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Cable Technology Feature Article

September 29, 2011

Would A La Carte Video Save Consumers Money?

By Gary Kim, Contributing Editor

The recent news that U.S. cable operators are seeking more freedom to buy programming and sell it in ways that create lower-cost alternatives for consumers has raised the idea of a la carte access once again.

The perhaps-intuitive sense most consumers probably have is that they would spend less money if they could buy just the video channels they want, one by one. Such an a la carte capability might actually be beneficial for lighter TV viewers who really want to buy just a few channels. But most consumers likely would find they pay higher prices when buying a la carte.

Most often, bundling is a mechanism for lowering the per-unit cost of goods and services by spreading costs over a larger number of units. In the case of hot dog or hamburger buns, that benefits consumers because the price per bun is lower than it would be if the company was forced to sell their product one piece at a time.

The price of a 12-pack of buns includes the manufacturing costs of the buns, but it also includes the labor and materials needed for packaging, shipping, stocking, and ringing up the product. Packaging a 12-pack of buns, for example, might only require three times as much material and labor as packaging an individual bun by itself, thereby reducing the per-bun packaging costs by a factor of four. These savings are passed onto the consumer.

The same can be seen in another example of bundling as practiced by newspapers. Some readers read the business section but not the sports section. So why don’t newspapers let their customers pick and choose which sections of the newspapers they want to receive? 'A La Carte' Cable Bad for Consumers

The reason is that most of a newspaper's costs don't vary by the number of customers who take a particular section. Delivering the paper, for example, costs virtually the same whether the paper is fat or thin. And the columnists and reporters who produce the content in the sports sections will collect the same salary regardless of how many readers get their section. So the better question is: if it doesn’t cost more, why not include every section in every paper?

An economist likewise 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.

According to some studies, relatively few networks actually make a $100 million or more in annual ad revenue, though. Network economics

When multichannel video distributors say a bundled approach creates economics that favor smaller, niche networks to thrive, they are right.

Deprived of carriage on a broad "enhanced basic" tier, perhaps 60 percent of networks might find themselves immediately imperiled, as going concerns.

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 providers in the video 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 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 only watch 12 or fewer channels. If you assume 200 channels, then any consumer tends to watch only about six percent of all channels available.

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. So perhaps some of the historic objections from a distributor point of view have eroded.

Separate studies by the Federal Communications Commission seem to have concluded that unbundling could save money, or wouldn't save money. See this study. 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. With online delivery coming to the fore, it might not ultimately matter. A la carte might happen, but on the Internet, and mostly for limited-time viewing of some current TV episodes, plus older content in catalogs.

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

Edited by Rich Steeves