Cable’s Packaging Dilemma

Video service providers are caught in a vice, and so are many of their customers. The problem is escalating costs for content access, and contact clauses that it make it difficult for distributors to restructure their service packages in ways that would allow customers to opt out of some pricey offerings.

ESPN charges cable operators an average $4.69 a month for each subscriber. And ESPN contracts mandate that ESPN be carried on the most-popular tier of service. Cable networks such as CNN or TBS charge less than a dollar, says SNL Kagan analyst Derek Baine. 


So if a distributor created a new tier of service without ESPN and other pricey sports programming, and consumers responded, distributors would have to put ESPN back into those lower-priced tiers, which would destroy the retail pricing advantage again.

And even in a hypothetical full a la carte environment, when all subscribers would have the option to buy each channel one by one, ESPN parent Disney Co would likely have to charge about $30 just for ESPN to make up for lost advertising and affiliate revenue it gets from distributors.


In part, the lost revenue would come from advertising revenue on ESPN, and in part the lower revenue would represent the value of the fees Disney gets from contracts that say distributors must carry a number of other networks, to get ESPN, argues Sanford C. Bernstein analyst Craig Moffett.

The end result would likely be that consumers wound up paying more money for just a relative handful of channels than they pay for hundreds of channels today. 


Unless distributors can force major programmers to sign different contracts, it is going to be very difficult to create the lower-cost packages many consumers actually may want, or even tiers that are cheaper because they do not include the pricey sports channels. 

Cable’s ESPN Dilemma

Old Debates Over "A La Carte" Might Not be Relevant in Future

An economist might say the typical video bundle works because it allows distributors to apply scale and scope economics.

 
The corollary is that most networks, which are advertising supported, want to be part of a "no choice" basic tier for business reasons of their own, namely the ability to better sell the advertising that underpins their business models.

According to some studies, relatively few networks actually make a $100 million or more in annual ad revenue, though.

When multichannel video distributors say a bundled approach creates economics that favor smaller, niche networks to thrive, they are right.

Deprived of carriage on a broad "enhanced basic" tier, perhaps 60 percent of networks might find themselves immediately imperiled, as going concerns.

An end to bundling would likely decimate most smaller, more-lightly-viewed networks. To the extent that content and program diversity is a desired end user benefit, "choice" in all likelihood would decline in a full a la carte environment, because most people would not buy most channels.

The possible advent of over-the-top TV viewing worries most in the current ecosystem for one compelling reason: "households view less than one quarter of the networks they are forced to buy in the bundle," the Consumers Union noted in an past analysis assuming a 50-channel offering. Even today, with hundreds of available channels, end user behavior does not seem to have changed much.

Most people watch a dozen or so channels on a regular basis.

Cable operators have argued that end-user costs might actually climb in an a la carte environment, for a number of reasons. Higher customer care costs, operating and marketing are likely, cable operators have argued. Part of the argument has been based on the need to supply new decoders to customers who did not previously need them. That is likely not much of an issue these days, as cable operators convert to largely-digital or all-digital services where customers already must be provided set-top boxes.

So perhaps some of the historic objections from a distributor point of view have eroded.

Separate studies by the Federal Communications Commission seem to have concluded that unbundling could save money, or wouldn't save money. See this study. One of the studies suggested “consumers that purchase at least nine networks would likely face an increase in their monthly bills" when buying a la carte.

Likewise, one of the studies suggested bill increases ranging from 14 percent to 30 percent under a la carte, while the other suggests a consumer purchasing 11 cable channels would face a change of bill ranging from a 13 percent decrease to a four percent increase, with a decrease in three out of four cases.

The point is that it is very hard to tell, conslusively, what might happen if providers shifted to a la carte viewing. With online delivery coming to the fore, it might not ultimately matter. A la carte might happen, but on the Internet.