A La Carte Entertainment Video Might Not Work, Though People Want It

Most people these days would probably agree that the ability to buy video a la carte, show by show, series by series or channel by channel, using the Internet or any other distribution method, is a good idea. Some blame the distributors for failing to meet demand. But distributors would say their programming contracts forbid such sales. 

"We should be clear about something: cable companies are at the mercy of content companies on the issue of content rights and use," says Michael Powell, National Cable and Telecommunications Association president. 

The licensing rights dictate most of what distributors can, and cannot do, with that licensed programming. Most consumers probably think, intuitively, that shifting to an a la carte retail regime would lead to lower costs.

Powell points out the flaw: "The a la carte model is deceptively attractive until you do the math."

People generally assume that if ESPN were sold a la carte the price would fall. But if you assume a shift to a la carte could not happen unless such a development were revenue neutral, you have the crux of the problem. With fewer customers, there would be less revenue, but programming and other costs would remain the same. So prices would rise. 

Studies are inconclusive, though. Some show a sort of neutral or slightly positive outcome if a typical consumer purchased about 11 channels. 

A la carte would mean fewer subscribers and fewer advertising dollars. So prices actually would rise. For "ESPN to maintain its current revenue, it would have to cost hundreds of dollars," says Powell.

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. 

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

Operators also have argued that customer care costs would rise, and there is more substance to that argument, at least during the period where customers would be confused about the new way of buying service. The National Cable and Telecommunications Association has estimated that customer care costs increase by more than 75 percent in a pure a la carte scenario, the Consumer Union says. 

Others believe a typical household might wind up paying about the same amount each month. That is likely true more for ulti-person households and for households that watch more television.

Separate studies by the Federal Communications Commission seem to have concluded that unbundling could save money, or wouldn't save money. 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.

Consumers, Providers Profoundly Disagree about What A La Carte Video Might Cost

There is a huge disconnect between consumer and content owner or service provider expectations about what a TV channel should cost, if it were possible to buy channels one by one. Consumers think they will save money; distributors and content owners are just as certain they would not save money.

A study by PricewaterhouseCoopers indicates that 44 percent of consumers would like a the ability to buy all their channels one at a time.

Including the 29 percent of respondents that would prefer at least more customization of packages than is currently offered, some 73 percent of consumers surveyed would prefer either the full a la carte purchase option or at least some ability to customize.

Only 14 percent of respondents appear to be satisfied with the current method of packaging.

Of those interested in a customized or a la carte package, 65 percent would be willing to access 10 or more channels in a customized package. Older users (50-59) are more likely to want to buy 10 or more channels, while 55 percent of those 18 to 24 are more likely to prefer a package of 10 or more channels.

The expected pricing “per channel” is where the biggest disconnect exists. About 16 percent of respondents say they would not pay more than 99 cents a month for a channel. Some 24 percent will pay $1.99 and 22 percent will pay $2.99.

At $8 a month per channel, only about five percent of respondents indicated they would pay.

When asked about what they would pay for a single show, the survey found that 57 percent would not pay more than 99 cents a month for access to an individual show each month.

Some 20 percent indicated they would pay $1.99 for access to one TV show for a month (not per episode) and 12 percent would pay $2.99 for such access.

Only two percent would pay $8 a month for a show. If one assumes four episodes a month, tha indicates a fee of $4 per episode was considered too high.

Of respondents interested in a customized package, some 62 percent are willing to pay up to $2.99 per channel per month. About 72 percent are willing to pay up to $1.99 per show per month, driven by the 35-49 demographic, among whom 83 percent are willing to

pay this amount.

But 26 percent of consumers indicated they would be willing to pay between $4.00 to $8.00 per

channel per month.

Studies by the Federal Communications Commission seem to have concluded that unbundling could save money, or wouldn't save money, depending on how many channels a consumer buys under an a la carte regime, compared to what they buy now.

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 FCC 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, conclusively, what might happen if providers shifted to a la carte viewing.

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. That suggests they might have to make up the revenue shortfall some other way, in an a la carte regime.

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

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

An end to bundling would likely harm 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.

And there are costs besides content fees. 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.

The point is that it is very hard to tell, conclusively, what might happen if providers shifted to a la carte viewing.

Is A La Carte TV a "Farce?"

Chase Carey, Twenty-first Century Fox chief operating officer says a la carte TV--the ability to buy any single programming network, a TV series or a single channel, is a “farce.” 

At a high level, Carey simply is arguing that the current practice of bundling channels together provides the greatest value for consumers.

Skeptics would say that is an executive defending a business model that supports supplier revenue models and profit margins. 

