that come into his house. That’s true for most people. But there are also probably one or two small networks he does watch from time to time.

We all have our particular interests and tastes, and under its current business model, cable does a remarkable job of satisfying those interests. Diversity of programming is one of the real benefits that cable has over the old over-the-air broadcasting system. When we pay for the cable bundle we are, in effect, subsidizing those channels for everybody — including ourselves.

The cable industry is far from perfect, of course. Its customer service leaves much to be desired. Its relentless price increases are galling. Because of its monopoly roots, it can still act like a monopolist at times.

But the bundle of networks cable delivers into your home? That’s not one of the problems with the cable industry. That’s one of the blessings.

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