À La Carte Won’t Fix Cable

Unbundling cable will actually raise prices and reduce choices for most customers.

A visitor uses a remote control as she looks at television programmes during the annual MIPCOM television programme market in Cannes, southeastern France, October 4, 2010.
Families (or groups of roommates) whose members like to watch different things would end up paying much more, as assembling a diverse content bundle will be comparable in cost to three or four separate cable connections

Photo by Eric Gaillard/Reuters

Briefly a maverick again, Sen. John McCain wants to require that cable companies offer their channels to consumers on an à la carte basis. It’s nice to see a Republican recognizing that a healthy respect for the free market is not the same thing as mindless deference to the business model of entrenched firms. Unfortunately, though à la carte sounds like common sense to many people, it’s unlikely to be a good idea. Everyone hates their cable company, and à la carte is a way to vent that rage in a way that would hurt cable companies’ profits. But it would do so in a way that would leave most consumers worse off, and generate meaningful savings for only a small minority.

The problem starts with a fundamental misunderstanding: the delusion that if your basic package contains plenty of channels you never watch, you’re paying for many channels you don’t watch.

It’s understandable that people would think in those terms, but it’s wrong. If you subscribe to basic cable and just four channels represent 95 percent of your viewing, then by definition what you’re paying for is access to those four channels. If Bravo, the Food Network, MSNBC, and USA are all you watch, then whatever amount you pay monthly for cable is roughly what access to those channels is worth to you. Under any regulatory scheme, the cable company will try with all its might to make you pay that money. In an à la carte scheme, what you would lose is the remaining 5 percent—the channels you don’t value very much but do have access to and might watch on some rare occasion when the fancy strikes you.

Cable is an industry with very high fixed costs and very little competition. Once a company has gone through the trouble of constructing a network that’s physically capable of delivering cable television to your neighborhood, the cost of actually delivering the shows is quite low.

This creates an opportunity for fat profit margins, as the cable provider charges customers far more for access to its network than it actually costs to run it on an ongoing basis. In happy markets, the existence of fat margins would attract new entrants and more competition. But it would be very expensive for a second operator to build a redundant set of wires to your house. And the second network would be much less lucrative than the first, both because prices would be lower and also because market share would be divided. In some markets, there is a second cable company anyway. But to construct a third or fourth redundant network is pointless and uneconomical. Consequently, consumers get stuck with little competition and poor service.

That said, once the network is built the marginal cost of actually providing service to a consumer is low. That’s why if you call up your cable company and threaten to quit, you can offer get them to offer you a substantial discount. Where robust competition is present, it drives the price of goods down to the marginal cost of making an extra one. Where it’s absent, you get this pricing tussle. As long as there are some channels you really want to watch, it’s essentially free for the cable operator to throw in the rest of the bundle. The key insight is that unbundling—à la carte pricing—doesn’t change the monopoly dynamic. Unbundling just means you’ll be charged monopolist prices for the specific channels you love, while finding yourself priced out of the market for the other channels.

The existence of “carriage fees”—a per-subscriber charge that the most powerful cable channels levy on cable operators—does slightly complicate the analysis. Devoted fans of not-very-popular cable channels who have zero interest in sports really would win with à la carte. But many more people will lose.

Families (or groups of roommates) whose members like to watch different things would end up paying much more, as assembling a diverse content bundle will be comparable in cost to three or four separate cable connections. The sports fan would, as an individual, subscribe to cable just for the sake of ESPN. The reality TV junkie would subscribe for Bravo and the Food Network. Disaggregating the channels simply means that both will need to pay—and then pay even more for kid-oriented programming—rather than one getting to free ride. 

Casual sports fans and sporadic news watchers will also lose out. Access to NBA games or Rachel Maddow will be priced to maximize profits from die-hard fans. The kind of person who likes to tune in once March Madness is over or on unusually busy news days is going to be priced out of the market. The typical person, in other words, is going to save a small amount of money and lose a large number of channels. The operators will lose a lot of money in the aggregate and experience almost no cost savings. And the channels themselves will lose viewers. It’s a lose-lose-lose dynamic, which soaks cable companies’ monopoly profits without really redistributing them to anyone.

Still the spirit of unbundling is admirable and correct. Cable-rate deregulation in the 1990s was meant to replace ineffective government price-setting schemes with robust competition. It hasn’t really worked, because there isn’t enough competition. If Congress can’t think of a way to bring real competition to the industry, then a firmer regulatory hand is appropriate. But rather than mucking around with à la carte pricing schemes, why not just make the companies lower rates? That way cable companies take the same revenue hit, but consumers score a clear win rather than losing access to marginal channels. It sounds crude, clever, and un-subtle compared to fashionable à la carte proposals, but it would make a lot more sense.