Others would say what also is at stake is a related practice, namely the programming contracts that require distributors to buy lesser-viewed channels in order to buy a "must have" channel. In other words, to gain the right to distribute ESPN, a service provider has to agree to carry a number of other lesser-viewed channels owned by Disney (ESPN owner) as well.

But even some who support the idea that consumers ought to be able to buy their content a la carte might agree that it is not clear every consumer would save money under such a regime. 

Generally speaking, consumers content to by only a few channels might save money. But most consumers would spend less money buying a bundle of channels. Heavy users would find a la carte an expensive proposition, and clearly would be better off with the bundled channel price.

Most long-time observers might agree that the total number of viable channels would shrink drastically in an a la carte retail environment, and programming executives say consumers would pay more, for a single channel, than at present.

Some studies suggest that is the case. Other studies suggest prices for most consumers might not change much. The point is that it is unclear whether most consumer would save money on video in a shift to a la carte packaging.

Programmers say prices per channel would grow substantially, but consumer think channels will not cost much. Consumers generally estimate per-channel prices in the $2 each range, while programmers tend to believe prices will be closer to 300 percent higher, for most channels, one might argue.

If a la carte access to TV channels is a "farce," it might therefore be most true in the sense that the notion most customers would save money is profoundly wrong. 

A la carte might not be a farce for buyers who really only want to watch a few channels. 

And a la carte is no "farce" in a business sense, for programmers. It might be an industry-changing event. 

Oddly Enough, it is Nearly Inpossible to Tell Whether A La Carte Video is "Better" for Consumers and Distributors

Just what will happen to the economics of the video subscription business if Canada moves to complete unbundling of video subscription channels is unclear. It is virtually certain that programming networks will suffer.

In the U.S. market, for example, about 35 channels represent about 66 percent of all programs watched, on all channels. In a universe of hundreds of channels, that suggests most channels would either fail, or be forced to raise end user prices to compensate for lost advertising and affiliate fees (fees paid to distributors based on the number of subscribers).

In the case of advertising potential, lightly-viewed channels would retain a small fraction of their current “viewership potential.” Since advertising is sold on the basis of potential viewers, that would devastate ad revenue streams.

Also, since affiliate payments to networks by distributors also are based on the potential number of viewers, the affiliate revenue stream also would diminish.

What is unclear is the impact on service provider distributors. On one hand, a full a la carte environment would lead some subscribers to downgrade to much-smaller menus. In other words, viewers really wanting only a few channels would be able to pay less, reducing service provider revenues.

On the other hand, distributors face a growing threat of product abandonment, so some downgrading, while generating less revenue per account, would still be better than losing customers outright.

Much would depend on how any unbundling rules were promulgated. If current versions of retail packages still could be allowed, but customers also had the option of buying their channels one at a time, the revenue losses would be contained.

In other words, heavy users, watching a dozen or more channels, would still be better off buying the standard packages, so revenue from a substantial percentage of video subscribers might be largely unaffected.

Users who really only want a few channels would pay less, and distributors would lose some revenue in such cases. In between, some users would find an a la carte menu of channels costs about the same as the standard packages. In such cases, it would still make sense to buy a standard video bundle.

Almost without question, programmer affiliate payments would have to increase substantially, as networks raised prices to offset lower ad revenue. In addition, marketing costs would grow substantially, as networks suddenly would find themselves compelled to market themselves more intensively.

Some have suggested the revenue losses to service providers and networks would be quite substantial.

According to a study of the U.S. market conducted by Needham Insights, half the industry’s revenue—about $70 billion—would disappear if people didn’t have to pay for bundled television.

A bit less than half of that loss would probably be borne by distributions, and more than half by the networks. Needham Insights thinks only 20 U.S. networks would survive, Needham believes.

Whether that would be the case is, of course, unclear. Only after consumers were faced with real choices, and actually figured out what it might cost to go a la carte, would we see how consumer behavior might change.

Some studies suggest most consumers would not save much. It all depends on how many channels an account holder wanted to purchase.

ESPN, for example, costs U.S. cable TV providers about $5.15 per customer each month. In an a la carte regime, ESPN might have to raise its prices to distributors to $13 per month to make the same amount of money, according to Nielsen.

But wholesale costs could be much higher. It is impossible to estimate, at the moment. Some estimate subscribing to the ESPN family of channels alone could cost as much as $30 a month.

The issue is reach. ESPN advertising and affiliate fees rates are set on a base of 100 million U.S. homes. In an a la carte world, if subscribing households dropped to 20 percent of that amount, affiliate fees would rise commensurately, to about $6 times five, or $30.

