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?
