The End of TV and the Death of the Cable Bundle

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People have been predicting the demise of cable television for years. After this week, they might be right.

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Two small pieces of news yesterday could make for a big headache for TV.

First, Viacom yanked its 19 channels -- including Nickelodeon, MTV and Comedy Central -- from DirecTV after the two companies failed to agree on subscriber fees. Second a federal judge cleared the way for Aereo, an exciting new startup that could bring local TV (NBC, ABC, CBS, PBS) to any device you wish, from a smart phone to an actual TV.

Big deal, you might say, so DirecTV people can't watch "South Park" and techies can get a crappy stream of "The View" on their iPad. That's not a wrong interpretation of the news, but it's too narrow. The bigger story here is the death of the bundle. 

Every year, 100 million homes pay for a bundle of cable channels. Like any bundle, it's hard to see exactly what they are paying for. That is somewhat the point of bundling -- to disguise the true cost of the constituent items. If you watch ESPN and 17 other channels regularly for four hours a day, you are probably getting a good deal. And that means that millions of other people are getting a "bad deal" on their cable and are subsidizing your TV experience. For these millions of households -- who don't watch live sports; or only want HBO; or only need their Law & Order, ANTM, and Daily Show fix; etc -- an à la carte option for television would almost certainly be cheaper.

But à la carte would blow up television, which has been the most dependable and lucrative business model in modern entertainment history. The Internet gutted the music industry. Print journalism has been forced to innovate or die -- or, sometimes, both simultaneously -- in response to the Web. The American movie industry has survived fundamentally because it learned to diversify away from the terms "American" and "movie industry" -- most of their revenue now comes from overseas and "merchandise-able" franchises. But the cable bundle is still basically the cable bundle, and it is still growing by hundreds of thousands of subscribers a year. Innovation is an answer to a problem. As long as cable providers don't have a revenue problem, they have less need to innovate.

The debate between DirecTV (a provider) and Viacom (a "content" creator) is about finding the right price that providers should pay for content that most people don't watch. That's where bundles are useful. They disguise the price of things we don't use. But with pay TV growth slowing, we're at the edge of a revolution. "DirecTV thinks video streaming is eating away at the ratings of channels like MTV and Comedy Central," Jeff Bercovici writes at Forbes, and the company has "demanded that Viacom give consumers the right to select channels a la carte."

The Aereo story is different. It's not about cable. But it is about distributing broadcast networks online. Once sports fans can get the Olympics and NBA and other shows without a cable package, whenever they want it, it could serve alongside Netflix, Hulu and other services to replace the cable bundle.

The Internet is ruthlessly efficient at stripping cross-subsidies and allowing content to shine on its own. (As Jim Fallows has pointed out, newspapers once paid for international coverage with classifieds and cars. Now, if you want classifieds and cars, you go to a classifieds site or a cars site. Bye-bye, cross-subsidy.) Devices like Aereo combined with cases like Viacom's could be leading to an a la carte model for television. The question isn't really if the Internet's unbundling revolution will visit the television industry but when.

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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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