All of that ignores the other changes that would happen, though. ESPN would look for ways to reduce its costs. And that would ripple back through the value chain, likely reducing the fees ESPN was willing to pay for sports rights.

The point is that one change--the shift to a la carte--would set off a series of other changes, of unknown magnitude. And much would hinge on whether traditional bundles remained available.

At least some service provider executives think distributors could win in an a la carte environment. That could be the case if distributors were able to keep customers they otherwise would lose, by offering more-affordable packages, with rights fees commensurately reduced.

At least some distributor executives might also believe that the only way to halt the spiral of annual price increases is for the government to intervene, by mandating a la carte wholesale offers for distributors, who then could offer a la carte to customers.

That presumably would reduce leverage held by content companies, often able to require that distributors pay to carry lightly-viewed channels in order to gain rights to "must have" networks.

Canadian Lawmakers to Introduce "A La Carte" Plan

With the caveat that lots of bills get introduced into national legislatures, with no chance of enactment, Canadian Parliament legislation to mandate a la carte retail packaging of video entertainment channels appears headed for introduction.

The legislation would mandate that video service providers provide a la carte video options for consumers of cable and satellite TV services.

The Canadian Radio-television and Telecommunications Commission already in 2011 had urged cable and satellite companies to adopt the a la carte pricing model.

If the legislation passes--there is no certainty about passage--it would provide a test of the economics of such unbundling, as well as a test of consumer appetite, that would certainly have at least some repercussions in the U.S. market as well. 

Nobody can be sure precisely what would happen to service provider and content provider revenues is such a change were to be made. 

There is a huge disconnect between consumer and content owner or service provider expectations about what a TV channel should cost, if it were possible to buy channels one by one. Consumers think they will save money; distributors and content owners are just as certain they would not save money.

A study by PricewaterhouseCoopers indicates that 44 percent of consumers would like a the ability to buy all their channels one at a time.

But it is not clear that the economics of the video subscription business can match consumer expectations about the retail price of a single channel. 

The expected pricing “per channel” is where the biggest disconnect exists. About 16 percent of respondents say they would not pay more than 99 cents a month for a channel. Some 24 percent will pay $1.99 and 22 percent will pay $2.99.

Studies by the Federal Communications Commission seem to have concluded that unbundling could save money, or wouldn't save money, depending on how many channels a consumer buys under an a la carte regime, compared to what they buy now.

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 FCC 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, conclusively, what might happen if providers shifted to a la carte viewing.

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

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

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.

92% of Consumers Want A La Carte Video: Won't Get It

About 92 percent of consumers want some type of a la carte programming offering from their video subscription  providers, but they're not willing to pay much for it, according to RBC Capital Markets. The upshot is that they aren't going to get a la carte programming. 


About 92 percent of respondents said they would be at least "somewhat likely" to switch to a full a la carte option, the RBC Capital survey of more than 1,000 consumers found. 


Some 82 percent said they would subscribe to at least 11 channels and 40 percent indicated they would subscribe to more than 20 channels, with a weighted average of about 19 channels. 


That sounds about right: most people watch seven to 12 channels on a regular basis, a rule of thumb suggests. 


Of the respondents who would prefer a la carte service, and would pay for the services, about 51 percent said they would pay at least $1 per month per channel, with the weighted average being $1.47 per month.


That works out to about $28.50 per month, or about a third the average monthly video subscription bill. Some programmers might be able to build a business case on an a la carte basis, but most likely would not fare as well. 


Granted, programming rights costs appear low for many channels, in the cents per month range. But that is based on volume discounts and represents only licensing fees, not marketing, operations, billing and other costs of delivering content to a customer. 


Consumers seem to be using the same sort of logic they use in assessing the "right cost" for a single downloaded song. People seem to divide the retail cost of a CD by the number of songs and assign a value. Users might be doing the same thing with their video service, essentially dividing the monthly recurring cost by the number of channels in their packages. 


Service providers would rightly argue that there are sunk overhead costs that are not "channel based." All those costs would, in a full a la carte regime, need to be amortized over a smaller number of revenue units (channels). 

100% Price Increases for Video Subscriptions Cannot Continue Indefinitely

Disruption on a major scale of the U.S. video entertainment ecosystem seems highly unlikely, for the moment, despite building pressures that suggest the current pattern cannot last forever.

Virtually every observer notes that U.S. cable TV prices have grown at least 100 percent over a decade, at least double the underlying rate of inflation, as measured by the consumer price index.

Many would rationally argue that cannot continue for decades more, as the value-price relationship will grow unappetizing. 

