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Cable Technology Feature Article

December 17, 2010

A La Carte is a 20th Century Solution to a 20th Century Video Problem: It's the 21st Century

By Gary Kim, Contributing Editor

If in 2011, larger numbers of TV viewers become more screen-agnostic, using Hulu (News - Alert), Netflix, mobile video to a greater extent than they do today, with their demonstrated appetites for "snackable" video clips of all sorts, and as major TV distributors and appliance vendors ramp up sales of devices that allow Internet-delivered TV to be viewed on standard TV screens, it is possible more questions are going to be asked about the future of linear TV. 

That would come as no surprise. It is not clear whether older debates about allowing or forcing linear TV to be offered channel-by-channel, in a la carte fashion, will resurface. Right now, it seems unlikely. Nor is it especially likely any of the leading linear video providers will reverse course and suddenly decide their business models are better served by a widespread shift to a la carte viewing. 

Click here and here for a discussion of online video trends for 2011. 

An impartial observer might well continue to conclude that a la carte, implemented on a wide scale, poses more danger to the existing multichannel video business than consumers can expect to see in a full a la carte world. Ignoring for a moment the threats to revenue models for existing providers, networks, advertisers and studios, it never has been terribly clear that the typical multichannel video subscriber necessarily would pay less under an a la carte regime than under the current system. 

To be sure, there is an argument against bundling video channels any particular consumer is unlikely to watch, just as there are arguments for doing so, as a means of advancing consumer welfare. People instinctively believe they should be able to buy only the channels they want. Providers typically say it is the bundling of such channels that allows the program diversity that has been the chief benefit of first cable TV, and then satellite and telco variants. 

In 2004, Consumers Union surveyed subscribers and found that 66 percent wanted to choose the channels in their plan, while 66 percent also wanted the ability to pay for only some channels, rather than all. About 66 percent also expected to pay less if they chose fewer channels. 

About 30 percent reported they would choose fewer channels, even for no discount.

An economist might say the typical video bundle works because it allows distributors to apply scale and scope economics. The corollary is that most networks, which are advertising supported, want to be part of a "no choice" basic tier for business reasons of their own, namely the ability to better sell the advertising that underpins their business models. 

When multichannel video distributors say a bundled approach creates economics that favor smaller, niche networks to thrive, they are right. An end to bundling would likely decimate most smaller, more-lightly-viewed networks. To the extent that content and program diversity is a desired end user benefit, "choice" in all likelihood would decline in a full a la carte environment, because most people would not buy most channels. 

The possible advent of over-the-top TV viewing worries most in the current ecosystem for one compelling reason: "households view less than one quarter of the networks they are forced to buy in the bundle," the Consumers Union noted in an past analysis assuming a 50-channel offering. Even today, with hundreds of available channels, end user behavior does not seem to have changed much. 

Most people watch a dozen or so channels on a regular basis. 

Cable operators have argued that end-user costs might actually climb in an a la carte environment, for a number of reasons. Higher customer care costs, operating and marketing are likely, cable operators have argued. Part of the argument has been based on the need to supply new decoders to customers who did not previously need them. That is likely not much of an issue these days, as cable operators convert to largely-digital or all-digital services where customers already must be provided set-top boxes.

Operators also have argued that customer care costs would rise, and there is more substance to that argument, at least during the period where customers would be confused about the new way of buying service. The National Cable and Telecommunications Association has estimated that customer care costs increase by more than 75 percent in a pure a la carte scenario, the Consumer Union says. 

Others believe a typical household might wind up paying about the same amount each month. That is likely true more for ulti-person households and for households that watch more television.

Separate studies by the Federal Communications Commission seem to have concluded that unbundling could save money, or wouldn't save money. One of the studies suggested  “consumers that purchase at least nine networks would likely face an increase in their monthly bills" when buying a la carte. 

Likewise, one of the studies suggested bill increases ranging from 14 percent to 30 percent under a la carte, while the other suggests a consumer purchasing 11 cable channels would face a change of bill ranging from a 13 percent decrease to a four percent increase, with a decrease in three out of four cases.

The point is that it is very hard to tell, conclusively, what might happen if providers shifted to a la carte viewing. 

Marketing costs certainly would increase, possibly paid by cable and other distributors as well as networks. Premium networks and package goods sellers spend 15 to 27 percent of their revenue on advertising, compared with basic cable networks, which spend only two to six percent of their revenue on advertising. In theory, the new a la carte networks would have to increase their promotions and advertising spending to premium channel levels. 

Revenue is the other big issue, obviously for a distributor, but for each network as well. The ability of a programming network to sell advertising is based on the number of actual and potential viewers. An a la carte environment would reduce advertising attractiveness for most networks. 

Now, as in the past, the argument for clear cost consumer savings when making a shift to a la carte viewing is not clear. Nor is the idea likely to get a renewed hearing anytime soon. Nor, some might argue, should it. With momentum growing on the online delivery front, a la carte might be a 20th century solution to a 20th century problem. We might have other alternatives in the 21st century.

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

Edited by Patrick Barnard