Everyone I know hates cable bundling. Why should they pay for the soap opera channel when they never watch it?

They are envisioning, of course, paying something like 1/100th of their current cable bill for each channel. But this is not right, for a number of reasons. If you are now willing to pay $45 to get the five channels you actually watch, you will be willing to pay $45 for those five channels, which the cable company knows; they will price the most popular channels accordingly. There's no reason they have to lower their prices to make it cheaper for you to buy cable. Apple has succeeded in forcing 99 cent downloads of unbundled songs, but that's because Apple has market power that it is using to sell expensive iPods. I see no similar market force in cable. Moreover, the transaction costs of maintaining millions of individual channel lists might well push up the overall cost of cable.

CoyoteBlog offers another reason that unbundling won't work the way people hope:

I see that the drive to force cable companies to offer their basic cable package a la carte rather than as a bundle is gaining steam again. This is the dumbest regulatory step imaginable, and will reduce the number of interesting niche choices on cable.

For some reason, it is terribly hard to convince people of this. In fact, supporters of this regulation argue just the opposite. They argue that this is a better plan for folks who only are passionate about, say, the kite-flying channel, because they only have to pay for the channel they want rather than all of basic cable to get this one station. This is a fine theory, but it only works if the kite-flying channel still exists in the new regulatory regime. Let me explain.

Clearly the kite-flying channel serves a niche market. Not that many people are going to be interested enough in kite flying alone to pay $5 a month for it. But despite this niche status, it may well make sense for the cable companies to add it to their basic package. Remember that the basic package already attracts the heart of the market. Between CNN and ESPN and the Discovery Channel and the History Channel, etc., the majority of the market already sees enough value in the package to sign on.

Let's say the cable company wants to add a channel to their basic package, and they have two choices. They have a sports channel they could add (let's say there are already 5 other sports channels in the package) or they can add the Kite-flying channel. Far more people are likely to watch the sports channel than the kite flying channel. But in the current pricing regime, this is not necessarily what matters to the cable company. Their concern is to get more people to sign up for the cable TV. And it may be that everyone who could possibly be attracted to sports is already a subscriber, and a sixth sports channel would not attract any new subscribers. It is entirely possible that a niche channel like the kite-flying channel will actually bring more incremental subscribers to the basic package than another sports channel, and thus be a more attractive addition to the basic package for the cable company.

But now let's look at the situation if a la carte pricing was required. In this situation, individual channels don't support the package, but must stand on their own and earn revenue. The cable company's decision-making on adding an extra channel is going to be very different in this world. In this scenario, they are going to compare the new sports channel with the Kite-flying channel based on how many people will sign up and pay for that standalone channel. And in this case, a sixth (and probably seventh and eighth and ninth) sports channel is going to look better to them than the Kite-flying channel. Niche channels that were added to bring greater reach to their basic cable package are going to be dropped in favor of more of what appeals to the majority.

The real problem with cable pricing is not bundling; it's that cable companies have cozy local monopolies because of a combination of political influence, and the natural reluctance of municipalities to tearing their streets up.