Should current rate increases prevail, in 10 years a typical consumer could be paying $200 to $300 a month for the equivalent of today’s “expanded basic” package, while other prices grow less than 33 percent over a decade, and possibly less.

Perhaps enough value will be added that such prices are deemed reasonable. But many would argue that seems unlikely.

Since 2000, the U.S. consumer price index (which excludes housing prices)  increased by about 34 percent, while another index, the “Everyday Price Index,” which includes such costs, shows a 57 percent increase between 2000 and 2012.

Even using the EPI figures, cable TV prices have grown nearly twice as fast between 2001 and 2011 as average consumer prices, and as much as three times as much by some standard measures, for example.

Video prices subscription prices In Multnomah County, Oregon, for example, grew by about 100 percent from 2000 to 2011, exceeding the background consumer price index and the everyday price index.

Some might point to services such as Netflix, available for roughly $10 a month, and compare that to an HBO subscription, which might cost $15 a month, and see a way for single channels to be sold at retail for about $10 to $20 a month on a stand-alone, streamed basis.

If similar economics prevailed for most networks generally, whether any given subscriber is better served buying a la carte, or buying a subscription, hinges on the number of channels or programs normally viewed.

If single channels could be purchased for $15 a month, then a consumer now paying $90 a month would break even at about six channels. A household habitually viewing more than six channels still would come out ahead simply buying a bundled subscription. But nobody really knows what economics of unbundled channel access actually would emerge.

Some argue that essentially little change would occur, and that typical households might wind up paying about the same amount each month, in an unbundled scenario where customers can buy channels one by one.

Studies by the Federal Communications Commission are inconclusive about whether unbundling would, or would not, save money. 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, conclusively, what might happen if providers shifted to a la carte viewing. 

Nor, given content owner preferences and contract clauses, are we likely to find out very soon. 

In truth, video distributors have little discretion about where to place channels (most contracts for ad-supported channels require placement on the most-viewed tier of service), and no freedom to sell any channel a la carte.

But the system has to break at some point.

source: FCC

AT&T "Harvest" Strategy is Not New; DirecTV Buy Makes Sense

Some have questioned the wisdom of AT&T’s bid to acquire DirecTV, the argument being that the capital is better invested elsewhere, while the linear video business is declining.

AT&T thinks differently, and perhaps partly because of its historical legacy and business culture. Keep in mind that AT&T (the former SBC) grew primarily by acquisition, organic growth notwithstanding.

Also, AT&T contains many executives who remember vividly the former independent AT&T’s strategies related to a declining business (long distance calling). While attempting to create new replacement revenue streams, AT&T harvested its declining, but substantial long distance business.

That is what AT&T sees in linear video, a mature business that throws off enough cash flow to be interesting, as the legacy business slowly erodes. Yes, there are risks. If the business declines precipitously, the gambit will not play out so well.

But AT&T is betting it will see what it has seen in the past: a major legacy business declining at a predictable rate.

Precisely what happens to the linear video subscription business once over the top streaming alternatives proliferate is as yet uncertain. But it is hard to imagine aggregate revenue increasing, and a stretch to think revenue will be no worse, but no better, than at present.

The best scenario for AT&T is gradual revenue descent, at predictable rates.

And there is reason to believe new alternatives will have incremental impact. Though a full-blown transition to “every channel is available, a la carte” would be more damaging, that does not seem to be the general pattern for developing streaming services.

Instead, the general pattern is smaller packages of channels, not full a la carte sales.

The economics of full streaming access of a la carte channels, should that be the dominant model, arguably would be worse for the ecosystem than a linear model.

Consider the Sling TV package of 20 streaming channels. That “skinny” bundle includes ESPN.

In a full a la carte regime, where a channel such as ESPN could be purchased by itself, the implied cost, at a revenue neutral outcome, would be more than $36 a month, MoffettNathanson analysts have estimated.

Obviously, Sling TV is being sold for far less than the implied cost of ESPN alone, on a revenue-neutral basis.

The same problem is faced by other less-popular channels. Disney might cost more than $8 a month. but HGTV’s implied cost might cost only $1.42 a month.

Many observers believe fewer channels will be viable once on-demand and a la carte content viewing becomes easy and affordable. The reason is simply that the implied cost of a single channel is more than a reasonable consumer would pay.

So the context for AT&T’s bid to buy DirecTV is not that linear video is a growth business; it is not. The expectation is that DirecTV will throw off huge amounts of cash flow, despite a shrinking overall business, long enough to help AT&T make a transition of revenue sources.

Yes, there are risks. But AT&T has done it before.