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Cable Technology Feature Article

September 20, 2010

Would A La Carte Pricing Be a Good Deal for Consumers?

By Gary Kim, Contributing Editor

Cablevision Systems (News - Alert) CEO James Dolan says rising programming costs, high unemployment and a slumping economy could result in a la carte being forced on the industry.

“At some point you reach a point where the consumer rebels,” Dolan said. At first glance, the notion of a la carte pricing sounds like a money saver for many consumers. The issue is whether it actually would be. 

Advocates of a la carte pricing seem to think that, if 50 cable channels cost $50 a month, or if 200 channels cost $80 a month, then a single channel should cost between 40 cents and a dollar.

That is not likely to be the case if or when a la carte pricing becomes available. For starters, not every channel "costs" the same at the wholesale level where cable, telco and satellite distributors buy. Some, such as ESPN (News - Alert), cost many dollars. Others essentially cost very little. 

Also, there are volume effects. Some channels can be carried because the large base of potential viewers allows distributors to sell advertising. Take away the audiences and the advertising revenue goes sharply lower. 

In effect, every video consumer essentially compares the cost of watching the channels really wanted with the monthly subscription fee, effectively discounting all the dozens of channels never watched at all. In essence, a standard video offering is a bundle of channels each valued on highly-differential basis. Some channels are worth nothing, while a few are highly valued and essentially justify the entire purchase. 

Overhead (the cost of building the access network) also is part of the sunk cost that has to be covered, no matter how many channels a consumer might choose to purchase in an a la carte regime. This includes both "common costs" such as the distribution network and common headend facilities, marketing and other costs. 

The point is that the marginal cost of delivering one channel to any single end user is very small, if not close to zero. 

In fact, some experience with a la carte suggested, in 2006, that the typical price for an a la carte channel could range from $2.75 to $13. At those prices, it doesn't take long before a consumer realizes that getting the channels every member of a family wants actually is more expensive when purchased a la carte than when purchased as a bundle.

In principle, the economics could work out better for a single-user household where viewing preferences are highly limited. Where 200 channels might cost $80 a month, buying just 10 a la carte channels with an average price of $3 each would result in a bill of $30 (assuming each channel was one of the lesser-viewed channels). Of course, that is rarely the case. The reasons some channels, such as ESPN, cost so much more is that lots of people want to watch it. So assume that a subscriber opts to receive 10 popular channels, with an average price of $6. At that rate, the 10 channels cost $60 a month.

But that analysis also assuames that none of the a la carte channels are among the higher-priced channels, such as HBO, which can cost $15 a month by itself. 

See http://www.law.gmu.edu/assets/files/publications/working_papers/06-05.pdf for a discussion of a la carte pricing. 

The other unknown is how high prices might have to increase in an environment where ad-supported network no longer have the wide exposure on basic service tiers that allow them to sell advertising. One has to assume the lost ad revenue would have to be recovered through higher carriage prices for distirbutors, who then would pass the costs along to end users. 

The whole point is that the current costs of a typical multichannel video subscription include lots of cost assumptions that would change, adversely, in a full a la carte regime. 

None of that is to suggest that a la carte pricing might not ultimately be available, in the the form of streaming services, if nothing else. What remains to be seen, though, is whether the total cost of obtaining all the channels any single user actually wants will work out to be less than the current price of buying a bundle that includes lots of channels never watched. 

Gary Kim (News - Alert) is a contributing editor for TMCnet. To read more of Gary’s articles, please visit his columnist page.

Edited by Juliana Kenny