Reports that Cable Channel Bundle is a Good Thing — Greatly Exaggerated

Posted By on Apr 2, 2014 | 0 comments

Wired magazine published an opinion piece by Jonathan Wilner this week, arguing that cable channel bundling—including bundling of the most expensive channels, like ESPN—is actually a good thing for consumers.

I’m glad it was published as opinion, because a key part of Wilner’s argument, and conclusion, certainly isn’t fact.

Now, I actually agree with Wilner’s basic thesis that consumers can gain real benefits from bundling.  And those businesses that pursue a la carte packaging models are certain to quickly discover that, even as they say they want a la carte, consumers still do the channel math—that is, calculating what the cost per channel is—and that channel math has a big effect on whether they consider a deal to be good or not.

You see, when consumers say they want a la carte, what they’re thinking is something along the lines of “I pay $50 for 50 channels.  I want to pay $10 for just the 10 channels I watch regularly.”  And while they might think it acceptable to pay $15 for those 10 channels, they’re definitely not thinking it’s acceptable to pay $35 for those ten channels.

From the operators’ cost perspective, however, they might have $20 in costs to serve a customer, regardless of how many channels the customer takes, and the ten channels the customer wants are likely to include at least some of the more popular and more expensive channels.

When faced with a choice similar to 10 channels for $35 or 50 channels for $50, a very high percentage of customers decide that they actually prefer having many additional options, for a price that’s just somewhat higher.

That consumers do this channel math clearly demonstrates that bundles do indeed have value for consumers.

But that doesn’t mean that the current cable bundle isn’t broken, for it surely is.  As we explained in a recent article on such, the current system doesn’t merely offer bundle options to consumers.  A dysfunctional program carriage market forces huge bundles on subscribers, and insulates popular channels from the normal price elasticity effects that they would experience in a properly functioning marketplace, enabling them to demand exorbitant fees.  That cable television prices have been escalating at hyperinflationary rates for decades, even as pay television significantly increased its subscriber base, is clear evidence of how broken the marketplace is.

Wilner’s ESPN example—sports in general, actually—is a perfect example to consider.  He argues that ESPN would cost about $100/month if it were only offered a la carte.

The evidence for this that he calls compelling is, in fact, a deeply flawed analysis.  It mentions price elasticity—the notion that if ESPN’s price actually did go up to $100/month, even many of those who want ESPN wouldn’t subscribe it—and suggests that this means the price for ESPN would have to go even higher!

But this is predicated on the notion that ESPN would have to increase subscription fees to maintain their current revenues.  Why should we presume that ESPN would—or should—maintain their current revenues?

In fact, what price elasticity and a potential $100/month subscription fee for ESPN tells us is that there would be irresistible pressure for ESPN to reduce their subscription fee, in order to attract and retain subscribers, to have a larger base for both subscription fees and advertising.  ESPN’s business impetus would be to maximize their revenues (actually, profits), not chase some fantasy that they could maintain their existing revenues by charging their most dedicated customers hundreds or thousands per month.

Faced with the prospect of dramatic subscriber losses without the benefit of forced bundling, ESPN would surely decide to scale back their subscriber fee just as dramatically, in order to attract mere occasional viewers, who would only subscribe if the cost were very low.  Or if operators only bundled low-cost channels (perhaps because regulations were changed to prohibit bundling of high cost channels), ESPN would cut back their fees to qualify for bundling.

ESPN would not maintain its current revenues, or current profits.  It would have to settle for much lower revenues and lower profits.  The same would hold, of course, for all the regional sports networks, some of which now charge nearly as much as ESPN, thanks to the same forced bundling process.

What impact would such have on the quality of sports content available for viewers?  It’s not obvious that it would be much.

These cable sports channels would no longer be able to bid up sports rights as aggressively, in competition with, for example, broadcasters who, historically, supported such programming entirely via advertising, not forced subscription fees.  So sports rights would not be nearly as valuable as they are today.  We should expect player salaries and sports franchise profits would decrease.  Likewise, NCAA revenues would be expected to decrease.

Would any of these be likely to fundamentally change the quality of those sports?  It’s pretty hard to believe they would.  Even with a sharp reduction in salaries, professional athletes are unlikely to find many alternative employment options that would pay them anything close to what they earn as athletes.  And there’s never a shortage of would-be owners who are interested in sports franchises, regardless of the economic details.  As for the NCAA, we all know well that only a tiny fraction of NCAA revenues actually go to supporting student athletes (or should I say employees?).

But let’s allow for the possibility that there could be some reduction in the quality of sports.  And let’s also allow that there could be some reduction in the quality of coverage.  With lower subscription fees, perhaps channels like ESPN won’t be inclined to invest quite as much toward developing fancy new digital enhancements for sports broadcasts.

But if that’s the case, it’s perfectly ok.  It merely tells us that consumers don’t value those incremental differences enough to pay higher fees to support them.

When it comes to sports channels, the effect of fixing the currently broken cable bundle would be to drastically reduce consumer costs mostly by deflating the bubble in sports rights, salaries, etc.  Anything else is the free market deciding what level of quality consumers are willing to pay for.

When it comes to other content, we can expect that the effects would be similar.  Whereas sports would likely see a rebalancing of content among broadcasters and cable networks, non-sports entertainment would also be likely to see a rebalancing—not just among channels, but potentially between television and film, considering that television entertainment quality has vastly improved over the last decade, seemingly at the expense of film.

There could also be a reduction in the salaries creative personnel are able to demand.  But as with sports, one has to wonder how much of an impact this is likely to actually have on quality.  And just as with sports, to the degree there is some incremental reduction in quality, it’s merely the marketplace telling us that consumers don’t value those quality differences enough to pay for them.

Bundling can indeed provide real consumer benefits, and I don’t expect we’ll ever see a transition to a predominantly a la carte model for pay television.  But the notion that the current cable bundle isn’t broken, and doesn’t harm consumers, is simply bunk.

For a discussion of what drives the cable channel bundle, see Comcast-TWC and the Broken Market for Program Carriage.  Or for a discussion of how the content bundling model is spreading to internet service, see Like the Cable Channel Bundle? Netflix and ESPN are bringing it to Broadband.