Why Can't We Unbundle Cable?

By Megan McArdle

Alyssa Rosenberg wants a la carte pricing for cable, rather than getting the smorgasbord of food channels, gardening networks, and the occasional excellent television series that she now enjoys.  This is a really common plaint, and it's getting more common as twenty-somethings (and increasingly, thirty-somethings) get used to enjoying content-on-demand from both legal and illegal sources.


But it's far from clear that unbundling would either reduce costs (which is what most people think) or direct more money towards the sources that Rosenberg wants to support:

But it's not just the delivery mechanism for the product that's a problem: respondents in the survey that article cites say they think cable is a bad value, and with good reason. The bundle of channels that come in a cable package are a truly random spread of things, and while that may seem like it provides a lot of choice, it's not actually letting me pay directly for the things I'd like to purchase. No one would stand for a model where to buy George R.R. Martin books, I had to guy the whole Left Behind series. The music industry's evolved to a point where I am no longer required to pay for the skits on hip-hop albums. Cable's obviously much more dependent than either of those kinds of art on delivery mechanism, but if I were the strong, profitable, critically acclaimed network, I would totally gang up on the dead weight I was packaged with and insist on letting consumers do something like pick ten channels for a set price and then pay a la carte for extra channels. Channels could opt to be available in that initial tranche, or to stay independent like HBO, or participate in both.

I'd pay what I'm paying for cable now if I could just get BBC America, SyFy, USA, TNT, FX, Bravo, AMC, Showtime, HBO, and ESPN. I imagine those networks would be happy to take their greater share of my subscription dollars and use them towards nifty programming. But I don't have that option. Instead, I'm stuck subsidizing endless spinoffs of Tyler Perry's House of Payne.
This neglects a few things.  First of all, as far as I know affiliate fees do, in fact, vary by how popular the content is: ESPN gets more than ID, and networks with too few eyeballs get bumped entirely unless they're affiliated with a more powerful network (i.e. Fox Business).  So it isn't really the case that Alyssa is subsidizing terrible content; cable channels are at least roughly paid on how many eyeballs they can attract. 

Moreover, all those channels already get another significant part of their revenue on a per-user basis; they charge advertisers (roughly) by the eyeball.  There are more networks devoted to reality shows than to making things like Game of Thrones because there are more eyeballs on the reality shows to sell advertisers.

Nor does unbundling mean that you can save money by just paying for the channels you want.  Right now everyone on your cable network is paying for everything.  Now say we break it up so that you only pay for the ten channels you want, out of 100.  Well, everyone else also only pays for the ten channels they want.  Before, say your channel made $5 million a year off of affiliate fees; now they need to make that $5 million off of the 10% of viewers who actually watch them occasionally.  So instead of getting (to make it easy) $1 apiece from 5 million viewers, they need $10 apiece from 500,000 viewers.  Multiply by ten and . . . your cable bill is exactly what it was, there has been no net increase in the number of great shows, and you have to spend two hours hassling with the phone company because they gave you the Science Channel instead of SyFy.  

Plus you lose what economists call the option value of the other channels--that every-once-in-a-while experience of seeing something you want to watch outside of your usual channels. As James Surowiecki pointed out last year, most people actually like bundling--they don't want to buy books by the chapter or newspapers by the article . . . or SyFy by the show.  What they dislike is paying so much for cable.  But they are mistaken in the belief that unbundling will bring their bills down; one recent estimate was that unbundling would lower prices by $0.35 a month.  Other studies indicate that the average consumer would pay more, to cover the transaction costs of an unbundled system.

Bundling is what happens in markets with a high fixed cost and a low marginal cost.  It costs a great deal to run cable to your house, and make or buy television shows to send down that pipe; it costs basically nothing for each show you actually watch.  In this environment, attempting to give people only the networks that they want simply adds costs and hassle for the company, which has to customize everyone's feed and then deal with the inevitable errors.  That's why they only do it for really premium content, not a channel you want to pay $1 a month for--and even then, they are prone to bundle these services into "Ultimate Sports Fan" or "Movie Lover" packages rather than building a custom set of choices just for you.

To be sure, technology is bringing down those costs--but customer service remains expensive, and always will be as long as actual people have to take your call and service your equipment.  But more to the point, what's the benefit?  Your costs aren't particularly likely to drop, you lose the option value of the other channels, and it's a hassle to choose.

So why is Netflix so cheap, I hear you cry--I want everything to be like Netflix!  

But Netflix doesn't do the same thing as cable; specifically, they don't have premium content. They're repackaging stuff that has already either made money, or at least had most of its costs paid--through affiliate fees and advertising, in the case of television, and through theater tickets, television sales, and tie-ins in the case of movies.  If the cable networks didn't exist, Netflix's content would probably be more expensive, and of course some of it wouldn't exist at all.

In fact, you can already see that unbundling doesn't offer consumers a lot of extra value, by looking at . . . cable channels. After all, a channel is just a bundle--a bundle of shows. You don't want to watch all or even most of them, but you pay for the channel as a whole.  So say you wanted to unbundle and just watch a few of the shows.  Would you save money?

Well, watching the last season of Treme or Mad Men (legally, on DVD) will run you $30-40.  And even there, you're getting some discount because you're watching it late, rather than in first run.  If you watch only a few shows a year on a given network, eschewing cable and waiting for the DVDs does not save you money; you only save money if you're willing to wait a long time, until other, more impatient people have already paid most of the costs by subscribing to the channel, or buying the DVDs.  You don't have to follow many shows in order to make bundling cheaper.

Netflix's foray into making its own shows is certainly interesting and may attract new customers, but if they get into the content business in a big way, I'd guess that they, too will move to tiered pricing--and that those tiers will be bundled.  I don't think there's any glorious future awaiting us filled with lots of great, cheap, unbundled content.

This article available online at:

http://www.theatlantic.com/business/archive/2011/06/why-cant-we-unbundle-cable/239849/